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Will Insurers Suffer on Halt in Risk-Adjustment Payment?

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Injecting a fresh dose of uncertainty for health insurers, the Trump administration has said that it would halt payments under risk adjustment. This will put the money of many insurers with sicker customers at stake.

The risk-adjustment program was formed under Obamacare. It is a mechanism under which insurers with a healthier customer profile received from Obamacare health exchanges compensate those with a sicker patient population.

This risk-adjustment arrangement was put in place to make the functioning of the insurance market places smoother and prevent any of the insurance companies from “cherry-picking” customers.

On Saturday, the U.S. Centers for Medicare & Medicaid Services said that it will be compelled to suspend $10.7 billion in risk-adjustment payments which were due for 2017, following a month’s old federal ruling.


Effect of Suspension

The effect of this halt will be varied, with insurers as well as customers facing the consequences. In the short term, however, insurance companies with a healthier patient population will be better off as they would stand to gain on savings on the risk-adjustment payment, which otherwise would have to be made by them to their less-advantageous counterparts. The loser would obviously be the insurer group that was the recipient of funds under the risk-adjustment program.

Over the long term, the fear is that the end of the risk-adjustment program will disrupt the health insurance market place. Since those who lose from costly customers and do not get compensation from the risk-adjustment program would raise the premium, making health insurance more expensive. This might eventually lead to an increase in the uninsured rate, which means a lesser number of Americans buying policies and a decline in the top line of players.

The risk-adjustment program along with two other programs, namely risk corridors and reinsurance, were put in place to stabilize premiums and lessen the risk of operating in the law’s fledgling individual marketplaces.

According to FierceHealthcare, Aetna Inc. AET paid the maximum in the risk-adjustment program from 2014-2016 of nearly $1 billion. Molina Healthcare Inc. MOH, Centene Corp. CNC, Kaiser Permanente and Fidelis Care rounded out the top five payers.

The action has caused industry-wide chaos among health insurers and supporters. Blue Cross Blue Shield Association’s Chief Executive Officer Scott Serota said in a statement that the Centers for Medicare and Medicaid Services “should take immediate action to reinstate these payment transfers to ensure the market works as intended.”

One of the biggest health insurance companies, UnitedHealth Group Inc. UNH, has already left the insurance marketplace due to losses incurred from it.

Given the uncertainty over risk-adjustment payments, other insurers still present on the exchanges are struggling to price their policies and decide marketplaces on which to offer their plans. If regulatory uncertainty persists, other companies also may call it quits from the marketplace business.

Friction in Sight?

This action along with other regulatory moves would make the functioning of the Affordable Care Act all the more difficult. The most pertinent of the recent regulations is the repeal of the individual mandate provision, which required individuals to carry a health insurance or to pay a fine in case of failure to do so.

This regulatory action is believed to give healthy young individuals the choice to remain uninsured. The CBO estimates that this rule will cause premiums to go up by nearly 10%. Other changes such as reducing the advertising budget for Obamacare exchanges and narrowing the open enrollment period work against the ACA.

All these factors combined will lead to an increase in the uninsured rate, which has already been showing an uptick. The nonprofit Commonwealth Fund data showed that the uninsured rate rose in the first few months of this year, from 12.7% at the end of 2016 to 15.5% in the first three months of 2018.

Health insurers have showed resilience by putting up a superior performance for the past several years since the Affordable Care Act was enacted andwe believe that the players will emerge as winners over the long term. Nonetheless, short-term jerks will prevail until the regulatory dust settles.

In a year’s time, the industry has grown 30%, which is more than double the gain of 14% clocked by the S&P 500 index and 1.7% by the Medical sector.

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