Understanding Risk Corridor Concepts and Health Care Reform

Risk corridors were introduced as part of the Affordable Care Act to help stabilize the individual and small group markets. They allowed insurers to transfer some of the financial risk associated with offering health insurance to the federal government.

The risk corridor program was designed to help insurers who took on too many high-risk patients and incurred significant losses. These insurers could then transfer some of those losses to the federal government, which would reimburse them for a portion of their losses.

The program was optional for insurers, but many chose to participate in order to mitigate their financial risk. Insurers who participated in the program had to pay a portion of their profits to the federal government, which would then be used to reimburse insurers who incurred losses.

The risk corridor program was funded by a combination of insurer contributions and appropriations from Congress.

Risk corridor concepts are actually pretty straightforward. Risk corridors are policies that reimburse payers for plan-level spending beyond a preset threshold, typically a percentage of the premium charged by the insurer.

Risk corridors have been around for a while, existing in both the private and public sectors. In the private sector, aggregate protection is included in some reinsurance contracts. In the public sector, Arizona's "Health-care Group" program began in the mid-1980s and included a risk corridor-like policy that reimbursed health plans for costs exceeding an aggregate medical loss ratio of 86 percent annually.

Symmetric risk corridors limit plans' profits or losses and are included in Medicare payments to prescription drug plans in Part D. Payments to Part D plans for greater than expected costs are financed by recouping funds from plans with greater than expected profits.

The ACA established a symmetric risk corridor program for the Marketplaces to operate from 2014 to 2016. This program mimics the Part D policy, where a "target amount" of medical expenditures is calculated for each health insurer's covered risk pool.

If a plan's actual expenditures for medical care for its enrollees exceed the target by at least 3 percent, the plan will receive a payment from the risk corridor program. This program is "symmetric" because if a plan's actual medical expenditures are lower than the target by 3 percent or greater, the plan must make a payment to the risk corridor program.

The Medicare Shared Savings and Pioneer Accountable Care Organization (ACO) Programs also include payment models with risk corridors. ACOs can choose between a one-sided and two-sided arrangement, with the vast majority (98 percent) choosing the one-sided model.

Broaden your view: What Is Payment Posting in Medical Billing

We simulated a distribution of outcomes for plans participating in a Marketplace to calculate baseline risk measures for the base case with no risk-reducing policies.

This was done to understand the initial risk levels before applying any policies. We then applied reinsurance and risk corridors to the distribution, recaling the risk measures, and calculated our measure of power under each policy.

This process allowed us to determine how each policy affects insurer risk and the incentive for insurers to limit spending among their enrollees.

For your interest: Risk Measures

Table 2 provides a snapshot of insurer risk under proposed policies. The base case shows a standard deviation of $61.02, with the 95th and 99th percentiles of the cost distribution at $3,424.51 and $3,471.75, respectively.

The reinsurance only policy reduces the standard deviation to $44.48, but the 95th and 99th percentiles remain relatively unchanged. Two-sided risk corridors, on the other hand, decrease the standard deviation to $57.98, but also increase the 95th and 99th percentiles.

When both reinsurance and two-sided risk corridors are implemented, the standard deviation drops to $44.03, with the 95th and 99th percentiles returning to their base case values. The power of each policy configuration is also reported, with the reinsurance only policy resulting in a significant reduction in power.

Here's a breakdown of the insurer risk measures under each policy:

Adjustment is a crucial step in any research project, and it's essential to understand how to do it correctly. A good adjustment can make all the difference in the accuracy of your results.

Data from the study shows that a well-adjusted methodology can reduce errors by up to 30%. This is because a good adjustment allows for a more accurate representation of the data.

The researchers used a combination of statistical analysis and expert judgment to make the necessary adjustments. This approach was chosen because it had been shown to be effective in similar studies.

You might like: Companies with Good Health Insurance

By taking the time to make the necessary adjustments, the researchers were able to produce more reliable results. This is because a good adjustment helps to minimize the impact of outliers and other sources of error.

In this study, the researchers adjusted for a total of 12 different variables. This included factors such as population density and weather patterns.

The adjustments were made using a variety of different techniques, including regression analysis and data normalization. These techniques were chosen because they had been shown to be effective in similar studies.

By using these techniques, the researchers were able to produce a more accurate picture of the data. This is because a good adjustment helps to ensure that the data is representative of the population as a whole.

The results of the study show that a good adjustment can have a significant impact on the accuracy of the results. In this case, the adjustments made by the researchers resulted in a 25% increase in accuracy.

Check this out: Anthem Medical Data Breach

To understand the data and methods used in this study, we need to look at the empirical analysis. The researchers simulated a distribution of outcomes for plans participating in a Marketplace to calculate baseline risk measures for the base case with no risk-reducing policies.

The researchers used a simplified form of each policy to compare the performance of reinsurance and risk corridors. For risk corridors, they set θ = 1, which effectively provides "full coverage after a deductible." Similarly, they simplified the definition of reinsurance by setting δ = 1, reimbursing plans for 100 percent of an individual's costs above a threshold.

The researchers allowed the reinsurance and risk corridor cutoffs (i.e., ᾱ and x̂) to vary over a wide range. For reinsurance, they allowed the cutoff to vary between $0 and $375,000. For risk corridors, they allowed the cutoff to vary between 100.1 percent and 130 percent of the target.

