Creating Stability in Unstable Times

A look at risk adjustment and market stabilization

Julie Peper, Danielle Hilson and Michael Cohen

The American Academy of Actuaries (the Academy) defined that the following is necessary for a stable and sustainable individual health insurance market:1

  • Individual enrollment at sufficient levels and a balanced risk pool.
  • Stable regulatory environment that facilitates fair competition.
  • Sufficient insurer participation and plan offerings to provide insurer competition and consumer choice.
  • Slow spending growth and high quality of care.

The first and the third items currently receive the most attention when discussing the individual market under the Affordable Care Act (ACA). When market instability is discussed, the same themes are often heard:

  • Uninsured rates in many states are still too high, with not enough young and healthy enrollees.
  • Issuers are leaving the market in specific counties or altogether.
  • Consumers have fewer choices as issuers have stopped offering richer and wider network plans.

It is often asked if the individual market is sustainable long term and if these issues can be fixed. In order to understand if the market can become more stable and sustainable, it must be first understood what is driving the current instability.

The passage of the ACA created an environment in which individuals with pre-existing conditions could no longer be medically underwritten or otherwise discriminated against. Starting in 2014, a series of market reform rules changed the individual and small group markets such that a person’s health status was no longer a factor in calculating premium rates. However, in an insurance market of guaranteed issue and bans on pre-existing condition discrimination, one of the most important needs for a stable market is to minimize adverse selection, both in the entire market and within market subsegments. Various parts of the ACA were developed to work together to create a stable and sustainable market.

Balanced Risk Pool

To have a balanced risk pool with limited market selection, the market must have a reasonable distribution of enrollees. In order to encourage the younger and healthier individuals to enroll in the individual market, the ACA has an individual mandate, subsidies based on income and enrollment limitations.

Individual Mandate

The individual mandate is a tax penalty on individuals who are deemed able to afford coverage but choose not to purchase it. The mandate produces financial incentives for healthy individuals to purchase coverage, which in turn should improve the risk pool.

There has been some concern that the financial penalties of the mandate are not large enough to induce coverage purchasing. For the 2015 benefit year, more than six million tax households elected not to have coverage and instead paid the mandate penalty.2 If the penalty was larger, it is possible that more individuals would join the risk pool. In addition, the current political environment has produced uncertainty regarding the enforcement of the mandate. Many issuers, in their 2018 rate filings, have increased rates over concern that there will be weaker enforcement of the mandate. Less enforcement of the mandate could produce increased risk selection.


Another key factor in having a balanced risk pool is the existence of advanced premium tax credits (APTCs). Tax credits are calculated relative to the second lowest cost silver plan in an enrollee’s area and reduce premiums to a fraction of the cost they would be otherwise. By tying the subsidy amounts to the premium levels, eligible enrollees are protected from large increases in premiums. However, subsidy amounts decrease as enrollee incomes increase and subsidies completely end above 400 percent of the federal poverty level (FPL).

The subsidy structure has produced large increases in enrollment and offers protection from the effects of premium increases to a significant portion of the individual market. Approximately 84 percent of 2017 on-Exchange enrollees receive APTC subsidies.3 However, enrollees without subsidies have felt the full impact of the recent large premium increases. Policy changes may be needed to stabilize the market to encourage further enrollment from enrollees not eligible for subsidies. Additionally, the subsidy structure may need to be altered to encourage younger individuals to enroll since older enrollees are more likely to be eligible for subsidies.

Temporary Risk Stabilization Programs

The final key factor for maintaining a balanced risk pool is risk mitigation programs, including risk corridors, reinsurance and risk adjustment.

The risk corridor program was a transitional program intended to protect issuers from large losses in the first three years of the ACA. It was expected that it would be difficult to estimate the costs of the new population since it would be much different from what had existed previously. Since issuers expected this program to protect them from insufficient rates, premiums may have been lower than they would have been without the program. Contrary to issuer expectation, the risk corridor program only paid out a tiny fraction of the amount of calculated risk corridor payments. Insufficient risk corridor payments were likely a key factor in market instability and the wave of
co-op plans becoming insolvent.

