Rate Setting During COVID-19: Risk Corridors and Reinsurance

Update 5/22/2020: This article has been updated to reflect that the one-sided risk corridor in the HEROES Act applies to individual and small group markets as well as self-insured and large group health plans. Additionally, Mr. Ario was quoted as referring to an FDIC process, which has been corrected to say NAIC. Lastly, a line referencing “exorbitant premiums” from the first year of the risk corridors has been replaced with a quote from the original article to show that the high premiums were actually attributable to the 2017 silver-loading when cost-sharing reductions were eliminated.

Risk corridors and reinsurance can be valuable tools as payers attempt to set rates amidst the uncertainties of coronavirus, according to Joel Ario, managing director at Manatt Health, and Katherine Hempstead, senior policy adviser at the Robert Wood Johnson Foundation.

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The frequency and severity of coronavirus cases as well as the distinct state and local approaches to these factors are unknown elements that will strongly influence payer healthcare spending in 2020 and 2021, Ario and Hempstead explained. As a result, these uncertainties also grip the rate setting process.

However, the payer industry can lean on lessons learned between 2013, the first year for the ACA exchange, and 2017, the year the Trump administration considered and decided on eliminating cost-sharing reductions.

While the scenarios differ significantly from the present situation, Ario and Hempstead drew valuable insights from these moments to construct a potential response to the current coronavirus uncertainties.

Pulling from the 2017 silver-loading strategy, the experts first recommended that states accept provisional filings from payers in the spring of 2020 and supplemental filings potentially through September 2020.

A panel of public health experts, actuaries, and some payers would collaborate to construct a more definitive framework for the costs and savings associated with the coronavirus pandemic. Gathering and modeling data on everything from hospitalizations to the costs of reopening the economy would allow payers to make a more informed rate determination.

The panel has already assembled and hopes to be able to release guidance to the public by mid- to late-June, Hempstead shared with HealthPayerIntelligence.

By offering the chance to submit supplemental filings, payers would be able to integrate actuarial guidance as it emerges and potentially be more accurate in rate-setting.

While the panel develops its guidance and payers set provisional and supplemental filings, Ario and Hempstead recommended that policymakers move towards two tested strategies from the first years of the ACA exchange: reinsurance and risk corridors.

By reimbursing payers up to the reinsurance cap if their costs exceed a certain threshold, reinsurance programs successfully reduce premiums by 16.9 percent on average, according to data from Avalere. Not only did the US implement reinsurance in 2013, but as recently as 2019 individual states have established their own reinsurance programs, such as the ones in Colorado and North Dakota.

Ario and Hempstead recommended that Congress establish a reinsurance program that strictly covers coronavirus-related costs or that supplements a more overarching program.

Whatever form it takes, the 2021 national reinsurance program would need to account for the fact that coronavirus healthcare spending will be vastly different state-by-state and even insurer-by-insurer, the experts emphasized. Furthermore, costs will not be as centralized in a handful of patients as is typically the case.

States that already have established reinsurance programs, such as Maryland, should make adjustments for coronavirus. Meanwhile, others that have not yet established their own reinsurance program should get started, even though it may not be effective for this year, the experts recommended.

The embattled risk corridor program, which distributes the excess revenue from payers that set their premiums too high to the payers who set their premiums too low, could be instrumental in navigating coronavirus uncertainties.

"These incentives may be critical to avoiding the inflated pricing that we saw in the first year of silver loading," the experts explained. "Premiums have stabilized since then through a combination of rate adjustments and record high MLR rebates, but it would be better to get prices closer to right and minimize later adjustments."

This strategy would disincentivize payers from setting prices too high in order to compensate for escalating coronavirus healthcare spending.

“It's in the public interest to get as much information as we can out into the public so there's less uncertainty because when there's uncertainty, insurers tend to want to charge more for that, sort of a risk premium,” Hempstead said.

Ario and Hempstead also pointed out that for the past twenty years, risk corridors have been incorporated into the Medicare prescription drug program, successful and uncontested.

Both of these policies would require regulatory backing in order to become realities and both face a somewhat fraught political path. Ultimately, it will be up to states to decide how to handle the coronavirus rate-setting uncertainty.

“The states are basically the ones that are doing the reviews of the filings and making a decision. Only three states can default to the federal government review process. So the states really are the ones that need to be supported here through the NAIC process, through that task force, to be equipped to look at these filings and make the right judgments on what the rate should be,” Ario explained.

That being said, the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, the fourth coronavirus relief act which recently passed in the House, does include a one-sided risk corridor for self-insured group health insurance plans, group health insurance market, and individual health insurance markets.

As payers face this uncertain time period, both Ario and Hempstead agreed that the best way forward is through transparency. Ario cited Oregon’s rate review process as an excellent example. The state includes a public comment period which is currently underway on oregonhealthrates.com and, while some information remains proprietary, much of the relevant content is open to the public.

Hempstead likewise stressed transparency, particularly in light of the fact that, while consumers may be protected from rate changes through subsidies, changes in the individual health insurance market rates might affect employer-sponsored health plan rates that have a more direct impact on consumers.

“Transparency is really important and getting a lot of information out into the public that everybody can talk about and have a common frame of reference is really healthy for this process,” said Hempstead.

An array of institutions have echoed Ario and Hempstead’s recommendations or similar ones, including the Kaiser Family Foundation and the Alliance of Community Health Plans.

The American Academy of Actuaries also just released a brief that begins the process of compiling relevant data. The brief noted reinsurance and risk corridors as mechanisms that could address the present uncertainties.