Health Exchange Risk Programs Would Protect Insurers and Consumers
Health and Human Services Department officials have coupled the health exchange regulation released on Monday with another proposed rule designed to minimize the impact of covering sick, expensive patients on insurance companies. The federal government proposed to give insurers higher payments for patients whose claims cost more than average so insurers don't have an incentive to avoid covering high-cost patients.
The 103-page regulation includes three components that would encourage insurers to cover high-risk policy holders just as they would those who are healthy:
- A permanent risk adjustment formula that would pay insurers higher rates for sicker patients, such as those with chronic conditions. The adjustment would apply to those in the individual and small group markets inside and outside of the exchanges.
- A three-year reinsurance program that would establish a nonprofit entity to handle temporary payments for insurers that cover patients with high medical claims in the individual market.
- A three-year risk corridor program that would give insurers inside the exchanges more certainty by limiting losses and gains. Insurers whose claims are at least 3 percent higher than projected would get more federal funding, while those whose costs are at least 3 percent less than projected would get fewer federal dollars.
The reinsurance and risk corridor programs were made temporary because lawmakers felt that over time, more people would enter the new exchange program, insurers would have a better understanding of the risks of covering enrollees, and the market would mature.
The law requires that each state establish a reinsurance program to "help stabilize premiums for coverage in the individual market during the first three years of exchange operation," which are 2014-16. The money will come from all insurance plans and third-party administrators of self-insured group plans which will contribute funds to a nonprofit that will dole out additional money to insurers who have higher claims. Any insurance company in a state's individual market that was not grandfathered under the law -- including plans outside of the exchange -- could be eligible for the higher reimbursements. The law calls for states to collectively assess and disperse a total of $10 billion in 2014, $6 billion in 2015 and $4 billion in 2016 for reinsurance in addition to collecting other funds from insurers such as $2 billion in 2014-15 and $1 billion in 2016 for the general treasury.
The risk corridor program, which will be administered by the federal government instead of the states, would apply to insurers in the exchange's individual and small group markets during the first three years that the exchange is operating.
The three mechanisms are intended to help smooth the transition and provide more stability in the marketplace for insurers who end up with more sick people, or sicker people, than other insurers as well as for insurers who might not be able to predict their risk in the first couple of years. Risk corridors also could cap the profits of some insurers.
States could choose to change the details of reinsurance or risk adjustment from those set out by the federal standards. Any state that decides to make changes would need to publish a notice at least one year before the benefit year begins, and by March in the calendar year before the effective date.
The public has been given 75 days to comment on the proposal.
Milliman Identifies Key Questions That Will Drive the Creation of State Healthcare Insurance Exchanges
Milliman, Inc., today identified a series of considerations for states, health plans, and employers as they look toward the 2014 state exchange implementation deadline set forward in the Patient Protection and Affordable Care Act (PPACA) and reiterated in regulations issued by Health & Human Services on July 11. "The possibility that exchanges could serve a larger role in the rate review process introduces questions about interaction between state insurance departments and exchanges. Perhaps most importantly from an actuarial perspective, we are still awaiting regulations on essential benefits and other key aspects of pricing, which will be pivotal in dictating the design of plans in the exchange."
Some of the questions that still remain include:
- How firm is the deadline? Exchanges are supposed to be established by the open enrollment period that begins on Oct. 1, 2013. However, the regulations indicate that some states could miss the 2013 deadline and then receive regular or conditional approval for an exchange in subsequent years.
- How will essential benefit regulations shake out? Many of the plan design and cost considerations that will influence the insurance policies sold through an exchange begin with the question of which benefits are offered and at what level. The exact nature of insurance policies sold through exchanges will remain vague until these regulations are introduced.
- What rating role will be played by exchanges? The exchange regulations suggest that exchanges may have a larger role in the rate review process, on top of a full review currently performed by state departments of insurance. Is there redundancy and, if so, how will that redundancy be reconciled?
- Yet another complexity involves methodologies used for rating individuals versus rating families. The discussion in the exchange regulations is not conclusive and leaves open a variety of different approaches that may allow flexibility or may just foment confusion.
- What about smaller insurers? The regulations indicate that health plans sold through the exchange can no longer determine their own geographic area, which introduces a new rating wrinkle. The same areas must be used within and outside of the exchanges. What should a health plan do if a state introduces a geographic area that is larger than the area served by a health plan?
- How will federal exchanges operate? The federal government will create an exchange for any state that does not create its own exchange by the deadline, but the federal exchange concept remains undefined.
- Who will pay for federal exchanges? Will federal exchanges need to be financially self-sufficient, as is the case with state-run exchanges?
- What should we expect from "Navigators"? Navigators are entities intended to help consumers make insurance purchasing decisions in the exchange. To date, little detail on Navigators exists.
- The regulations help by clarifying that Navigators must be in place by the exchange's first open enrollment period on Oct. 1, 2013.
- The proposed rules now require that an exchange include two types of entities as Navigators.
- The proposed rules ensure that a community-based or consumer-focused group will fill one of these slots.
- Navigators will need to demonstrate an existing relationship to consumers before appointment.
- Brokers and agents may act as Navigators as long as they are not receiving compensation from a qualified health plan.
- How will exchanges interact with CO-OPs? PPACA allows for the creation of Consumer Operated and Oriented Plans (CO-OPs), but details of these plans are still unclear because CO-OP regulations are still pending. CO-OPs in theory will be sold on exchanges but they have some unique requirements; how will this interaction take place?
- What does success look like? The criteria for determining the success of an exchange are still unclear. Presumably there will be milestones for measuring such criteria, but these too are undefined.
- The regulations also do not get into quality measurement, though quality will likely feed success criteria; forthcoming regulations will pick up on the quality topic.