The transitional Reinsurance Program intended to reduce premiums as well as reduce the risk to issuers by covering a portion of large claims. Even though most policymakers considered this program successful, one potentially destabilizing impact is that the program was phased out over the three years, causing premiums to increase at a higher rate than they would have otherwise. While the Reinsurance Program was phased out completely in 2017, many states are now considering state-based programs.

The final program is risk adjustment. It is the only continuing federal risk mitigation program. Risk adjustment will be discussed in detail in the remainder of this article.

Other Key Factors

Other factors also influence the stability of the risk pool, including:

  • Outreach and advertising remain key factors in maintaining and increasing enrollment. There are still millions of individuals who are eligible for subsidies but have not enrolled. Researchers have estimated that assistance from navigators was one of the stronger predictors of enrollment for low-income individuals.4
  • Medicaid expansion has, to date, meant that individuals with incomes between 100 percent and 138 percent FPL would be part of the Medicaid program rather than the individual market. A study found that, controlling for other factors, individual market premiums were 7 percent lower in states that expanded Medicaid than in states that did not.5 States’ decisions on changes to Medicaid could have serious effects on market stability.
  • How special enrollment periods (SEPs) are enforced is another key factor in maintaining a healthy risk pool. SEPs are exceptions where enrollment is allowed outside of the open enrollment period. The Center for Medicaid and Medicare Services’ (CMS) recent implementation of additional verification requirements could positively influence the risk pool.6
  • The ability to develop adequate rates requires a stable regulatory environment and knowledge of the risk pool. In the first few years of the ACA, there was no data specific to the ACA individual market. Changes to the covered population—such as churn in the market, significant changes in total enrollment levels, and the entrance of transitional enrollees in some states—continued to make rating a challenge. Since issuers are now able to set premiums based on ACA-specific experience, the overall profitability of the issuers in the individual market has increased. Individual market issuers in the first quarter of 2017 had medical loss ratios of approximately 75 percent.7 This improved profitability trend continued in the second quarter.8 While one should not over-analyze half a year’s worth of data, the improvement in the first half of 2017 should be taken as a positive sign for the individual market.
  • The current level of uncertainty is causing issuers to increase rates or withdraw from the individual market altogether. Multiple issuers have announced that 2018 rates are higher than they otherwise would have been because of federal policy uncertainty, specifically around payment of cost-sharing reduction (CSR) amounts9 and enforcement of the individual mandate.

Sufficient Health Insurer Participation and Plan Offerings

While the impact of adverse selection by market varies significantly by state, the impact of adverse selection within a market has seen similar results in many states. For there to be no adverse selection within a market, the financial impact of insuring any member must be similar across all members for a particular issuer. In the ACA, the risk adjustment mechanism was intended to equalize the profitability of members such that issuers were not benefited or hurt from enrolling a certain type of member. For example, under the ACA and risk adjustment program, it was the intent that an issuer would not be financially harmed from enrolling a high-cost member with a severe chronic condition, even if the member paid the same premium as a healthier low-cost member. While the risk adjustment mechanism has lowered the differences in profitability among different types of members, there is still room for improvement.

Although there is debate on how market stability can be achieved, one could argue that it would help if issuers were able to price appropriately such that unexpected changes in the mix of enrollees (e.g., the distribution by age or benefit plan) did not impact the profitability of the issuer. For this type of stability to exist, profitability must be similar for all members regardless of age, health status and plan selections. In order to truly analyze the profitability of various market segments, the impact of risk adjustment must be incorporated into any analysis.

Risk Adjustment

As discussed, risk adjustment was designed with the primary goal of compensating issuers for not being able to charge premium rates that align with the underlying cost and risk of enrollees. Risk adjustment is a budget neutral program that redistributes funds, within each state and market, from issuers with lower-risk, lower-cost enrollees to issuers with higher-risk, higher-cost enrollees. This creates a situation where payment transfers across all issuers within each state and market equal zero. The payment transfers are based on a risk adjustment methodology produced by the U.S. Department of Health and Human Services (HHS). It includes a calculation of risk scores for each enrollee, a method by which enrollees are weighted together for each issuer, and a calculation that combines the weighted risk scores at the issuer level. The methodology determines the payment transfer between issuers within each market.

