In Back to the Future Part II,¹ Marty McFly and Doc Brown fire up the DeLorean and travel from 1985 to 2015 to straighten out the future from Biff’s attempts to use Grays Sports Almanac to make sure bets. We know the movie missed on a few 2015 predictions, such as the Cubs winning the World Series again (now at 106 years since their last championship and counting²), Jaws 19 (they stopped after Jaws: The Revenge, the fourth entry in the franchise³), and power lace shoes (Velcro has been the last innovation there).

If there would have been a Healthcare Almanac, what sure bets would Biff have placed? Would Biff bet that the risk takers and risk-taking arrangements of 1985 or maybe the 1990s would still be in place and evolving over the years, or would he bet that past deal terms and structures would be dusted off and reintroduced? While the current provider risk posture may seem much like the 1990s, the lessons learned from that time, coupled with the recent legislative initiatives, have created a risk-taking environment that is very different from the past. A renewed (and justified) interest has emerged in creating provider organizations and in seeing providers take on more risk.

There are a number of initiatives influenced by the Patient Protection and Affordable Care Act (ACA), such as accountable care organizations (ACOs), the level playing field created by risk mitigation, the product transparency existing on the exchanges, and carrier loss ratio requirements, along with a focus on quality and innovation. The ACA created a number of issues that are distinctly different from the past and that a provider organization should consider when structuring a risk-taking arrangement, including:

• Homogeneity of the covered population
• ACA-enabled parameters such as:
  • Cost-sharing reduction subsidies for low-income individuals
  • Risk adjustment
  • Reinsurance
  • Risk corridors
   

Homogeneity of the population

Insurance carriers typically classify their risk-taking arrangements by line of business: commercial, Medicaid, or Medicare Advantage. Each of these lines of business has unique characteristics such as revenue sources, utilization levels, acceptable reimbursement rates, distribution channels, competitive landscape, market dynamics, profit targets, and administrative loads. Within each of these lines of business, there are also diverse subpopulations. Each of these subpopulations are quite different and represent varying per capita healthcare resource consumption rates coupled with approaches to effective clinical intervention.

• Medicaid may include members eligible for Temporary Assistance for Needy Families (TANF) and aged, blind, or disabled populations as well as Supplemental Security Income (SSI), both with and without Medicare.
• Medicare Advantage may include traditional beneficiaries (age 65+), dual special needs plans (SNPs), chronic SNPs, and retiree employer groups.
• Commercial may include individual, small group, and large group.

The ACA introduced dual demonstration programs along with the Medicaid expansion in many states while Baby Boomers continue to become a greater proportion of the Medicare Advantage program. These changes could affect the homogeneity of the population within these lines of business; however, ACA provisions are expected to have the greatest impact on the homogeneity of the commercial line of business.

Starting in 2014, the ACA introduced a number of provisions that leveled the playing field for carriers in the individual market. The most visible of the provisions was the creation of a new distribution system, the exchanges. In addition, mandated coverage through guaranteed issue policies⁵ was enabled by creating tax penalties to encourage all persons to enroll regardless of health status to ensure a representative cross section of risks. The profiles in the individual population will range from those not previously seeking insurance (young invincibles) to the medically underwritten to the previously uninsured, depending on the competitive position, marketing efforts, benefit offerings, and the network of the carrier.

While the exchange mechanism for the individual market is maturing, most of the small group enrollment is expected to be off the exchange in the near future. The small group exchange or Small Business Health Options Program (SHOP) was not fully implemented in 2014.⁶ Going forward, many states⁷ elected to allow employees to have the choice of carrier and benefit plan, rather than the employer, which can lead to adverse selection for carriers and downstream risk-taking providers. Given the new level playing field and the easy premium rate comparisons between the individual and small group markets, many small employers may choose to drop coverage and allow their employees to buy coverage through the individual market while others may take advantage of carriers willing to self-insure small groups with as few as 20 employees. Finally, in 2016, the small group market will be expanding from 50 eligible employees to 100.⁸ The composition and size of the small group population for a carrier could vary significantly depending on the size of the groups enrolled and the prevalence of small group self-insured products.

The primary impact of the ACA on the large group market is groups with 50 to 100 employees moving to the small group risk pool in 2016 and more large employers self-insuring to avoid ACA mandates and the health insurance tax.

