Explaining Health Care Reform: Risk Adjustment, Reinsurance, and Risk Corridors

As of January 1, 2014, insurers are no longer able to deny coverage or charge higher premiums based on preexisting conditions (under rules referred to as guaranteed issue and modified community rating, respectively). These aspects of the Affordable Care Act (ACA) – along with tax credits for low and middle income people buying insurance on their own in new health insurance marketplaces – make it easier for people with preexisting conditions to gain insurance coverage. However, if not accompanied by other regulatory measures, these provisions could have unintended consequences for the insurance market. Namely, insurers may try to compete by avoiding sicker enrollees rather than by providing the best value to consumers. In addition, in the early years of market reform insurers faced uncertainty as to how to price coverage as new people (including those previously considered “uninsurable”) gained coverage, potentially leading to premium volatility. This brief explains three provisions of the ACA – risk adjustment, reinsurance, and risk corridors – that were intended to promote insurer competition on the basis of quality and value and promote insurance market stability, particularly in the early years of reform.

CONCLUSION

The Affordable Care Act’s risk adjustment, reinsurance, and risk corridors programs were designed to work together to mitigate the potential effects of adverse selection and risk selection. All three programs aimed to provide stability in the early years of a reformed health insurance market, with risk adjustment continuing over the long-term. Many health insurance plans are subject to more than one premium stabilization program, and while the programs have similar goals, they are designed to be complementary. Specifically, risk adjustment is designed to mitigate any incentives for plans to attract healthier individuals and compensate those that enroll a disproportionately sick population. Risk corridors were intended to reduce overall financial uncertainty for insurers, though they largely did not fulfill that goal following congressional changes to the program. Reinsurance compensated plans for their high-cost enrollees, and by the nature of its financing provided a subsidy for individual market premiums generally over a three-year period. Premium increases are expected to be higher in 2017 in part due to the end of the reinsurance program.