July 11, 2018
On July 7, the Centers for Medicare and Medicaid Services announced that it would indefinitely delay making “risk adjustment” payments owed to insurers participating in the individual and small group markets. In the short-run, this would result in many insurers not receiving payments they are expecting this year as scheduled. That would adversely affect these insurers’ bottom line as well as their cash flow, as they assumed they would receive those payments as scheduled, when setting their past premiums for 2017. This delay could also provoke substantial uncertainty among insurers about whether risk adjustment payments will be made, as they assumed for 2018 and 2019. That could result in some insurers revisiting their 2019 premiums (and increasing them) as well as their overall decisions to participate in the individual markets inside and outside the marketplaces both in 2019 and in future years.
Under the Affordable Care Act, all insurers offering plans in the individual and small group markets must participate in the permanent risk adjustment program. Under risk adjustment, insurers who enroll sicker-than-average individuals receive payments from insurers who have healthier-than-average enrollees. The intent of risk adjustment is to mitigate adverse selection and promote market stability by compensating insurers that take on higher-cost individuals with chronic conditions and serious illnesses and discourage insurers from “cherry-picking” only low-cost, healthy people. Risk adjustment is budget neutral; that is, payments are funded by other insurers, not the federal government. The payments can be substantial. CMS has determined that insurers will receive a total of $10.4 billion in risk adjustment payments for 2017.
Was the July 7 action to indefinitely stop 2017 risk adjustment payments another act of sabotage against the Affordable Care Act? It seems like it. CMS ostensibly claims that a February U.S. District Court decision in New Mexico invalidating part of the risk adjustment formula requires them (many months later) to not make any payments owed to insurers for 2017 nationwide. But as legal experts explain, since February, CMS could have instead issued interim final regulations modifying the risk adjustment formula for 2017 in response to the court decision. (CMS has already modified the risk adjustment formula for 2018 and future years.) It also could have stopped payments only in New Mexico. The Department of Justice could have also asked for a stay of the decision while it is being appealed. Even if CMS ultimately makes the risk adjustment payments owed to insurers at a later date, its action would still have disrupted insurers’ revenue streams this year and created substantial uncertainty among insurers about whether future risk adjustment payments for 2018 and beyond will be made as they have assumed and as scheduled.
Moreover, this is not the first time that CMS has taken steps to undermine the risk adjustment program. Under regulations finalized in April, starting in 2020, states can seek federal approval to reduce by up to 50 percent how much insurers in both the individual and small group markets must pay in risk adjustment charges. That, of course, would considerably reduce how much insurers with sicker-than-average enrollees receive to compensate them for their higher costs. A substantially less effective risk adjustment program could result in a more unstable market and spur some insurers to focus on strategies that avoid enrollment of higher cost individuals. While marketplace insurers are generally prohibited from designing discriminatory benefit packages and marketing efforts, it is doubtful that those standards will be enforced to any significant degree by CMS, especially in federal marketplace states. Moreover, CMS has also given states authority to provide insurers greater latitude to scale back or drop benefits in ways that would adversely affect those with pre-existing conditions. Insurers would either have to take these kinds of steps or risk facing adverse selection that forces them to sharply raise premiums or drop out of the markets entirely.
Finally, even a fully effective risk adjustment system, which was not hobbled by the Administration’s actions, would not address the significant threats to stability in the individual market posed by short-term plans which do not have to comply with the Affordable Care Act. Such plans, for which the Administration is in the process of finalizing regulations expanding their availability, can discriminate against people with pre-existing conditions by charging higher premiums or denying coverage outright and dropping critical benefits. These plans can thus cherry pick and siphon off healthy individuals from the marketplaces and the rest of the individual market, driving up premiums in the ACA-compliant markets and severely destabilizing them. Risk adjustment does not even apply to these non-compliant plans.