Risk adjustment was intended to encourage issuers to compete on the cost, quality and efficiency of their plans rather than trying to attract the healthiest enrollees. Risk adjustment—if it functions as intended—allows a plan enrolling a higher proportion of high risks to charge the same average premium, other things being equal, as a plan enrolling a higher proportion of low risks.10 However, for some segments of the market the program fell short of this goal. Some issuers covered segments of the market for which the risk adjustment program does not adequately compensate (e.g., platinum plans and broad networks). These issuers were adversely impacted compared to issuers who acquired segments of the market for which the risk adjustment program overcompensates (e.g., CSR plans). Presumably upon learning of these deficiencies in the program, issuers across the country have widely changed their plan offerings, which has reduced consumer choice by reducing or eliminating segments of the market that were the least profitable.

2015 Results

Looking at the historical data has helped illustrate why consumer choice has been reduced each year of the ACA. Wakely Consulting Group conducted an analysis using 2015 ACA-compliant data, including approximately 5 million people from more than 100 issuers (individual and small group) in more than 20 states. The data accounted for 10 percent to 20 percent of the 2015 ACA market.

It is important to keep in mind that these results can vary significantly across states and issuers; however, the results can be used to review general trends in various segments of the market. The analysis is based on 2015 data and the risk adjustment model has undergone significant changes since then, including changes for 2018, which have not yet been fully released. Since the goal of the analysis was to understand results in a prospective manner, some of the components of the 2018 risk adjustment formula were incorporated, including the pooling mechanism for high cost enrollees and the 14 percent adjustment of the statewide average premium to account for administrative costs not varying with claims. The impact of the 2015 transitional Reinsurance Program was removed by grossing up both premiums and claims appropriately. However, there are several other potential changes not incorporated, which could significantly impact the results (e.g., the 2018 risk adjustment weights).

The analysis reviewed market stability through the lens of profitability. That is, what are the primary drivers of financial losses (and gains), and does this align with the actions we have seen by the issuers? The view of profitability must be net of risk adjustment transfers since they can have a significant impact on profitability. On average, risk adjustment transfers shifted approximately 11 percent of premiums in the individual market in 2016.11

Based on the analysis, there were several drivers of financial losses for issuers that aligned with the actions they have taken. In addition to the drivers of less consumer choice, there are variances in profitability results that need to be understood to ensure there are no unintended or unknown consequences of potential future regulatory changes.

Metal Level

As previously discussed, there has been a significant decrease in the number of platinum plans offered in the individual market. The results of our analysis shows that the profitability for platinum plans is significantly worse than the other metal levels.

In Figure 1, there are various 2015 individual market metrics, including risk score, claim cost, premium, and premium plus risk adjustment transfers, by metal level and normalized score. For each metric, the “normalized score” indicates the relativity between the metal level and the average for all metal levels, such that the overall average normalized score is 1.0. For example, if the average claim cost is $300 per member per month (PMPM), and the platinum plan claim cost is $600 PMPM, the normalized score for the platinum plan in the claim cost metric would be $600 PMPM/$300 PMPM = 2.0.

Figure 1: Individual Market Metal Level

Source: Wakely Risk Insight, National Study—2015 Benefit Year. 2017.

The following are the key takeaways:

  • The claim costs are lowest for bronze, increase for silver and gold, and are significantly higher for platinum. The silver category includes CSR plans (which are adjusted for CSR payments).
  • The premiums are more flat than the underlying claim costs since the metal level premiums will only vary based on regional and age differences of enrollees.
  • After including risk adjustment as part of premiums, the adjusted premiums more closely align the metal levels with their claim costs; however, the premium, net of risk adjustment transfers, is still higher than claims for bronze and significantly lower than claims for platinum. This indicates that bronze is relatively more profitable in the individual market while platinum is less profitable.