As described above, there are many dynamics that providers need to be aware of in the commercial line of business created by the ACA. Standard actuarial and underwriting practices attempt to match the premium levels to the underlying risks at the most granular levels. The tenets of the ACA make the notion of “pricing to the risk” less attainable. There are a number of implicit premium subsidies embedded in the premium rates of ACA-compliant products.

Providers should consider the subsidies and mix of members between the individual, small group, and large group markets. Capitation payments and targets reflect the costs of an average covered member when, in fact, each subpopulation could have significantly different costs such as previously medically underwritten members (low cost) versus previously uninsured, low-income members (high cost). The mix of members within the population could easily vary from what the carrier assumed, subjecting providers to substantial mix risks over which they have no control. The potential for a nonhomogenous population could result in unintended financial results such as not beating carrier-established targets (claim costs, loss ratios, trends, etc.), which would be due to a disproportionate share of low-income members, small group members, or older members. While it may add administrative complexity to the risk-taking arrangement, separate agreements or parameters for individual, small group, and large group coverage may help mitigate risk, especially in light of the ACA parameters affecting risk.

ACA provisions

The Centers for Medicare and Medicaid Services (CMS) introduced cost-sharing reductions to make coverage more affordable for low-income individuals and provided risk adjustment, reinsurance, and risk corridors (i.e., the 3Rs) for additional protection to carriers introducing ACA-compliant products in the individual and small group markets.

Cost-share reduction⁹

Individual market carriers file benefit plans that must meet actuarial value (paid claims divided by allowed claims) guidelines, which map each benefit plan into one of four metallic tiers:¹⁰ platinum (actuarial value [AV] of 88% to 92%), gold (AV of 78% to 82%), silver (68% to 72%), and bronze (58% to 62%). Thus, the AV is an indication of the richness of each benefit plan. The higher the AV, the lower the member cost sharing, the more the carrier pays, and generally, the higher the premium rate.

A goal of the ACA was to reduce the number of uninsured and underinsured people through individual market reforms. Instead of offering low-income members—those with incomes less than 250% of the federal poverty level (FPL)—a “richer” tier such as platinum or gold, the ACA allowed low-income members to receive a cost-sharing reduction (CSR) applied to a silver plan.

All silver plans offered on the exchange also have three CSR variations¹¹ for low-income members: 73% AV (200% to 250% of FPL), 87% AV (150% to 200% of FPL), and 94% AV (100% to 150% FPL). Members in these plans pay the standard silver premium rate; however, they pay lower cost sharing at the time of treatment, and the carrier pays higher claims to the provider. For example, a member making 125% of FPL who is enrolled in an individual plan would pay about 6% cost sharing, on average, versus the standard silver plan cost sharing of 30%, on average. Thus, there will be a mismatch between claims and revenue. Carriers are paid a prospective monthly payment, which estimates the CSR for each low-income member. At the end of the year, the carrier identifies what it actually paid in CSR. The actual amount is compared to the prospective amount, and the carrier reconciles the difference with CMS.¹² In theory, this provision should create no risk to the carrier; it is just a mechanism to help with cash flow. The carrier’s reconciliation with CMS will take months after the end of the calendar year. The timing and reconciliation of the CSR payments with CMS need to be considered in risk-taking arrangements.

Actual claim costs will be overstated (i.e., paid at CSR AV rather than silver AV) prior to the reconciliation with CMS for low-income members in the individual market. Providers should be aware of this provision and understand how carriers reflect it in percent of premium and fixed capitation or target claim costs and trend arrangements.

Risk adjustment

Providers have been introduced to risk adjustment in the past. Carriers hear “our members are sicker” from capitated providers. The risk adjustment process identifies morbidity differences between populations, allowing for more valid comparisons of claim cost levels.

The ACA introduced risk adjustment¹³ to the individual and small group markets effective January 1, 2014. Risk adjustment protects the carrier against a disproportionate share of higher risks. For each market within each state, CMS will compare each carrier’s risk score to the statewide average risk score. Carriers with risk scores higher than the statewide average will receive payment while carriers with risk scores lower than the statewide average will make payments. Within each state and market, the risk adjustment transfer will be a zero-sum game (i.e., payments = receipts). Similar to the CSR settlement process, the settlement between a carrier and CMS does not occur until seven months after the close of the calendar year. If the carrier has a disproportionate share of higher risks, then the risk adjustment transfer will reflect this.

