Losing risk adjustments will further weaken insurers, but only if the problem isn't fixed soon.
The loss of the risk adjustment payments that healthcare insurers depend on to remain profitable under the Affordable Care Act could be another devastating blow that drives them away from the marketplace and further increases premiums.
But that's only if the Trump administration doesn't restore the payments, and it has strong motivation to do so.
The problem could be fixed by changing the payment formula CMS uses, without any legislation or regulatory maneuvers.
Saying it had no choice after a recent court ruling, CMS announced Saturday that it is temporarily ending the billions of dollars of payments intended to compensate insurers for covering even the sickest consumers.
A district court ruling in New Mexico called the calculations used to determine risk adjustment payments "arbitrary and capricious."
The decision puts on hold $10.4 billion that would have been provided to insurers for the 2017 benefit year.
Health plans were quick to condemn the decision, saying it creates even more uncertainty as they determine premiums for 2019. The Blue Cross Blue Shield Association released a statement predicting dire consequences.
"Without a quick resolution to this matter, this action will significantly increase 2019 premiums for millions of individuals and small business owners and could result in far fewer health plan choices," the association said. "It will undermine Americans' access to affordable coverage, particularly for those who need medical care the most."
No Need to Panic
Similar handwringing and grave predictions came from others in the insurance industry and media analysts, but that reaction is overblown, says Robert H. Iseman, JD, partner with the Rivkin Radler law firm in Albany, New York.
If nothing further happens with risk adjustments, it is true that insurers would suffer another blow and pass the hurt on to consumers in the individual and small group markets, he says.
But he thinks that is highly unlikely.
"You have to approach this from the political angle. A lot of people are overreacting without taking into account the fact we have midterm elections coming up, and I think the last thing the Trump administration would want is further disruption of the healthcare market due to events that are within their control," he says. "HHS has the ability, through regulation, to fix anything that may be wrong with the risk adjustments required in the ACA."
Iseman notes that CMS said as much in its announcement, with Administrator Seema Verma noting that CMS has asked the district court to reconsider its ruling. CMS "hopes for a prompt resolution that allows [it] to prevent more adverse impacts on Americans who receive their insurance in the individual and small group markets," Verma said.
"A lot of people are overreacting ... and I think the last thing the Trump administration would want is further disruption of the healthcare market due to events that are within their control."
—Robert H. Iseman
The motivation for CMS is not entirely clear, however. There was another ruling from the U.S. Court for the District of Massachusetts, a month before the New Mexico district court's, which said that CMS had acted within its authority in basing its risk adjustment calculations on statewide average premiums.
"It's a little puzzling why, with the conflicting court decisions, they decided now that they can't make the payments any longer," Iseman says. "There must be a line of reasoning that led them to see the New Mexico decision as more authoritative, but they have not said what that might be."
The Last Risk-Sharing Feature
The risk adjustments are especially important to health plans because they have already lost the other two risk-sharing features of the ACA: the "risk corridor" program that incentivized insurers to offer coverage in difficult or unattractive markets, and the cost sharing reduction program that subsidized discounts on deductibles and copays for lower-income individuals.
"When those things happened a lot of the same people were writing the same things, that this is the end of the world for insurers," Iseman says. "Those were supposed to be catastrophic. The loss of the individual mandate was supposed to be the death knell for the whole program. But what's left of the ACA continues to function, at least in the sense that the exchanges continue to provide meaningful coverage for individuals and small businesses."
The risk adjustment payments are the one risk-sharing mechanism that has remained, and it works pretty well, he says.
"These payments that are being withheld now are based on the insurers' experience in 2017, which is another reason I can't believe something won't be done to fix this," he says.
CMS could fix the problem by reworking the formula it uses to calculate the payments, Iseman says, because the particulars of the formula were at the heart of the New Mexico ruling.
One concern has been that smaller insurers are disadvantaged because they do not have access to the same amount of data as their larger competitors, and the formula relies on that data to determine payments.
"This is really an arithmetic problem," he says. "They can change the way the formula works or how they are administering the formula, without having to change the regulations in the ACA."
Critics have contended that the CMS decision is just another effort by the Trump administration to dismantle key components of the ACA and let it fail, and Iseman doesn't rule out the possibility that CMS will announce a discontinuation of the risk adjustment program going forward.
But because the $10.4 billion in payments for the 2017 premium year were already earned, he expects them to be distributed.
"I think they will be worked out sooner, rather than later. Insurers are getting ready to consider what's on the exchanges this fall, and they're setting premiums for next year, so they need this resolved quickly," Iseman says.
"Ordinarily I don't know if the Trump administration would find that a compelling reason to give them what they want, but with the midterm elections coming up, I think you have to look at this from a practical aspect and the administration won't want to leave this hanging," he says.
Gregory A. Freeman is a contributing writer for HealthLeaders.