The context

The close of 2016 will mark the end of the third full year that the Affordable Care Act (ACA) has been fully implemented. Data is available for the first two "reporting years," 2014 and 2015, for which health insurers and managed care companies (carriers) have reported vital figures, such as premiums earned, cost-sharing reductions received, medical loss ratios and risk adjustment data, the subject of this Update, among other data points. As a result, we now have a better picture regarding the extent to which the ACA has been working as intended, and where it has fallen short.

The ACA's Risk Adjustment Program (as authorized by 42 U.S.C. §18063 and as detailed in previous IREG Updateshere and here, has become highly controversial. Although the Centers for Medicare & Medicaid Services (CMS) report that the Risk Adjustment Program is generally working as intended, and indeed that may be true in some cases, it has arguably compounded the financial difficulties facing ACA-created Consumer Operated and Oriented Plans (CO-OPs), the vast majority of which have failed, and has also had detrimental effects on newer and smaller carriers which, if left unaddressed, could force more of those players to exit the market as well.

Decreasing competition in the marketplace would certainly be an unintended consequence of the Risk Adjustment Program, as evidenced not only by the language and legislative history of the ACA but also by the fact that state and federal regulators now moving to address the subject of risk adjustment. At the advent of the ACA, many health insurance markets were dominated by a single large carrier, but smaller carriers were still important market players, offering consumers a choice of coverage options and forcing the larger players to compete on price.

Now, however, in a number of states, only a single carrier remains in the individual exchange market due to the exits not only of large carriers like United, Humana and Aetna, but also many of the newer and smaller carriers. As a result, consumers in these single-carrier markets are essentially required to purchase coverage from that particular carrier or face a penalty. The McKinsey Center for U.S. Health System Reform estimates that these single-Exchange-carrier service areas will account for seventeen percent (17%) of eligible Americans in 2017, up from two percent (2%) this year. The Kaiser Family Foundation (KFF) estimates the single-Exchange-carrier figure to be closer to nineteen percent (19%), or 2.3 million Exchange enrollees. KFF named Alabama, Alaska, Arizona, Florida, Mississippi, Missouri, Nevada, North Carolina, Oklahoma, South Carolina, Tennessee, Utah, West Virginia, and Wyoming as likely to have only one insurer in all or most counties in 2017. Worse yet, until just this week, one county, Pinal County, Arizona had no carrier going into coverage year 2017. This week, Blue Cross Blue Shield of Arizona announced that it would offer plans in Pinal County for 2017. The situation in these single-Exchange-carrier counties and in Arizona highlights the fragility of the current ACA Exchange markets where, absent a change in direction, consumers could well be left unable to purchase health insurance at all in the future.

State solutions

State regulators, who are charged with protecting the solvency of carriers and otherwise fostering competitive state insurance markets, are considering state solutions to issues caused in large part by the Risk Adjustment Program.

Alaska, for example, where only one carrier—Premera Blue Cross Blue Shield of Alaska—remains in the individual exchange, has already implemented its own solution. Specifically, this past July, Governor Bill Walker signed a law the purpose of which is to avoid the potential total collapse of the state's individual market. H.B. 374 essentially redirects funds from the state's former high-risk pool to a newly established state reinsurance program. The funds will be used to cover claims for high-cost members in the individual market. Alaska's program is temporary (two years) and authorizes the state insurance commissioner to seek a 1332 state innovation waiver from the federal government permitting Alaska to alter ACA implementation from the federal requirements. CMS, in its August 11, 2016, blog post, "Building on Premium Stabilization for the Future," praised Alaska's efforts as having "the potential to improve access and affordability by strengthening the state’s insurance market and buffering risk for insurers."

