2023 ACA Risk Adjustment Transfer Report - Part 1

On Monday, July 22, 2024 CMS issued the 2023 ACA Risk Adjustment Transfer report - 3 weeks later than usual as a result of an extended submission deadline granted in light of the Change Health Care outage. The report is available here, and appendices can be found on the Premium Stabilization Page of the CCIIO web site.

This report provides information on the risk adjustment transfer receivables and payables for carriers selling in the small group and individual Affordable Care Act markets. The ACA risk adjustment program is zero sum - carriers receive or pay risk adjustment to each other within a state. Unlike Medicare Advantage, which is an upside-only risk adjustment program, carriers can either receive money from the lower risk carriers in the state, or if they are a lower risk carrier, they pay into the pool. The aggregate transfer of funds is $0 - this is not a direct taxpayer subsidy of the carriers, but a mechanism designed to change incentives for health plans.

Though these reports were much anticipated in the early days of the ACA when carriers had little information about the market risk, these reports make less of a splash ten years into the ACA. However, although we are ten years in, it seems a lot of folks who report on these results in the media (and many of the industry insiders they quote) don’t understand the significance. Articles typically frame the ACA receivables / payables as if receiving RA money is good and means you won, and paying RA money is bad and means you lost. But it’s far more complicated than that!

Evensun is doing a deep dive into the 2023 and 2022 report, and in this post, the first of a series, we explain what these numbers actually mean and how you should think about them. You can take a look at some of the data we pulled together here, but if you don’t know what these numbers mean, we’ll try to unpack it in this series.

In today’s post we’ll provide some background on risk adjustment and try to explain why looking at just the raw numbers alone doesn’t tell you much. In the weeks to come, we will explore some of the ways you can glean insights from the reports and what the data might tell us about the individual ACA market.

Why Risk Adjustment?

First, why does the ACA have risk adjustment to begin with? No such mechanism existed in commercial insurance before - but the guaranteed issue nature of the ACA creates a need that didn’t exist in the “underwritten” world. Before the ACA, an individual buying coverage could be denied if they had particular health conditions, which greatly reduced the risk of “adverse selection” where a carrier gets a non-random distribution of risk. Now that carriers must sell to any individual who wants a policy, carriers have to think about who might choose their plan over another plan. If a carrier gets a randomly selected set of membership, then the premium pricing is pretty easy - just figure out what the average health care costs are in your area and price accordingly.

Of course, people don’t make their health plan decisions based on random chance. There’s lots of considerations that go into it - like what providers are in network or what drugs are on the formulary. If you’re healthy, premium pricing is probably the biggest driver, but if you have health conditions you’ll be looking at other things. So, if carriers have to sell their plans to anyone who wants it, people with health conditions may make the very rational choice to purchase plans that have the better network, even if the plans are more expensive. Here’s where the problem comes in in a world without risk adjustment: all the healthiest individuals would purchase the cheaper plan with a narrower network, while the higher risk individuals would be likely to purchase the more expensive plan with a broader network. And likely, the premium pricing for the broader network plan wouldn’t be nearly high enough to compensate for the costs of getting higher risk members. In that world, carriers would have a strong incentive to try to only attract healthy individuals.

Fixing the incentives

Risk adjustment tries to fix that incentive - carriers can still try to target healthy individuals, but if their population is healthier than the other carriers in the state, they’ll have to pay those carriers to compensate for that risk. But this isn’t necessarily bad! Let’s look at some examples. If a carrier’s average premium is $500 per month, but they only pay out $300 in claims, that leaves them with a $200 gross margin, or a 40%. But the ACA’s Medical Loss Ratio rule also required carriers to spend at least 80% of their premium revenue on claims. In this scenario, then, the carrier would have to pay a $100 rebate to its members. However, if their population was lower risk than the market average, they might instead pay $100 into the risk adjustment pool, which would go to the carriers who had higher risk members.

Paying into risk adjustment doesn’t hurt the carrier in this example - it just redistributes money. Without risk adjustment, in the long run, the carrier would probably lower their premiums, but because of risk adjustment, the carrier will price their plans assuming that they’ll have lower claims expense, but knowing that they’ll also have to give back some of that premium money through the risk adjustment transfer.

The practical effect of this is that people who are healthier are paying higher premiums than they would for plans in a “no risk adjustment” world and people with health conditions are paying lower premiums than they otherwise would in a “no risk adjustment” world. Many of the critiques and challenges to the ACA have centered around this challenge - there’s no question that a young, healthy individual pays more for an ACA plan than they would have before the ACA - and that’s an intentional policy choice. Whether it’s the right one or not we’ll leave to the politicians.

The risk adjustment transfer amount alone, then, is pretty meaningless. If a carrier’s claims expenses are $100 million for the year, but their premium was only $80 million, they likely wouldn’t be happy with a $15 million risk adjustment receivable - they would have paid more in claims than they received in premium plus risk adjustment. On the other hand, if a carrier’s claims expenses were $65 million and the carrier’s premium was $120 million, if the carrier only had to pay in $15 million in risk adjustment transfer, they’d probably be thrilled - this might mean they can lower premiums in future years and expand their market share, because their medical loss ratio is below 80%

Now you know why the transfer alone doesn’t tell you much. So what does the report tell you? We’ll explore that in the weeks to come!