1. T HE A FFORDABLE C ARE A CT:
R EINSURANCE , R ISK C ORRIDORS , AND
R ISK A DJUSTMENT

2. O VERVIEW
These are all
premium/
• Reinsurance
subsidy
stabilization
• Risk Corridors
programs to
help protect • Risk Adjustment
enrollees and
issuers from • Key Dates
significant
overpayments
or losses.
PAGE 2

3. REINSURANCE
PAGE 3

4. R EINSURANCE
• A temporary program starting in 2014 to help stabilize amount
of premium payments for high-risk individuals and small group
plans
o Will be in effect from 2014-2016
o Will be operated by the state or HHS
• Reinsurance entities will use the money collected to make
payments to issuers that insure high-risk individuals in the
individual market for any plan year
PAGE 4

5. R EINSURANCE :
S ET - UP
• Reinsurance entities are tax-exempt, non-profit organizations
o States can choose to operate multiple reinsurance entities or partner
together with other states
o States that already have a high-risk pool in place the reinsurance program
will replace or expand the high-risk program
• High-risk individuals are determined by using a listing of 50-100 high
risk medical conditions that will be developed by HHS
o The ACA indicates that this listing of medical conditions is based on the use
of applicable diagnostic and procedure claims codes that indicate an
individual has a pre-existing condition or is considered high-risk to insure.
o The American Academy of Actuaries (AAA) has provided several methods
for classifying high-risk individuals for developing the list of medical
conditions.
PAGE 5

6. R EINSURANCE :
C ONTRIBUTIONS AND PAYMENTS
• HHS is in charge of collecting and disbursing payments during
the calendar year
o Every health insurance issuer/self-insured group plan must
contribute to reinsurance program
o Only non- grandfathered issuers in the individual market will be
eligible to receive payments
• Issuers contribution will be based off the national per capita
formula:
o = National reinsurance pool + Treasury contribution + Administrative costs
Estimate of enrollees in plans required to make reinsurance contributions
o Estimated rate for benefit year 2014 will be $5.25 per month
o Issuers will multiply this rate by the average number of enrollees in all their
plans to determine their payment amount
• 2014 – 2016 reinsurance payment contributions for all states
PAGE 6
will equal a total of $25 billion

7. R EINSURANCE :
PAYMENT PARAMETERS
• Payment amounts will be based on the following three payment
parameters to be issued annually by HHS:
o Attachment Point – dollar amount that the reinsurance
program will begin contributing to the claim amount
o Coinsurance rate – percentage rate that is multiplied by the
difference between the attachment point and the
reinsurance cap
o Reinsurance cap – dollar amount that the reinsurance
program will stop contributing to the claim amount
PAGE 7

8. RISK CORRIDORS
PAGE 8

9. R ISK C ORRIDORS
• In order to control cost, insurers have traditionally sought to
primarily insure healthy individuals, who generally require fewer
medical services.
• To offset the additional medical costs of high-risk individuals,
insurers would increase overall premiums.
• To help minimize this effect and to help ensure premium
stabilization as the ACA is enforced, a risk corridor program will
be put to use.
PAGE 9

10. R ISK C ORRIDORS :
P ROGRAM O VERVIEW
• A temporary program starting in 2014 to help protect
individuals against incorrect costs that were estimated
for the beginning years of the ACA
o Will be in effect 2014-2016
o Will be operated by HHS
• Will apply to individuals and small groups whose plans
are within the Exchange
o If issuers’ QHPs outside of the Exchanges are substantially
similar (i.e., provide similar healthcare coverage) to those
within the Exchanges, the risk corridors will also apply
• Risk adjustment payment/charges are due 30 days after notice
PAGE 10