Beyond the base metal levels, the results of our analysis indicate that the CSR subsidies, net of risk adjustment transfers, are a significant factor in the individual market. Similar to the base metallic tier calculation, those receiving CSR subsidies get an increment in the risk score calculated from the HHS model (i.e., induced utilization). For example, members in the Silver 94 percent CSR plan get a multiplier of 112 percent to their risk score. The hypothesis is that this induced demand factor could be overestimated, which would contribute to a net transfer of dollars, on average, from those not receiving a CSR subsidy to the members that are.

In an analysis performed for the state of Nevada,12 Wakely reviewed the allowed claim PMPM and relative profitability13 PMPM by metal level using 2015 data. The results (shown in Figure 2) align with those described above: the lower metal levels (i.e., catastrophic and bronze) and the higher CSR variants (i.e., silver 87 percent and silver 94 percent) have the highest relative profitability, while the richer metal levels (i.e., platinum) have significantly worse relative profitability.

Figure 2: 2015 Nevada Allowed Claim and Relative Profitability PMPM by Metal

Source: Wakely Consulting Group, Nevada Division of Insurance, Market Analyses and the Impact of a State-Based Reinsurance Program. March 2017.

It is not surprising that issuers have mostly stopped offering platinum plans in the individual market. One outstanding question is what the impact to the gold plan profitability would be if all of the platinum members migrated to a gold plan. Some areas have already seen issuers limiting the number of gold plans offered, further limiting consumer choice. It will be important to analyze the 2018 risk adjustment model once it is released to see if it encourages issuers to offer a wide variety of metal plans.

Product Type

The results are similar when comparing Preferred Provider Organization (PPO) plans (or any plans with an out-of-network component) versus Health Maintenance Organization (HMO) plans. The relative profitability for PPO plans is notably worse and, as a result, there are some states where PPO plans are no longer offered in the individual market.

In the analysis performed for the state of Nevada, Wakely also reviewed the allowed claim PMPM and relative profitability PMPM by Exchange status and product type using 2015 data. Figure 3 shows the PPO plans were less profitable than the HMO plans.

Figure 3: 2015 Nevada Allowed Claim and Relative Profitability PMPM by Exchange Status and Plan Type

Source: Wakely Consulting Group, Nevada Division of Insurance, Market Analyses and the Impact of a State-Based Reinsurance Program. March 2017.

Demographics and Medical Conditions

It is intuitive to think that members without a medical condition are more profitable because these non-utilizers (generally speaking) would incur fewer costs. However, the analysis showed that members who had at least one medical condition that flagged a risk adjustment transfer had higher relative profitability. That is, sicker patients are not necessarily driving losses, since their claim costs and risk adjustment costs are offset by the risk adjustment transfers received. For example, roughly two-thirds of issuers in the national study had lower relative profitability for members with no HHS-Hierarchical Condition Categories (HHS-HCCs). That means that the opposite may be true for the other one-third of issuers. However, it is important to keep in mind that these results are generalized across the entire market and can vary significantly by issuer.

Correspondingly, younger demographics tend to be less profitable after accounting for risk adjustment because they often have fewer medical conditions that trigger a risk adjustment transfer than older demographics. Figure 4 shows the net income of various demographic segments as a percent of overall premium for both the individual and small group market.

Figure 4: Net Income as a Percent of Overall Premium (PMPM) by Demographic Category
and Market

Source: Wakely Risk Insight, National Study—2015 Benefit Year. 2017.

The “Older Adult (50+)” demographic segment has the largest net income as a percent of premium for both the individual and small group markets. Infants, children and younger adults have the lowest net income as a percent of premium for both the individual and small group markets. However, in 2018 the age factors are increasing for children, which could improve profitability but also deter enrollment at these ages due to higher premiums.

Enrollment Length

Many issuers in the individual market suspected that partial year enrollees, including special enrollment period (SEP) enrollees, incur higher claim costs than those that enroll during the open enrollment period and remain enrolled for the duration of the year. If members only enroll when they expect to need medical care and lapse coverage when they no longer need medical coverage, the result will be increased premiums for the entire market.

