What will happen to a health plan that enrolls a different mix of members in 2014 than anticipated? Beginning in 2014, when major provisions of the Patient Protection and Affordable Care Act (ACA) become effective, including guaranteed issue and community rating, many people with poorer health will have the opportunity to purchase insurance—some for the first time—and at premium rates the same as those charged to their healthier peers. Insurers are wary of the unknown financial impacts inherent in this market shift.

To address this risk, the federal government introduced the “3Rs” to help insulate insurers. This paper explores the net impact of these programs, in particular risk adjustment, when members of varying characteristics are enrolled in a plan. In particular, we investigate the financial impact to a health plan of enrolling a membership base with different demographic and morbidity characteristics than those that were anticipated when developing rates.

The results of our analysis are, in most cases, the precise opposite of what one would expect without these programs. In several important ways, the nuances and interactions inherent in the 3Rs can generate impacts that actually turn traditional risk management practices upside down.