For your interest: Blue Shield Medigap Medicare Supplement Plans

The researchers also allowed risk corridors to be either two-sided or one-sided, and for two-sided risk corridors, they set α by reflecting ᾱ across the target: α = 1 − (ᾱ − 1). They used 5,000 draws from the Marketplace-eligible sample to simulate the cost distribution and used a plan with 20,000 enrollees for the simulations.

Here's a summary of the simulation methods:

Estimation is a crucial step in understanding how different policies affect insurer risk and the incentive for insurers to limit spending among their enrollees. To estimate insurer risk, the authors use two measures: the standard deviation of the expected cost distribution and the "value at risk", which is the Yth percentile of the expected cost distribution.

The authors assume that premiums are constant for all individuals and set equal to the average cost in the Marketplace-eligible population, as they would be in a perfectly competitive market with zero profits. This assumption is made to simplify the analysis.

To estimate the "value at risk", the authors use a specific percentile, such as the 95th or 99th percentile. The choice of percentile determines the level of risk being measured.

The authors also estimate power, which is defined as the portion of the marginal dollar spent on an average enrollee's health care by the health plan. This measure is calculated using a simulation-based approach.

Here's a summary of the power estimation process:

The power estimation process captures the expected change in plan revenues for an incremental change in plan costs, leading to a measure of power that reflects the portion of the marginal dollar of an enrollee's health-care spending borne by the plan.

The results of policy simulations show that all reinsurance and risk corridor policies significantly affect insurer risk, especially as the reinsurance cutoff approaches $0 and the risk corridor cutoff approaches one.

Two-sided risk corridors provide about twice as much risk reduction as one-sided risk corridors at a given cutoff point. This is a key takeaway from the simulations, highlighting the importance of policy design in managing insurer risk.

Here's an interesting read: Health Insurance for Small Business with One Employee Cost

The power of each payment system under each policy approaches zero as the cutoff approaches one ($0), but increases dramatically as the reinsurance cutoff approaches zero. This indicates a trade-off between power and insurer risk, where reducing risk comes at the cost of power.

The Marketplace reinsurance policy reduces the standard deviation of the insurer's cost distribution by $17 (28 percent), while the Marketplace (two-sided) risk corridor policy reduces the standard deviation by $3 (5 percent).

Additional reading: How Does Commercial Insurance Policy Define Hurricane Risk

The simulation results show that all policies significantly affect insurer risk, especially as the reinsurance cutoff approaches $0 and the risk corridor cutoff approaches one.

All policies, including reinsurance and risk corridors, transfer risk from the insurer to the government, which is expected to reduce insurer risk. However, the marginal return to a lower reinsurance cutoff in terms of insurer risk reduction is somewhat small until it increases dramatically as the reinsurance cutoff approaches zero.

Risk corridors provide about twice as much risk reduction as one-sided risk corridors at a given cutoff point, according to the standard deviation measure of insurer risk. Two-sided risk corridors affect risk identically to one-sided risk corridors with respect to the value at risk measures.

The power of both risk corridor policies (reinsurance) approaches zero as the cutoff approaches one ($0), and the power of the risk corridor policies (reinsurance) approaches one as the cutoff moves away from one ($0). The marginal effect of a lower reinsurance cutoff on power is somewhat small until it increases dramatically as the reinsurance cutoff approaches zero.

Here's a comparison of the risk and power for each simulated policy:

The results also show that as risk is reduced, so is power. This is an explicit trade-off between power and insurer risk, indicating that policymakers must carefully balance these competing goals when designing policies to manage insurer risk.

Here are the key findings from our analysis.

The Marketplace reinsurance policy had a significant impact on reducing insurer risk, decreasing the standard deviation of the cost distribution by 28 percent.

In comparison, the Marketplace risk corridor policy had a relatively small effect, reducing the standard deviation of the cost distribution by only 5 percent.

When the reinsurance and risk corridor policies were implemented together, the risk reduction was nearly as effective as a simple "full coverage after a deductible" reinsurance policy alone.

The reinsurance policy also had a modest effect on the value at risk, reducing the 95th percentile of the cost distribution by $28.

Risk corridor programs were established to stabilize the Affordable Care Act (ACA) marketplaces by reducing the financial burden on insurers who took on more risk.

The programs were designed to reimburse insurers for losses in excess of a certain threshold, which varied by year and state.

In 2014, the first year of the ACA, the overall risk corridor payment was $2.87 billion to insurers, but only $362 million was collected from the exchanges.

This resulted in a net payment of $2.51 billion to insurers, which was a significant relief for many who were struggling to stay afloat in the new market.

The program's effectiveness in reducing insurer losses was evident in the following years, as the net payment amount decreased significantly, from $2.51 billion in 2014 to $0 in 2016.

However, the program's sustainability was a concern, as the reimbursement amount was not guaranteed and was subject to congressional appropriation.

The ACA's risk corridor program was a crucial component of the law's implementation, helping to stabilize the marketplaces and encourage more insurers to participate.

The program's success was a testament to the importance of government support for the health insurance industry, particularly during times of transition and uncertainty.

For more insights, see: Medical Bill Payment