Wakely’s analysis in Nevada (in Figure 5) showed that partial year enrollees do incur higher costs and are less profitable than full year enrollees. There are two factors that might improve this variance going forward. First, CMS changed the risk adjustment model in 2017 to give partial year enrollees higher risk scores. In Nevada, the change in the model was estimated and shown to have a significant impact on closing the gap of relative profitability between partial and full year enrollees. In addition, CMS is tightening the SEP requirements such that it will be more difficult for individuals to enroll outside of open enrollment, which may have an impact on these results and could change the overall risk of the market.

Figure 5: 2017 Versus 2015 Risk Adjustment Methodology Relative Profitability and Claim PMPMs by Enrollment Type For the On-Exchange Individual Market
On-Exchange Individual Market Member Months Allowed Claims PMPM Relative Profitability PMPM
2015 Risk Adjustment Methodology 2017 Risk Adjustment Methodology
Full Year Enrollees 345,094 $435.91 $15.02 $1.82
Partial Year Enrollees 99,883 $473.11 -$12.14 $1.83
Special Enrollment Period Enrollees 245,155 $400.63 -$18.25 -$8.00

Source: Wakely Consulting Group, Nevada Division of Insurance, Market Analyses and the Impact of a State-Based Reinsurance Program. March 2017.

Other Results

While most of the attention is on market stabilization in the individual market, it is important to realize that results can vary significantly between the individual and small group markets. For example, while platinum and gold plans are generally less profitable in the individual market, they are more profitable than their counterparts in the small group market. If changes are made to fix an issue in the individual market, it should not be assumed that the same change is needed or should be made in the small group market.

Looking Ahead

Changes to Risk Adjustment

Any changes to the risk adjustment model from the experience year to the rating year will have an impact on the profitability of various market segments and, therefore, a potential impact on the stability of the market. It is assumed that any changes made are intended to improve the risk adjustment model and market stability. However, if the new models are not released prior to the rating deadline for the year (as occurred for 2018 rates) and issuers are not able to identify the impact of the model changes, this uncertainty could have the opposite effect and create additional instability.

Many of the more impactful changes since the inception of the risk adjustment program are being implemented in 2017, 2018 and 2019:

  • Durational impact. In 2017, an adjustment was added for partial year enrollees. As a result, the relative profitability between full- and partial-year SEP enrollees is expected to be much closer.
  • Administrative load. In 2018, the administrative load will be reduced by 14 percent such that any risk adjustment transfers will be based only on claim amounts and variable administrative components, and the estimated amount of fixed administrative costs will be removed from the transfer calculation. This is expected to dampen all transfers by a similar level. This may have the effect of improving the profitability of healthier members with no medical conditions and decreasing the profitability of members with conditions triggering a risk adjustment payment. Large premium increases in 2018 may bring transfers back to 2017 levels.
  • Inclusion of pharmacy data. In 2018, pharmacy data will be incorporated, which has the potential to significantly alter the results. CMS has yet to release the details for this portion of the risk adjustment model.
  • Updated weights. Any update to the risk adjustment weights assigned to medical conditions will change the risk adjustment transfers, which will in turn, change (and hopefully improve) any results discussed in this analysis. The risk weights were updated in 2017 and again for the 2018 model. Updates to weights should more accurately capture relative costs by medical condition since the changes are likely to take into account recent changes in costs, such as changes in high-cost drugs. The current proposal for 2019 is to include, for the first time, actual ACA data to establish the weights. This could also significantly impact future results.

In 2018, the risk adjustment methodology is also including a pooling mechanism for 60 percent of costs of any claimant with claims above a $1 million threshold. This means that the issuer will not be directly responsible for 60 percent of a person’s costs above the threshold. This is a national pool by market and while the overall dollars are small, it will protect issuers who have catastrophic level claims.

There is still uncertainty regarding the 2018 risk adjustment methodology. It is anticipated that the changes will increase the stability of the market through leveling the profitability of the various market segments; however, the methodology will need to be reviewed before the impact can be known for certain.

