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The Three Rs: An Overview

Date
2015-10-01
Title
The Three Rs: An Overview
Contact
go.cms.gov/media

The Three Rs: An Overview 

The Affordable Care Act (ACA) recognized that there would be uncertainty in the early years of the Marketplace for insurance companies as they tried to set premiums for a new group of people and implemented a higher standard of coverage – for example, no longer being able to deny coverage or charge more because of someone’s pre-existing conditions.

The Act introduced three programs – risk adjustment, reinsurance, and risk corridors – to assist insurers through the transition period, and to create a stable, competitive and fair market for health insurance.

This document provides a brief overview of each program and how it has helped contribute to the stabilization of the Marketplaces, as well as information about 2014 risk corridors payments.

Reinsurance Program – Paying Insurers $7.9 Billion for 2014

The reinsurance program, which helps keep premiums affordable for consumers by spreading the cost of very large insurance claims across all coverage providers, will be paying $7.9 billion in reinsurance claims for 2014.

Because claims were not as high as expected, health insurance plans are being paid for 100 percent of their filed claims – 25 percent more than plans were expecting.

Risk Adjustment Program – $4.6 Billion Transferred Among Insurers

The risk adjustment program protects consumers’ access to a range of robust coverage options by reducing the incentive for insurance companies to seek only to insure healthy individuals.

The program requires insurance companies with healthier consumers in a state to pay charges that help offset some of the costs of those insurance companies with sicker consumers in that state.

For 2014, the risk adjustment program will transfer about $4.6 billion among insurance companies nationwide. Unlike reinsurance, the risk adjustment program is not a temporary program and will be a long-lasting part of how the health insurance market functions.

Risk Corridors – Paying Insurers $362 Million for 2014

The temporary risk corridors program is modeled after a similar program used in the Medicare Part D Prescription Drug benefit.

The goal of the risk corridors program is to support the Marketplaces by providing insurers with additional protection against uncertainty in claims costs during the first three years of the Marketplace.

The temporary risk corridors program provides payments to insurance companies depending on how closely the premiums they charge cover their consumers’ medical costs.

Issuers whose premiums exceed claims and other costs by more than a certain amount pay into the program, and insurers whose claims exceed premiums by a certain amount receive payments for their shortfall.

Rick Corridors – Data Validation  

While conducting quality assurance of the risk corridors data insurance companies submitted, CMS identified a significant number of material differences in the data.  On August 7, CMS announced that the data required additional review to make sure it was accurate, complete and validated and that we would not be publishing preliminary estimates for the 2014 risk corridors program as intended on August 14.

We requested that each company with plans on the Marketplace complete and attest to a checklist, which identified critical components of the risk corridors and MLR submissions, to validate the data and protect the integrity of the risk corridors and MLR programs.  Some insurers were also asked to submit additional information about the claims or premiums information they had submitted.  This information was requested by September 14.

Until we were sure the data was accurate, complete and validated, we could not know the final outcome for the program.  During the validation process, we were in ongoing contact with health plans and states. Just over half of all plans resubmitted their data during the data validation process.

We have now completed the initial phase of the data validation process.

Risk Corridors – Calculations

Based on current data for 2014, the first year of the three-year risk corridors program, insurers will pay risk corridors charges of approximately $362 million, and insurers have requested $2.87 billion of risk corridors payments.   As a result, consistent with our guidance, insurers will be paid approximately 12.6% of their risk corridors payment requests at this time. Standard & Poor’s Ratings Services estimated a similar result earlier this year saying that “risk corridor payables are less than 10 percent of the receivables insurers reported in 2014.”

The risk corridors payments for program year 2014 will be paid in late 2015. The remaining 2014 risk corridors claims will be paid out of 2015 risk corridors collections, and if necessary, 2016 collections.

Since this is a three-year program, we will not know the total loss or gain for the full three years of the program until the fall of 2017. 

We will continue our routine program integrity efforts throughout all three years of the program. Data concerns will be addressed during our auditing process.

In the event of a shortfall for the 2016 program year, HHS will explore other sources of funding for risk corridors payments, subject to the availability of appropriations. This includes working with Congress on the necessary funding for outstanding risk corridors payments. 

The Affordable Care Act reduces the deficit by $137 billion over the next decade according to the Congressional Budget Office.  The law’s coverage provisions cost about $200 billion less for 2015-20-19 than CBO predicted they would cost when the law first passed.

Next Steps

We will work with state Departments of Insurance and insurance companies so that any issues raised by this announcement are addressed quickly and appropriately, with the consumer foremost in mind. 

We recognize that for a limited number of insurers, a lower than expected 2014 risk corridor payment may raise concerns.  We will be in close contact with those states and insurers in the coming days.   We are beginning that outreach this afternoon and will continue to be available.

Open Enrollment starts on November 1. 

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