This summer featured continued disruption in aspects of the Affordable Care Act. This time, the vehicle was suspended risk adjustment payments to health plans. The payments have since resumed, but the methodology used to determine them has come under question.

So-called “risk adjustment” payments were established in the ACA to stabilize the health insurance market by transferring money to plans serving higher risk patients from those serving lower risk patients. The total in transfers for 2017 is $10.4 billion.

Two lawsuits, one in Massachusetts and one in New Mexico, declared the methodology used to determine payments respectively legal and then illegal. These lawsuits prompted CMS to issue a final rule in late July intended to address concern about the methodology used for the payments.

“The final rule will restore the operation of the risk adjustment program and mitigate some of the uncertainty caused by the New Mexico litigation,” CMS Administrator Seema Verma said in a statement. “Issuers that had expressed concern about having to withdraw from markets or becoming insolvent should be assured by our actions.”

And some issuers were glad to see the payments resume. “The risk adjustment program is an important tool that ultimately protects consumers and helps lower costs for members,” said Andy Hetzel, vice president corporate communications, Blue Cross Blue Shield of Michigan. “Overall, Michigan’s market is more competitive than other states, and has a lower statewide average premium. BCBSM is the largest insurer, with rates extremely competitive to other insurers.

But other issuers are not so sanguine. “We were disappointed that the states and CMS didn’t take this opportunity to rethink the payment formula equation, which is flawed. We thought it was a really great opportunity to crack open the model and the payment calculations to make sure what they had intended to protect against was actually occurring in the model,” said Marti Lolli, Chief Marketing Officer and Senior Vice President of Consumer and Government Markets for Priority Health, a Michigan health plan.

Lolli said the current formula bases risk adjustment payments on a state average premium, moving money from those with low premiums to those with higher premiums, ostensibly to cover the added risk of high-needs patients that tend to drive premiums up. But Lolli said administrative costs and profit margins are used to calculate a health plan’s average premium. She said the premiumsshould be calculated based on medical
costs alone, and health plans that have low administrative costs and use management strategies such as narrow provider networks (which Lolli
said save 18 to 20 percent) to drive down costs should not be penalized with high risk adjustment payments.

Lolli said larger plans with higher average premiums penalize other plans operating in the state by driving up risk adjustment payments.

In 2017, Lolli said Priority Health paid $57 million in adjustment
payments. Blue Cross and Blue Shield of Michigan received $105

“The statewide premium accomplishes the goal of the program, incentivizing insurers to set prices based on average risk, which creates a
more stable and less expensive risk pool,” said Hetzel.

“Frankly, the system would even better protect consumers if all carriers offered PPO plans. These plans have broader networks and typically attract people with more costly and complex health conditions. All other
carriers in Michigan have dropped this type of plan, leaving Blue Cross as the sole PPO option,” he added.

Lolli said there are a number of fixes that would make sense. In addition to removing administrative costs and profit margins from the state average
premium calculation, she said average premiums should be based on regions, rather than states to eliminate differences in costs between rural
and urban areas and to address market peculiarities within states.

Pursuing millennials and other young, healthy populations should not be penalized as enrolling healthy people who pay premiums was a major focus of the ACA, she said.

Another potential fix is limiting the exposure to risk payments for health plans that end up paying more in risk adjustment payments for their patients than they collect in premiums, a situation that affects about 20 percent of Priority Health’s enrollees, said Lolli.

“The risk of using a different formula, such as a calculation using a plan’s
own premium, is that the proposal would significantly increase volatility
in the market from year to year,” said Hetzel.