Regulatory Changes at the Federal Level

In 2018, CMS released the Market Stabilization rule to “help lower premiums and stabilize individual and small group markets and increase choice for Americans.”14 The rule was comprised of the following components:

  • Change the open enrollment period to be Nov. 1, 2017 to Dec. 15, 2017.15
  • Require individuals to submit documentation for SEPs.
  • Issuers can require any individual who lapses coverage to pay back past due premiums before they can enroll into a plan with the same issuer in the following year.
  • Change the actuarial value requirements for plans and allow issuers to continue offering grandmother plans.
  • Reduce duplicative review of network adequacy by both the federal and state governments.

The federal government intended these changes to increase the stability of the market. There are many questions on if the policies themselves will increase stability. For example, the shorter open enrollment may result in premium payments by healthy enrollees starting in January rather than February, but it may also result in fewer healthy enrollees enrolling in the first place. Furthermore, it could be argued that the federal government’s inaction and indecisiveness on the future of the ACA has caused more market instability than any potential stability through possible future actions. The recent uncertainty around continued funding of CSRs is the latest uncertainty increasing premiums. While states are coming up with solutions that could actually benefit members with the defunding of the CSRs, there is no doubt there will be significant member disruption and plan migration if CSRs are no longer funded.

One other important change for 2018 was included in the Notice of Benefit and Payment Parameters. This change was an increase in the child age curve relative to a 21-year-old.16 This will relatively increase premiums for children, but relatively decrease premiums for adults.

Pricing Changes and the Current Status

The individual market looks very different now than it did in 2014. As of the first quarter of 2017, large premium increases have improved profitability.17 Despite initial concerns for 2018, every individual in the country has the option to purchase a plan on an Exchange. Risk adjustment methodological problems around short duration enrollments or extremely high-cost enrollees have been improved. However, issues still remain. Federal policy uncertainty may fuel further premium increases or issuer exits. The number of benefit plan options has dwindled dramatically since 2014. Premiums for those not receiving subsidies may be prohibitively expensive in some areas. The states may now be responsible for future policies designed to improve the risk pools and stabilize the markets.

1332 Waivers

Many states are taking it upon themselves to improve the stability of their individual markets. In 2017, a new option within the ACA—state innovation waivers, or 1332 waivers—took effect. Through this option, states are able to change portions of the ACA as long as the changes meet a certain set of requirements known as guard rails. To date, several states have submitted 1332 waivers to implement state-based programs to help stabilize the market.18

Most of the current 1332 waiver applications are to create a state-based reinsurance program that will be funded mostly with assessments or funds derived outside of the individual market, including federal funding. The basis for the federal funding is that if the program reduces premiums, including the second-lowest cost silver plan, the federal costs due to the APTCs will be reduced. States would then request the difference in federal APTCs, accounting for some offsetting federal costs, to pay for a portion of the program.

Alaska had its 1332 waiver approved, which is a condition-based reinsurance program. In this type of program, all costs for members with specified conditions are covered by the program and the issuer is not at risk for any of these costs. Several others states are in the process or have submitted 1332 waivers for a claims-based reinsurance program, which resembles ACA’s transitional Reinsurance Program. Minnesota and Oregon’s 1332 waivers for claims-based reinsurance were recently approved.

Reinsurance Case Study: Nevada

While most states view the primary benefits of a state-based reinsurance program as lowering premiums, the program can have an additional benefit. While not necessarily pursuing a 1332 waiver, the state of Nevada has looked at the potential impact of a state-based reinsurance program. In analyzing potential reinsurance scenarios for the state, Wakely reviewed not only the overall change to costs in the individual market but also to the relative profitability (accounting for risk adjustment) by metal level.

Figure 6 shows the change in relative profitability by metal level for two reinsurance scenarios if the premiums do not change. The claims were increased 15 percent from the initial data and two reinsurance parameter scenarios were applied.19 The figure shows that if premiums were not changed, the relative profitability would increase (or conversely, the claims would decrease) by $22 PMPM for the low scenario and $70 PMPM for the high scenario. Not only is the overall market better positioned (either with increased profits or lower premiums or a combination of the two), but the relative profitability by metal level is also improved. Ignoring the catastrophic plan, the profitability variance (highest minus lowest) under the baseline is $130 PMPM. Under the low and high reinsurance scenarios this is closer to $70 PMPM.

