The Affordable Care Act’s Risk Adjustment and Other Risk-Spreading Mechanisms: Needed Support for New Jersey’s Health Insurance Exchange

Abstract

The Affordable Care Act includes a number of provisions designed to reduce or eliminate the possibility that the health insurance exchanges the Act establishes will attract a disproportionate number of relatively sick individuals. The most notable of these checks is the individual mandate requiring that most individuals secure health insurance. Risk concentration may still occur, however, including as a result of the phenomenon known as adverse selection.

This policy brief sets forth the provisions of the Affordable Care Act that are expected to have an effect on adverse selection, as well as steps states have taken to prevent it from occurring. The brief then describes the Affordable Care Act’s risk adjustment, reinsurance, and risk corridor provisions, and the corresponding provisions of the implementing regulations, all of which are designed to correct for any uneven distribution of risk across health plans that does occur, whether due to adverse selection or other causes. To the extent that these risk-distribution mechanisms function as intended, they will encourage insurers to compete on price and quality and not on the relative health of their risk pools.

New Jersey must make a number of choices with regard to the implementation of its reinsurance and risk adjustment programs; the risk corridor program will be run by the federal government. Key decisions New Jersey must make include the following: (1) whether to establish its own reinsurance program, and if so, whether to collect contributions from fully-insured plans or leave that to HHS; (2) if it chooses to establish its own reinsurance program, whether to vary certain federally-set parameters; (3) whether to establish its own risk adjustment program; (4) if it chooses to establish its own risk adjustment program, whether to use a risk adjustment methodology promulgated by HHS or to develop its own methodology for federal certification; (5) whether to coordinate risk adjustment in the individual and small group markets with risk adjustment in Medicaid managed care; and (6) what entity or entities should be responsible for the reinsurance and risk adjustment programs.

The brief concludes by noting that a planning tool New Jersey might employ to sort through its options is the creation of an expert advisory group, which could comprise exchange personnel, staff from the Departments of Human Services and Banking and Insurance, insurance and reinsurance experts, consumers, and navigators. While HHS is responsible for implementing risk corridors, New Jersey has significant choices to make and will play a central role in the implementation of the state’s reinsurance and risk adjustment programs.