Market stability

A variety of programs (including commercial insurance, Medicare and Medicaid) have embraced health risk adjustment concepts over the years to address unexpected medical needs and costs that can threaten health plan sustainability and competition.

Under the Affordable Care Act, programs known as reinsurance, risk corridors and risk adjustment—collectively known as the 3Rs—were adopted to protect consumers and stabilize premiums during the initial years of the new commercial health insurance market reforms and coverage expansions. The 3Rs have been designed based largely on lessons learned during implementation of the Medicare prescription drug program in 2006, when they were critical in stabilizing the market during a time of rapid growth and uncertainty.

  • Reinsurance: Under this temporary state-based program (due to expire in 2016), all plans are assessed annual fees that in turn will be used to limit some plans’ exposure to the very high costs associated with caring for the sickest enrollees in the individual market.
  • Risk corridors: Under this temporary program (due to expire in 2016), health plans and the federal government use a risk-sharing arrangement that shields consumers from possible spikes in premiums in cases where premium collections fall short of projected medical expense targets.
  • Risk adjustment: Unlike reinsurance and risk corridors, this is a permanent program. A risk calculation helps to spread risk among all health plans to protect those that enroll disproportionately higher-cost people, such as those with chronic diseases and other complex medical conditions.

Together, the 3Rs help create a more stable, predictable system for people enrolling in new commercial health coverage. They also promote more competition in the market by keeping the focus on care coordination and healthcare quality rather than on risk selection.

The nature of assessing and managing insurance risk serves to heighten the critical importance of the 3Rs. The stability and predictability afforded by such tools are needed to prevent the possibility of consumers facing higher premiums and fewer coverage choices in the future.

January 1, 2015