On March 20, 2012, HHS issued final regulations on the Reinsurance, Risk Corridors and Risk Adjustment requirements under the Patient Protection and Affordable Care Act (PPACA). These requirements are intended to help offset the adverse selection that will occur in the individual market beginning in 2014, when the Exchanges and Individual Mandate become effective.
- Reinsurance Program. PPACA requires the establishment of reinsurance programs to help stabilize premiums in the individual market during the first three years of the Exchanges (2014 through 2016). States can choose to establish one or more reinsurance entities or elect to enter into multi-state reinsurance entity agreements. The reinsurance entity will be responsible for distributing the reinsurance contributions to eligible health insurance issuers. Generally, a health insurance issuer will become eligible for reinsurance payments when its claims costs for an enrolled individual exceed the attachment point set by HHS in the annual Notice of Benefit and Payment (Notice). Issuers can receive reinsurance payments up to the reinsurance cap, also set by HHS in the Notice. States can choose to alter the attachment point and reinsurance cap, but must issue a Notice of its own explaining the same.
All "contributing entities" must make reinsurance contributions to fund the reinsurance program. A "Contributing Entity" is a health insurance issuer on behalf of insured group health plans or a third-party administrator (TPA) on behalf of a self-insured group health plan. Health Insurance Issuers will submit their contributions to the reinsurance entity if elected by the state, and TPAs will submit their contributions to HHS. No contributions are required for group health plans that are "excepted benefits plans" under the Public Health Service Act (e.g., limited scope dental and vision, on-site medical clinics). Contributions are required for standalone retiree-only plans.
Contributions are due on a quarterly basis beginning January 15, 2014. Additionally, Contributing Entities must submit to HHS or the reinsurance entity, as applicable, data required to substantiate the contribution amount. The reinsurance contributions are based on a national rate that will be set by HHS in the Notice for all individuals covered by the plan who reside in a state. However, states can require additional contributions if the state believes such additional funds are necessary for its program.
- Risk Adjustment. States that elect to operate an Exchange are eligible to operate a risk adjustment program. The risk adjustment program will provide increased payments to insurers in the individual and small group markets, both inside and outside of the Exchanges, that attract higher risk enrollees and will reduce incentives for insurers to avoid high risk populations. HHS will administer a state's risk adjustment program if the state does not elect to run an Exchange or a risk adjustment program. The risk adjustment program will begin in 2014 and will continue on a permanent basis. HHS will publish its risk adjustment methodology that all states must follow in the Notice. States may apply for approved alternate risk adjustment methodologies. Any approved alternate risk adjustment methodology will also be published in the Notice.
- Risk Corridors. The risk corridor program is designed to limit the extent of qualified health plan (QHP) insurers' gains and losses. A QHP issuer will receive money from HHS if its allowable costs exceed target amounts. Issuers that have allowable costs below the target amount will pay HHS. "Allowable costs" equal the sum of claims incurred by the QHP issuer for the QHP, expenditures for activities that improve health care quality and for health information technology.