Skip to main content

Advanced Search

Advanced Search

Current Filters

Filter your query

Publication Types



Newsletter Article


Health Exchange Risk Programs Would Protect Insurers Against Losses, Consumers Against Adverse Selection

By Rebecca Adams, CQ HealthBeat Associate Editor

June 11, 2011 -- Health and Human Services Department (HHS) officials coupled the recent health exchange regulation with another proposed rule designed to minimize the impact of covering sick, expensive patients on insurance companies.

The federal government proposed to give insurers higher payments for patients whose claims cost more than average so insurers don't have an incentive to avoid covering high-cost patients.

The 103-page regulation includes three components that would encourage insurers to cover high-risk policy holders just as they would those who are healthy. Those elements are:

  • A permanent risk adjustment formula that would pay insurers higher rates for sicker patients, such as those with chronic conditions. The adjustment would apply to those in the individual and small group markets inside and outside of the exchanges.
  • A three-year reinsurance program that would establish a nonprofit to handle temporary payments for insurers that cover patients with high medical claims in the individual market.
  • A three-year risk corridor program that would give insurers inside the exchanges more certainty by limiting losses and gains. Insurers whose claims are at least 3 percent higher than projected would get more federal funding, while those whose costs are at least 3 percent less than projected would get fewer federal dollars.

The public has 75 days to comment on the proposal.

The risk adjustment program is the only one of the three components that is permanent. Payments will essentially transfer money from plans that cover mostly low-cost individuals to those whose enrollees have higher costs. The federal government or the states would calculate the payment formulas. Paying plans with high-cost patients is envisioned as a permanent feature, just as it already is in Medicare, the federal program for the elderly and disabled.

Joel Ario, who directs HHS's exchange office, said that the risk adjustment will "be there to protect what the promise of this law is—that every consumer regardless of their health status can come to the marketplace and get a policy."

Under the health care overhaul law (PL 111-48, PL 111-152) the reinsurance and risk corridor programs were made temporary because lawmakers felt that over time, more people would enter the new exchange program, insurers would have a better understanding of the risks of covering enrollees, and the market would mature.

The law requires that each state establish a reinsurance program to "help stabilize premiums for coverage in the individual market during the first three years of exchange operation," which are 2014-16, according to the rule. The money will come from all insurance plans and third-party administrators of self-insured group plans, who will contribute funds to a nonprofit that will dole out additional money to insurers who have higher claims.

Any insurance company in a state's individual market that was not grandfathered under the law—including plans outside of the exchange—could be eligible for the higher reimbursements. The law calls for states to collectively assess and disperse a total of $10 billion in 2014, $6 billion in 2015 and $4 billion in 2016 for reinsurance, in addition to collecting other funds from insurers, such as $2 billion in 2014-15 and $1 billion in 2016 for the general treasury.

The risk corridor program, which will be administered by the federal government instead of the states, would apply to insurers in the exchange's individual and small group markets during the first three years that the exchange is operating.

"Those are important mechanisms, I think, in the first few years because you do have in most states today exclusionary policies, frankly, that discriminate against people who have health conditions," said Ario on a media conference call. "Many of those people are outside the market. The rules as of 2014 will allow everyone to come into marketplace without regard to their health status. That puts a certain amount of pressure on the marketplace."

The three mechanisms will help smooth the transition and provide more stability in the marketplace for insurers who end up with more sick people than other insurers as well as for insurers who might not be able to predict their risk in the first couple of years, Ario said.

The protections are "primarily designed to limit the downside" for insurers, Ario said. Although risk corridors also could cap the profits of some insurers, he said "primarily the focus is on protecting those insurers who may end up with a risk pool that was not as favor as another insurer's.

States could choose to change the details of reinsurance or risk adjustment from those set out by the federal standards. Any state that decides to make changes would need to publish a notice at least one year before the benefit year begins. The regulation proposes that states that want to modify the parameters publish a notice by March in the calendar year before the effective date.

Publication Details