11. R ISK C ORRIDORS :
PAYMENT M ETHODOLOGY
HHS makes payment to QHP to minimize losses: HHS receives payment from QHP to spread
gains:
103% of 92% of
Allowable 108% of Target Allowable 97% of Target
Target < > Target < >
Costs Amount Costs Amount
Amount Amount
o HHS will pay QHP an amount equal to 50% of the o A QHP issuer will pay HHS an amount equal to
allowable costs over 103% but below 108% of the 50% of the difference between 97% of the target
target amount amount and the actual allowable costs value
o When allowable costs are higher than 108% of the o When allowable costs are less than 92% of the
target amount, HHS will pay the QHP issuer an target amount, the QHP issuer will pay HHS an
amount equal to 2.5% of the target amount plus amount equal to 2.5% of the target amount plus
80% of the allowable costs over 108% of the target 80% of the difference between 92% of the target
amount amount and the actual allowable costs value
Definitions:
o Allowable costs are equal to the total costs of providing the plan’s benefits, excluding administrative costs.
Allowable costs can be reduced by risk adjustment and reinsurance payments.
o Administrative costs are the non-claim costs for running the QHP. The allowable administrative costs are
capped at 20% of premiums earned (including government-based plan premiums).
o A target amount is equal to total premiums less the plan’s administrative costs. The total premiums can
include premium subsidies from government-based plans.
Source: Patient Protection and Affordable Care Act (see pages 211-212) and Federal Register Vol. 77, No. 57 (see page 17251)
PAGE 11

12. RISK ADJUSTMENT
PAGE 12

13. R ISK A DJUSTMENTS
• Risk adjustment is the process of adjusting payments or premiums to
align with the health status of plan member
• A permanent program starting January 2014 to help stabilize financial
risk among health insurance issuers
o Will be operated by states or HHS
• Ranks issuers into two categories:
o Low Actuarial Risk (plans will be charged a fee)
o High Actuarial Risk (plans will receive a payment)
• Non-grandfathered individual and small group plans do not need to be
enrolled in an Exchange to participate
PAGE 13

14. R ISK A DJUSTMENT:
S ET - UP
• States can follow HHS risk adjustment program or create their
own
• States can have a third party perform risk adjustment functions
o Third Party must:
 Be incorporated
 Have experience in dealing with individuals/groups benefit
coverage
 Not be a health insurance provider
• States can use grant funds received for starting an Exchange to
set up their risk adjustment program
o Beginning 2014, states will need to decide what will be the
PAGE 14 revenue source to finance their program

15. R ISK A DJUSTMENT:
HHS R ISK A DJUSTMENT P ROGRAM
• HHS risk adjustment program will use the current Medicare
Advantage model
• HHS risk adjustment program will be using Hierarchical
Condition Category (HCC) classification System in order to
predict medical spending and their corresponding diagnoses
• HHS will be using plan liability to perform risk adjustment on the
different plan levels.
o However, states can choose between total expenditure or plan
liability
PAGE 15

16. R ISK A DJUSTMENT:
S TATE A LTERNATE R ISK A DJUSTMENT
P ROGRAM
KEY QUESTIONS TO CREATING A RISK RISK ADJUSTMENT CRITERIA
ADJUSTMENT PROGRAM
Should the state use a Prospective model or a Criteria is based on the HCC model used in
Concurrent/Retrospective model for its risk Medicare Advantage
adjustment program? o Accurately explains cost variation,
Should the state’s risk adjustment program o Choose risk factors that are clinically
include pharmacy categories? meaningful to providers,
Which data fields (e.g., diagnosis fields) o Encourage favorable behavior and discourages
should the state include in its program? unfavorable behavior,
What premiums will be applied to support the o Uses data that are complete, high quality and
state’s risk adjustment results? available in a timely fashion,
What rating variables will the state employ? o Is easy for stakeholders to understand and
What are the area calculations and implement,
adjustments? o Provides stable risk scores over time and across
How will the state score members with plans, and
insufficient experience? o Minimizes administrative burden
Source: State Health Reform Assistance Network Risk Adjustment and Reinsurance - A Work Plan for State Officials (see page 6) and
Analysis of HHS Final Rules On Reinsurance, Risk Corridors, and Risk Adjustment (see page 5)
PAGE 16

17. R ISK A DJUSTMENT:
S TATE A LTERNATE R ISK A DJUSTMENT
P ROGRAM
• John Hopkins University created a software states can
incorporate into their risk adjustment program
o Software is called ACG-HIE (Adjusted Clinical Group System
– Health Insurance Exchange)
o ACG-HIE will calculate the individual risk score by using
diagnosis or pharmacy data
o Will be provided to health insurance Exchanges at no cost
PAGE 17

