As new federal market stabilization programs start, many regulators and insurers are preparing for a new model of risk management: "when adverse selection isn't."
According to an analysis by Milliman actuaries Jason Siegel and Jason Petroske, the Affordable Care Act's reinsurance, risk corridors and risk adjustment programs may "generate impacts that actually turn traditional risk management practices upside down," potentially making older, and high cost-members more profitable than expected.
Under the "3Rs"--the two-year reinsurance and risk corridor programs limiting losses, and the permanent risk adjustment program transferring funds from low-risk plans to higher-risk plans--the Department of Health and Human Services will be trying to ensure premiums do not surge by sharing risk, with transfer payments of $10 billion in 2014, $6 billion in 2015 and $4 billion in 2016.
Based on the current payment schedule and the Hierarchical Condition Category formula, the programs may bring some unforeseen trends, Siegel and Petroske found, after modelling the financial impact to different health plan memberships of varying demographics and morbidities.
"There is a general understanding that the 3Rs will create winners and losers among health plans," they wrote. "What is surprising, though, is just how skewed the results can be by HCC condition and demographic with respect to the overall profitability of a health plan."
One factor is age. Under the first year of the adjustment programs, males aged 20 to 34 would have pre-tax profits (based on a 3 percent assumed margins) that are actually losses--about negative 3 percent--whereas previously that demographic might have margins of about 30 percent, according to Siegal and Petroske's estimates.
By their model, male members are not profitable until age 45; then as they age they generate between 2.5 percent and 7 percent in margins. The profit scale for female members rises after age 25, reaching 6.2 percent at age 40 and the 6.7 percent at 60.
Along with age, members with risk-adjusted conditions bring in more financial gains, Siegal and Petroske found. Just five of the 127 HCCs used in HHS's model result in net losses, and the HCC coefficients for most conditions "are higher than the average relative costs."
Their model also found "leveraging effect," those paying into the pool paying too much and those receiving getting too much, which could be amplified in the first two years. Under the temporary transitional reinsurance program and the risk adjustment payments, some plans maybe reimbursed twice for high cost claimants.
Siegal and Petroske wrote that the programs could end up creating "an incentive to attract and maintain a block of business that is demographically older and more female than one's competitors."
At the same time, with the risk adjustment program relying on the young health plan members to give insurers the premiums to pay into the pool and the readjustment thresholds falling, the goal of enrolling a good number of young consumers remains.