By Brian Blase, Ph.D.
Galen Institute, July 27, 2020 |
The Affordable Care Act dramatically changed insurance regulation in the individual and small-group health insurance markets. A key change detached the amount of an individual’s premium from his or her expected medical claims. By itself, this would have led to a variety of problems, including creating an incentive for insurers to design coverage to avoid those who are sick.
The ACA created a risk-adjustment program designed to ensure the availability of plans for less-healthy people and discourage plans from prioritizing enrollment of healthier people. Risk adjustment was supposed to make insurers indifferent to the health status and plan selection of their enrollees by transferring money from plans with healthier enrollees to plans with sicker enrollees.
Galen Senior Fellow Brian Blase examines the risk-adjustment program and finds that after nearly six years of experience, the risk-adjustment program is contributing to the excessively high premiums and limited number of insurers participating in the exchange markets.
It is not working as intended, causing a myriad of problems. It has harmed the risk pools and produced higher average premiums for consumers in the individual and small-group markets, with the problems most pronounced in the individual market. Oscar Health, in its insurance filing with New York State, proposed an average annual small-group premium of $10,752 for a single person for its 2021 plan. This amount is so high partly because 40% of the rate—or $4,332—is a built-in factor to cover expected risk-adjustment outflows.
Most importantly, the program has reduced the incentive for plans to enroll healthy people because of excessive transfers.
Risk adjustment will always be an imperfect exercise, and the ideal outcome—insurers’ indifference to the health status and plan selection of enrollees and a purely unbiased distribution—has shown to be virtually impossible to achieve.
Many reforms are needed to create a more robust individual and small-group health insurance market that offers greater competition and more affordable options. Blase recommends in his paper that the Centers for Medicare and Medicaid Services fix several aspects of the risk-adjustment program so that the program enhances choice and competition, rather than diminishing them.