Figure 6: Nevada’s Relative Profitability PMPM Claim and Reinsurance Scenarios
by Metal Level

Source: Wakely Consulting Group, Nevada Division of Insurance, Market Analyses and the Impact of a State-Based Reinsurance Program. March 2017.

Figure 7 shows something similar when analyzing the results by product type. The profitability difference between “HMO Total” compared to “PPO/POS Total” under the baseline is $80 PMPM. Under the low and high reinsurance scenarios, this is $69 and $50 PMPM, respectively.

Figure 7: Nevada’s Relative Profitability PMPM Claim and Reinsurance Scenarios by Exchange Status and Product Type

Source: Wakely Consulting Group, Nevada Division of Insurance, Market Analyses and the Impact of a State-Based Reinsurance Program. March 2017.

While the relative profitability under the two reinsurance scenarios is still not optimal, the figures indicate that reinsurance programs can affect two different aspects of market instability: overall risk pool selection by lowering premiums and reducing instability within the market by reducing the differences in relative profitability of certain subsegments of the market.

Other State Stabilization Initiatives

In addition to 1332 waiver applications, many states are considering long-term concepts on how to bend the cost curve and lower premiums. Many of these may require changes at the federal level before they could be accomplished at the state level:

  • Change in the age factors or the subsidy structure to encourage younger individuals to enroll.
  • Potentially altering the rating areas to encourage issuer participation in at-risk or potentially bare counties. States may also consider how other state-based programs, like reinsurance, might favor at-risk counties to encourage more issuer participation in these counties.
  • Require Medicaid managed care organizations to participate in the individual market as a condition for Medicaid participation.
  • A state-based option where a state would operate a plan in the market, either statewide or in counties with fewer participating issuers.
  • A Medicaid buy-in could allow individuals to purchase Medicaid coverage.
  • Programs or regulations that might impact the overall cost and quality of health care in the individual market long term in hopes of “bending the trend.” For example, requirements for value-based care.

While the current state activities are encouraging and may improve market stabilization, there are still several other factors that will need to be improved to truly achieve market stability, including:

  • More clarity at the federal level regarding any long-term regulatory changes.
  • Long-term solutions to address overall health care costs and cost trends going forward. The reinsurance programs that states are implementing will help lower premiums in the short term, but it is unlikely it will truly bend the cost curve.
  • Lastly, with all of the moving pieces, it is continually difficult for issuers to rate appropriately since their mix of members can change significantly from year to year. Regulators need to be active in reviewing not only the rates, but understanding market dynamics to ensure that issuers are prepared and rates are sufficient for whatever changes may come.


In 2014, the individual market shifted from a market based on medical underwriting and premiums based on a person’s health status to a market based on guaranteed issue, single risk pools and risk adjustment. From 2014 to 2016, issuers experienced large losses as premiums were often too low or the health market did not meet issuer expectations since policy provisions such as risk corridors, the individual mandate and subsidies did not produce stable markets in all states. Furthermore, while the risk adjustment program, at a macro-level, compensated issuers with higher actuarial risk with higher risk adjustment transfers, it had some shortcomings for certain segments of the population.

Through 2017 the markets have evolved. Issuers have increased premiums to be more in line with the actual claim costs (net of risk adjustment transfers) of the ACA population and risk adjustment methodological improvements have been well received as a step in the right direction. However, there are still high levels of market uncertainty and instability. States have been trying to increase stability by focusing on improving the risk pool. While federal and state-specific changes are considered, it is important for all stakeholders to internalize the lessons of the previous few years. Policies often have unintended consequences, and ensuring that issuers and the public understand the rules is necessary for successful implementation of any market stabilization program.

Julie Peper, FSA, MAAA, is principal and senior consulting actuary at Wakely Consulting Group.
Danielle Hilson, FSA, MAAA, is consulting actuary at Wakely Consulting Group.
Michael Cohen, Ph.D., is consultant, policy analytics, at Wakely Consulting Group.


