Reform Alert - News from the Blues' Office of National Health Reform

CMS Issues Proposed Rule: Risk Adjustment, Risk Corridors and Reinsurance

December 27, 2012

UPDATE: This is an update to the November 3, 2011 Reform Alert: Risk adjustment, risk corridors and reinsurance measures would help states, insurers mitigate risk. 

On November 30, 2012, the Centers for Medicare and Medicaid Services (CMS) issued a proposed rule amending risk adjustment, risk corridor and reinsurance rules.  Comments are due December 31, 2012.

What has changed with risk adjustment?

Risk adjustment is the process used to estimate health care spending based on a member's medical diagnosis and demographic information. Risk adjustment generally applies to non-grandfathered individual and small group market coverage.  However, the rule proposes that risk adjustment would not apply to coverage not yet subject to Affordable Care Act (ACA) insurance reforms such as modified community rating, actuarial value metal levels and essential health benefits.

The proposed rule establishes a risk adjustment fee to pay for the administrative expense of running the federal risk adjustment program. This fee is estimated at $1 per enrollee, per year and will be assessed on covered lives in risk adjustment “covered plans” (i.e., non-grandfathered individual and small group market coverage). The fee will be due June 30 of the year following the benefit year (e.g., June 30, 2015 for 2014 benefit year).  

The rule proposes using the following criteria to determine the average risk score:

  • Metal level
  • Age
  • Gender
  • Diagnosis factors
  • Geographic rating area
  • Induced utilization

To ensure privacy of protected health information (PHI), risk adjustment will use a distributed data collection approach, limiting the Department of Health and Human Services’ (HHS) access to PHI. Issuers will be required to establish a unique masked enrollee identification number for each enrollee.  

What has changed for the risk corridor program?

Although the risk corridor program in large part retains the structure of previously issued guidance, there are several proposed changes:

  • Modifies the allowable administrative costs definition.
  • Proposes to define profits for purpose of the risk corridor calculation as after-tax margin for the QHP with a floor of three percent of after-tax premiums. This profit definition is used solely in the calculation of allowable administrative costs.
  • More clearly defines taxes to be inclusive of all state and federal taxes and fees as defined in the Medical Loss Ratio (MLR) rules.
  • Modifies treatment of cost-sharing reduction payments received by an issuer.
  • Codifies that QHP issuers must submit risk corridor filings by July 31 of the year following the benefit year, and that any risk corridor charges must be remitted to HHS within 30 days of notification of charges.

What has changed with reinsurance?

The Centers for Medicare and Medicaid expect that the reinsurance fee amount will be $5.25 per-member, per-month for 2014, or $63 per-member per year, which it estimates will lead to collection of $12.02 billion, $10 billion of which would fund the reinsurance program ($2 billion would be designated for the U.S. Treasury and cannot be used for reinsurance, as required by law, and $20.3 million would be collected for administrative expenses of the reinsurance program).  

Additionally, HHS is proposing the following parameters for reinsurance payments: $60,000 attachment point, 80% reinsurance rate, $250,000 reinsurance cap. HHS estimates that these parameters will lead to $10 billion in reinsurance payments nationwide. If requests for payment exceed reinsurance contributions for a particular benefit year, HHS will pro rata reduce the reinsurance payments.

The proposed rule dramatically changes the timing for reinsurance contributions. Previously, CMS had indicated that reinsurance contributions would be remitted quarterly, beginning in January 2014. The proposed rule instead establishes that contributing entities would submit enrollment reports to HHS annually, beginning November 15, 2014. Issuers would be notified of fee amounts by December 15, with contributions due January 14.

HHS is also proposing a uniform national contribution rate and collection of funds; previous guidance required a complicated blend of national and state collection.

In addition to excluding grandfathered individual market coverage from receipt of reinsurance payments, CMS is proposing that reinsurance payments can only be made for individual market coverage for which certain health insurance reforms are in effect.

Where can I find more information?

You can read the full text of HHS Notice of Benefit and Payment Parameters for 2014 proposed rule in the Federal Register.

The information in this document is based on preliminary review of the national health care reform legislation and is not intended to impart legal advice. The federal government continues to issue guidance on how the provisions of national health reform should be interpreted and applied. The impact of these reforms on individual situations may vary. This overview is intended as an educational tool only and does not replace a more rigorous review of the law’s applicability to individual circumstances and attendant legal counsel and should not be relied upon as legal or compliance advice. As required by U.S. Treasury Regulations, we also inform you that any tax information contained in this communication is not intended to be used and cannot be used by any taxpayer to avoid penalties under the Internal Revenue Code.

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