Federal regulatory response

This past March, CMS asked states to come up with solutions to risk adjustment shortcomings but seemed hesitant to make any immediate changes for its own part. Then, somewhat surprisingly given the looming presidential election, just last week, on August 29, CMS published changes to the risk adjustment calculation formula in a proposed rule entitled "Patient Protection and Affordable Care Act: Benefit and Payment Parameters for 2018" (the Notice). In its press release describing the Notice, CMS acknowledged that it was releasing it ahead of schedule to provide more certainty to carriers. (Again, many of these carriers are facing potential market exits, due either to business considerations or to risk adjustment liabilities so extreme that they threaten the carrier's solvency.) CMS will be accepting public comments on the proposed rule through 5:00 pm (EST) on October 2, 2016.

We will not detail here all of the changes contained in the proposed rule; the salient ones are to the treatment of partial-year enrollees, the use of prescription drug utilization data, and the establishment of transfers to better spread the risk of high-cost enrollees. Accompanying these risk adjustment formula modifications are other regulatory changes. A CMS Fact Sheet is available here. (From a regulatory standpoint, one of the most interesting changes is a "Reassessment of the 5-Year Ban on Market Reentry upon Withdrawal from a Market." This federal "ban" has, in most cases, been the subject of state law, thus potentially requiring similar changes at the state law level in order to take effect in a meaningful way.)

State and federal interplay

State and federal interplay under the ACA is a topic worthy of its own IREG Update, or series of Updates. However, we would be remiss were we to fail to note here that the proposed changes in the Notice are already receiving state scrutiny as potentially improper. In particular, CMS's proposed pooling of funds from multiple states is being described by some as an improper subsidy that crosses state lines.

As enacted, the risk adjustment statute (42 U.S.C. §18063) requires states to administer their own Risk Adjustment Programs. The risk adjustment regulations, however, permit CMS to operate a Risk Adjustment Program on behalf of a state. Under the Notice, specifically Section III, High-Cost Risk Pooling, CMS would, with respect to high-cost risks newly incorporated into the formula, be authorized to pool "across all States for the individual (including catastrophic and non-catastrophic plans and merged market plans) and small group markets" to reduce "the impact of high-cost enrollees to better reflect actuarial risk"—a marked departure from the previous iterations of the formula, which were all state-specific calculations, and from the overall tenor of the Risk Adjustment Program which is statutorily set up as, and to date has been described as, a state program that happens to be administered by the federal government. Whether public comments to the Notice address this issue will be particularly telling. We will be monitoring this proposal to see how things play out.

Looking forward

We anticipate that the Notice will receive a very significant number of comments from industry and trade groups as well as from consumer groups, providers and other stakeholders. The changes to the Risk Adjustment Program have already come under fire in the press, and it remains to be seen whether the industry believes that the proposed changes go far enough in addressing the shortcomings of the current formula. The Notice, more than others before it, also has the potential to bring to the fore issues such as the scope of CMS authority under the ACA and the increasingly complex interplay of state and federal insurance regulation.

ICYMI
General

The National Association of Insurance Commissioners considered using credit for reinsurance rules to retaliate against EU countries that apply Solvency II in a discriminatory fashion against US companies [Insurance ERM]

The New York Times reported on the opaque ownership structure of acquisitive Chinese insurer Anbang [New York Times]

The market for catastrophe bonds has grown explosively [The Wall Street Journal]

The Affordable Care Act

Iowa Insurance Commissioner Nick Gerhart offered his thoughts on how to improve the ACA [CNBC] [Des Moines Register]

Withdrawal of major health insurers created potential for monopolies in some markets [The Wall Street Journal] [Best's Insurance News & Analysis] [The Wall Street Journal]

Health insurance policyholders across the country faced steep premium increases [USA Today]

Health insurers on the Affordable Care Act exchanges cut costs by narrowing providers networks [The Wall Street Journal]

Progress on reducing the number of Americans without health insurance slowed [The New York Times]

Life & Health

A National Association of Insurance Commissioners committee considered new rules for small closed blocks of long-term care insurance [LifeHealthPRO]