Risk adjustment is dependent on provider coding practices. Carriers will be relying on providers to properly capture all diagnoses, which they hope will improve risk scores. For capitated providers, this means submitting accurate and complete encounter data (i.e., fee-for-service equivalents). It is important to work with carriers on these initiatives as higher risk scores will either reduce the transfer payment to other carriers or increase the likelihood of a receiving a transfer payment from other carriers, both of which result in more revenue for carriers.

Providers should be aware of their relative risk positions within a carrier’s network. They should also be aware that their risk-taking arrangements take risk adjustment into account . In addition, providers should make sure their risk-taking arrangements include the proper incentives for reporting encounter data and for capturing diagnoses.

Reinsurance

CMS introduced a temporary reinsurance program¹⁴ in the individual market for 2014, 2015, and 2016. The temporary reinsurance program protects the carrier against high-cost claims that may be new and would be due to covering previously uninsured or underinsured members. Under the temporary reinsurance program, CMS collects a monthly contribution from virtually all covered lives that are not government-sponsored. These contributions are then used to fund the reinsurance recoveries.

In 2014,¹⁵ CMS pays 80% of claims between $45,000 and $250,000. In 2015,¹⁵ CMS pays 50% of claims between $70,000 and $250,000; however, we do expect CMS to reduce the lower threshold to $45,000¹⁶ and potentially increase the percentage of claims paid as contributions are expected to exceed the current benefits in 2014 and 2015.

Seemingly, these threshold levels should be incorporated into a risk-taking agreement or considered with regard to a provider’s own stop-loss coverage. Like risk adjustment discussed above, it will be important for capitated providers to record and submit accurate encounter data so that the carrier will appropriately be reimbursed for eligible large claims serviced by capitated providers. This is especially important if the capitation arrangement reflects expected reimbursement for these claims.

Risk corridors

The ACA also included temporary risk corridors in 2014, 2015, and 2016, which are also similar to Medicare Part D. The risk corridors protect the carrier against pricing risk. CMS shares 50% of the gains or losses between 3% and 8% of the target amount plus 80% of gains or losses above 8% of the target amount.¹⁷ For example, if the actual experience was 110% of the target amount, CMS would cover 4.1% (0% between 0% and 3% plus 50% between 3% and 8% plus 80% between 8% and 10%).

Unlike the approach to reinsurance and risk adjustment, the ACA did not establish a funding mechanism for the risk corridors. We expect many carriers to book a risk corridor receivable from CMS. There has been considerable discussion on whether the risk corridor will be fully funded by CMS. This will not be known until the 2015 federal budget is established.

Generally, when carriers have significant risk-taking arrangements in place, they balance the pricing or rate-setting process with the provider negotiations. As the risk-taking arrangements are expected to change, then so do the premium rates. An entirely new population is expected to enroll in ACA individual products as the government attempts to address the large number of uninsureds. If the carrier has underpriced a product because of uncertainty about the projected population, then there is a strong likelihood that the capitation is also understated. The provider settlement process with a carrier could include a provision for the CMS settlement of the risk corridor. This will help protect the provider from the carrier offering overly competitive premium rates that cannot support the underlying risk-taking arrangement.

Summary

Provider organizations and risk-taking arrangements may look like those from the past, but there are nuances created by the ACA that need to be considered. The individual and small group market reforms introduce new dynamics that can create significant demographic and morbidity differences. Providers need to understand the subtleties of the populations they are treating and the potential impact of the risk-taking arrangements.

The CSR and 3Rs also affect the levels and timing of carrier financing in these markets. Providers accepting risk must understand the CSR and 3R provisions and make sure they are properly accounted for in their risk-taking arrangements.

So don’t be like Marty and Doc Brown and crank your DeLorean up to 88 miles per hour, hoping to get to 2015 and beyond in one piece. Take the time to understand a carrier's products and perform due diligence before agreeing to take risk. A sound review of risk-taking arrangements along with a measured approach to managing care and improving quality should help providers avoid repeating risk-taking failures of the past.