Risk Adjustment — all clear

In Mayhew On Insurance by David Anderson

CMS released an interim final rule for the 2017 risk adjustment budget neutrality assumption last night.  Given the subject matter, it is scintillating reading.

TLDR: All is well (except insurance finance directors’ blood pressure)

HHS has published their thought process as to why risk adjustment for 2017 should be budget neutral and we should expect risk adjustment payments and receipts that are due to move around in the next two months to start moving normally.

This approach supports the overall goal of the risk adjustment program to encourage issuers to rate for the average risk in the applicable state market risk pool, and avoids the creation of incentives for issuers to operate less efficiently, set higher prices, develop benefit designs or create marketing strategies to avoid high risk enrollees. Such incentives could arise if HHS used each issuer’s plan’s own premium in the risk adjustment payment transfer formula, instead of statewide average premium…

First, Congress designed the risk adjustment program to be implemented and operated by states if they choose to do so. Nothing in section 1343 of the PPACA requires a state to spend its own funds on risk adjustment payments or allows HHS to impose such a requirement. Thus, while section 1343 may have provided leeway for states to spend additional funding on the program if they voluntarily chose to do so, HHS could not have required additional funding within the HHS-operated risk adjustment methodology…

PPACA’s risk adjustment statute makes no reference to additional appropriations whatsoever…

if HHS had elected to adopt a HHS-operated risk adjustment methodology
that was contingent on appropriations from Congress in the annual appropriations process that…would have created uncertainty for issuers in the amount of risk adjustment payments they could expect [DA — this may win understatement of the year]


Risk adjustment payables will be invoiced in September. Insurers in a net receivable position (ie insurers with a higher than state wide coded morbidity population) will get their money in October.

The value of the risk adjustment entries on insurer’s balance sheets will not be discounted if the district court judge accepts this interim final rule. The end result is that several insurance directors and auditors had significantly more burnt coffee than they really wanted and an implied assumption is made explicit.