Risk Adjustment

Final 2018 Notice of Benefit and Payment Parameters

On August 29th, 2016, CMS had released the proposed 2018 Notice of Benefit and Payment Parameters (NBPP) and on December 16th, 2016 the finalized rules were set forth that would impact the 2017 and 2018 risk adjustment programs as well rules specific to the qualified health plans (QHPs) market Exchanges.  The majority of what was finalized, in pertaining to the risk adjustment programs, were those model changes that CMS has been discussing implementing as of March 31, 2016, such as the partial year enrollment modifier to be implemented in 2017 and the utilization of prescription drugs within the model and the high-cost risk pool to be implemented in 2018.

Partial Year Enrollment

Beginning in 2017 benefit Year, CMS will be modifying the risk adjustment formula to account for partial year enrollments.  Based off feedback from issuers and trends taken from 2014 MarketScan® data, CMS determined that the current model undercompensates for enrollees who may not have accumulated diagnoses in their partial year of enrollment and plans that have a higher portion of these partial year enrollments the plan’s risk score might be lower than it should be.

Based off these findings, CMS has established the use of an additional risk score factor, enrollment duration, based off the number of months of enrollment (ED_01…ED_11).  This factor will decrease as the number of enrollment months increases and will only apply to the adult model.

Prescription Drug Utilization

Another model change that falls in line with the partial year enrollments, is the utilization of the prescription drug data.  In many cases, prescription drug data, can be useful in indicating health risks of an enrollee when diagnoses are not present, such as the case with the partial enrollments.  In conjunction with this, CMS has created a set of prescription drug categories (RXC), which are associated with a specific hierarchical condition category (HCC) or a group of HCCs for the 2018 benefit year.

CMS proposes twelve of these RXC-HCC pairs to impute diagnoses as well as to indicate the severity of diagnoses otherwise indicated through medical coding.  Ten of the RXC-HCC pairs will have three levels of incremental predicted costs (diagnosis only, prescription drug only, both diagnosis and prescription drug) and two of the RX-HCCs pairs will be utilized for severity only (both diagnosis and prescription drug).

High-Cost Risk Pool

As stated earlier, there are three Premium Stabilization Programs, but two of the programs are temporary and will no longer be in play after the 2016 Benefit Year.  One of these programs is the Reinsurance program.  Reinsurance was established to help compensate insurers who incur high cost members in order to discourage risk selection.  However, with the program ending at the end of 2016, CMS will be modifying the risk adjustment formula for 2018 to take into account these very high cost cases.

This will be done by creating a pool made up of high cost enrollees (enrollees with costs in excess of $2 million) across all states.  One pool for the individual market and one pool for the small group market.  Insurers who incur claims in excess of $2 million will be reinsured through the pool for 60 percent of the excess cost.

The high-cost risk pool will be funded by an adjustment to the risk adjustment transfer for all issuers by a percent of premium amount that will be determined based on the aggregate costs of the high-cost risk pool above $2 million at 60 percent coinsurance in the benefit year.  CMS expects that the results of the adjustment will only affect about 0.1 percent of premiums.

Child Age Rating

Currently the Allowable Rate Factor (age rating that is used for premium rates) provides a single band for children aged 0 through 20 with a factor of 0.635.  However, the average health care costs in children are highest for children age 0 through 4, followed by individuals age 15 through 20.  Also, having one age band for 0 through 20 resulted in 57 percent premium increase for an individual reaching 21.

CMS is modifying the age band going from 0 through 14 with a factor of .765 and then implementing gradual increases year by year from ages 15 to 20 in order to account for the higher heath care costs and to ease the transition to age 21.

The changes will not only have an impact on a families’ premiums but will also have an impact on the risk adjustment transfer amounts as plans could see an increase in their average allowable rate factor, which is used in calculating the plan premium without risk selection in the risk transfer formula and could therefore have an impact to the risk transfer payment.

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