18. R ISK A DJUSTMENT:
D ATA C OLLECTION
• Data will be collected by the state or HHS to determine an
individual’s risk score
o Issuers can submit raw data for the state/HHS to determine
risk scores or submit self-determined risk scores
o HHS/state privacy and security standards should be
implemented
o HIPAA transaction standards must be followed
• All data submitted will need to go through a validation process
to determine credibility
• Risk scores will be used to determine payment amounts to high
PAGE 18 actuarial risk plans

19. R ISK A DJUSTMENT:
R ISK SCORES
• In order to determine adjustment payments, individual risk
scores will need to be determined by the issuers
• Age, demographics, and any diagnosed illnesses will be used
when calculating an individual’s risk score
• To determine an individual risk score each factor would be
assigned a weight that is then entered into an algorithm to
compute the score.
• Once score is completed it is compared to the population
average to determine what that individual’s medical spending is
compared to the population average
PAGE 19

20. R ISK A DJUSTMENT:
E XAMPLE OF A RISK SCORE
PAGE 20

21. R ISK A DJUSTMENT:
PAYMENTS
Two ways HHS has determined to calculate payments:
Normalized Premiums
o Divide each plan’s premiums by the plan’s actuarial value. This will normalize plan and states
premiums.
o The amount calculated from above is then weighted by enrollee months for all specific risk
plans. This will create the normalized average premium which will be used as the basis for a
state’s normalized average premiums.
o The plan’s average actuarial risk deviation from the state average actuarial risk is calculated by
multiplying the state’s normalized average premium, the plan’s enrollee month, and the plan’s
actuarial value.
Plan-Specific Premiums
o This method works under the assumption that plan premiums reflect the state average
actuarial risk and that there is a risk adjustment for favorable/adverse selection.
o Actuarial risk deviation multiplied by the aggregated plan premium will give the gross plan
charges and total plan payments that will need to be collected and distributed.
PAGE 21 Source: Federal Register Vol. 76 No 136 (see page 41939)

22. R ISK A DJUSTMENT:
E NFORCEMENT
• HHS enforces the risk adjustment programs
• Each year, states will submit a summary report to HHS that
includes:
o Average actuarial risk score for each plan
o Corresponding charges/payments
o Any additional detail as required by HHS
PAGE 22

23. K EY D ATES :
P REMIUM S TABILIZATION P ROGRAMS
DATE EVENT
January 2013 HHS Final Notice of Benefit and Payment Parameters for 2014
published
January 15, 2013 HHS will respond to states about their risk adjustment
methodology
March 1, 2013 Deadline for States to publish annual Notice of Benefit and
Payment Parameters for 2014 reinsurance and risk adjustment
programs
April 2013 Issuers will start creating their premiums in order to match the
results of the risk adjustment methodology
January 1, 2014 Premium stabilization programs are in effect
PAGE 23

24. K EY D ATES :
P REMIUM S TABILIZATION P ROGRAMS
PROGRAM PERIOD
Reinsurance Transitional program in effect from 2014 – 2016 calendar years
January 2015 – HHS starts collecting contributions
April 30th following applicable benefit year – Issuers send data to HHS
for payment
June 30th following the applicable benefit year – HHS notifies issuers of
payment amount
November 15th of the benefit year – Issuers must report their annual
enrollment count to HHS
December 15th of the benefit year – HHS will send a notification
showing the amount due
Risk Corridor Transitional program in effect from 2014 - 2016 calendar years
June 30th following applicable benefit year – HHS will notify issuers of
their risk adjustment payments/charges and reinsurance payments for
preceding benefit year
July 31st following applicable benefit year – QHP issuers must submit
data regarding actual premiums received for the preceding benefit year
Risk Adjustment Permanent program that will go in effect January 2014
PAGE 24
June 30th following applicable benefit year - a risk adjustment will be
conducted

25. R EED & A SSOCIATES , CPA S
For more information on Reed & Associates, CPAs please
contact us at:
inquire@reedassociatescpas.com
Phone: 860-395-1996
Or visit our website:
reedassociatescpas.com
PAGE 25
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