Risk adjustment and reinsurance: A look at the biggest winners, losers

A calculator up close
Health Care Service Corporation, which has experienced steep individual market losses, led the country in reinsurance receipts from 2014-2016, with its share totaling $2.3 billion.

As has been the case with so many facets of the individual market under the Affordable Care Act, the federal risk adjustment and reinsurance programs have been a boon for some insurers and a burden for others.

That dichotomy is apparent in a new analysis from the consulting firm Mark Farrah Associates, which offers a look at the the experiences of the insurers most affected by the two programs since 2014. 

First, it’s important to note the differences between risk adjustment and reinsurance, which along with risk corridors, comprise the ACA’s “three Rs”—programs meant to stabilize premiums and lessen the risk of operating in the law’s fledgling individual marketplaces. 

RELATED: Special Report—8 ways to fix the Affordable Care Act

Risk adjustment, the only one of the three Rs that is permanent, is intended to deter insurers from the practice of risk selection—or seeking out lower-risk enrollees, as the Kaiser Family Foundation explains. It does this by transferring funds from plans with lower-risk enrollees to plans with higher-risk enrollees. 

Under the reinsurance program, which ended after 2016, the government collects funds from all health insurance issuers and self-funded group plans, then doles out that money to individual market health plans with higher-cost enrollees. The idea is to reduce the incentive for insurers to charge higher premiums because of concerns about operating under the ACA’s new market reforms. 

Even when under control of the anti-ACA Trump administration, the Centers for Medicare & Medicaid Services issued a report stating that the reinsurance and risk adjustment programs are “working as intended in compensating plans that enrolled higher-risk individuals” and protecting consumers from adverse selection. Still, the Mark Farrah analysis shows that some insurers have fared better than others.

Here’s a look at the findings:

  • Health Care Service Corporation, which has experienced steep individual market losses, led the country in reinsurance receipts from 2014-2016, with its share totaling $2.3 billion, or $42.57 per individual per month. Anthem, Humana, Aetna, Blue Shield of California, UnitedHealthcare, GuideWell, Kaiser Permanente and Blue Cross Blue Shield of North Carolina also made the list of top 10 recipients.
  • Four out of the top five recipients of risk adjustment payments were also on the list of top 10 reinsurance recipients—with Cigna the only exception. 
  • GuideWell (Florida's Blue Cross and Blue Shield plan), which the analysis says has been the most profitable insurance company in the individual segment, soundly beat the rest of the top risk adjustment receivers by netting $1.2 billion in payments over three years.
  • Aetna paid the greatest amount into the risk adjustment program from 2014-2016, at nearly $1 billion. Molina, Centene, Kaiser Permanente and Fidelis Care rounded out the rest of the top five. 
  • While Aetna paid the most into the risk adjustment program, Molina’s per-individual per-month burden, $84.49, was the highest. Centene's was also high relative to the rest of the pack, at $47.95.

Recent events underscore how insurers’ experience with the risk adjustment program, in particular, can affect their business. Higher-than-expected risk adjustment obligations have fueled Molina’s individual market struggles, which ultimately factored into the ouster of its CEO and CFO. And the CEO of Northwell Health, New York’s largest health system, said it is shuttering its insurance arm—in part because it is facing a $112 million payment into the federal risk adjustment program for 2017. 

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