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    How insurers should prepare for future ACA risk adjustments

    The first-year results of the Affordable Care Act's (ACA) Risk Adjustment Program are in, and while the experience may not have been a home run, it might be characterized as an RBI double.

    A major component of the ACA, the risk adjustment program is intended to spread out the cost of covering patients with pre-existing conditions by distributing payments, in part, according to the risk factors of those insured patients. The goal was to encourage insurers to cover high-risk patients by transferring funds from insurers focused on relatively low-risk populations.

    According to an April 2016 policy paper by the American Academy of Actuaries’ Risk Sharing Subcommittee, the program is largely headed in the right direction. Among its primary findings, the committee noted that the program “compressed the loss ratio differences among insurers with low loss ratios and reduced loss ratios for insurers with high loss ratios.” Simply put, the program did its job of shifting funds from plans with low-cost enrollees to others with high-cost enrollees.

    Not everyone, however, benefitted equally. The report says that “Risk adjustment experience can vary among insurers due to operational issues (e.g., technical issues with loading enrollment and claims data, timely processing of claims), which may have impacted some small or new insurers to a greater degree than large and more established insurers.” It also noted that the impact of premiums, upon which risk adjustment factors had a strong influence, also came into play for various payers.

    “Risk adjust transfers as a percent of premium were more variable and likely to be higher for insurers with a smaller market share,” the report states. “Insurers with a larger market share were by definition closer to the market average while small-market-share insurers were more likely to be skewed toward either low-risk or high-risk individuals.”

    Across the U.S., plans that are new have been understandably hindered the most in mastering the intricacies of the program. A survey by a coalition of 35 small insurers participating in ACA exchanges found that 27 were compelled to write checks to the program as a result of risk adjustments. Even some longtime payers were impacted; Earlier this year, The Washington Post reported that a decades-old South Florida HMO, Preferred Medical Plan, received a risk adjustment bill of $97 million.

    Larger plans generally fare better because they have the resources to chase claims and can more quickly identify high-risk members. Nonetheless, several such plans have struggled with ACA exchange participation since 2014. Humana Inc., while reporting a small profit on individual plans in Q1 of 2016, says it will make changes that may include statewide market and product exits, both on- and off-exchange. UnitedHealth Group reported a $720 million loss for 2015 on its exchange business segment, of which $245 million is a set aside for an anticipated loss of $500 million for 2016. It anticipates withdrawing from all but a small portion of the 34 states in which it offers exchange plans by 2017.

    Next: Balancing risk, cost and revenue

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