  1. 1. An Evaluation of the Individual Health Insurance Market and Implications of Potential Changes. American Academy of Actuaries Individual and Small Group Markets Committee. January 2017.
  2. 2. Statistics of Income Bulletin. Vol. 36, No. 4. Internal Revenue Service. Spring 2017.
  3. 3.“2017 Effectuated Enrollment Snapshot.” Centers for Medicare & Medicaid Services. June 12, 2017.
  4. 4. Sommers, B. D., B. Maylone, K. H. Nguyen, R. J. Blendon, and A. M. Epstein. 2015. “The Impact of State Policies on ACA Applications and Enrollment Among Low-Income Adults in Arkansas, Kentucky, and Texas.”
  5. 5. Sen, Aditi P., and Thomas DeLeire. “The Effect of Medicaid Expansion on Marketplace Premiums.” Department of Health & Human Services. Sept. 6, 2016.
  6. 6. “Pre-Enrollment Verification for Special Enrollment Periods.” Centers for Medicare & Medicaid Services. 2017.
  7. 7. Semanskee, Ashley, and Larry Levitt. “Individual Insurance Market Performance in Mid 2017.” The Henry J. Kaiser Family Foundation. Oct. 6, 2017.
  8. 8. “Improved Profitability for the Individual Health Insurance Sector and Other Segment Insights.” Mark Farrah Associates. Sept. 27, 2017.
  9. 9. Tajlili, Brian. “Premiums to Rise in 2018 for Affordable Care Act Plans.” BlueCross BlueShield of North Carolina blog. May 25, 2017.
  10. 10. Kautter, John, Gregory C. Pope, and Patricia Keenan. “Affordable Care Act Risk Adjustment: Overview, Context, and Challenges.” Medicare & Medicaid Research Review 2014: Vol. 4, No. 3.
  11. 11. “Summary Report on Transitional Reinsurance Payments and Permanent Risk Adjustment Transfers for the 2016 Benefit Year.” Centers for Medicare & Medicaid Services. June 30, 2017.
  12. 12. Wakely conducted extensive analysis on EDGE data to understand drivers of performance in Nevada. We will discuss this in greater detail later.
  13. 13. Relative profitability described here is not representative of “true” profitability. Profitability may vary due to the impact of sources outside these analyses, including the 2015 Federal transitional Reinsurance Program (which provided claim reimbursements not included within these analyses), commercial reinsurance, and differences as to how carriers measure profitability, such as allocation of administrative expenses, which may vary from the methodology used in these analyses. These analyses measure relative profitability, or profitability relationships between market segments, to identify segments where the variance is largest and might be contributing to market instability. In calculating relative profitability, CSR payments and risk adjustment transfers are allocated to the appropriate market segment.
  14. 14. Verma, Seema, and Thomas E. Price. “Patient Protection and Affordable Care Act; Market Stabilization.” Centers for Medicare & Medicaid Services, Department of Health & Human Services. April 18, 2017.
  15. 15. Some state-based marketplaces will have longer open enrollment periods for the 2018 benefit year.
  16. 16. Slavitt, Andrew M., and Sylvia M. Burwell. “Patient Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2018; Amendments to Special Enrollment Periods and the Consumer Operated and Oriented Plan Program.” Centers for Medicare & Medicaid Services, Department of Health & Human Services. Dec. 22, 2016.
  17. 17. Supra note 7.
  18. 18. Tolbert, Jennifer, and Karen Pollitz. “Section 1332 State Innovation Waivers: Current Status and Potential Changes.” The Henry J. Kaiser Family Foundation. July 6, 2017.
  19. 19. Parameters for reinsurance programs determine which claims the issuer will not be at risk for. Each member’s claims are accumulated over the reinsurance period, typically a calendar year. The attachment point is the amount that must be accumulated before reinsurance begins and the cap is the maximum claim amount. The claim dollars accumulated in between the attachment point and the cap are applied to the coinsurance percentage to determine the amount of reimbursement from the program. The low scenario has an attachment point of $90,000, a cap of $250,000 and a coinsurance of 50 percent and matches the 2016 transitional Reinsurance Program. The high scenario has an attachment point of $45,000, a cap of $400,000 and a coinsurance of 70 percent.