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JAY ANGOFF (DC, MO, NJ)

CRAIG L. BRISKIN (DC, NY, MA)

HEIDI R. BURAKIEWICZ (DC, MD, VA)

STEPHANIE J. BRYANT (DC, PA)

PIA WINSTON (DC, MD)

ROBERT DePRIEST (DC, NY)

JOANNA WASIK (NY)

BRETT WATSON (DC, MD)

AMELIA FRIEDMAN (TX)

N. JEREMI DURU (DC, MD)

MICHAEL D. LIEDER (DC)

KARLA A. GILBRIDE (DC, CA, NY)

RICHARD E. CONDIT (DC)

OF COUNSEL

.

Support for Challenging Health

Insurance Rate Filings

Data on Trend, Health Status, the Individual Mandate

Penalty, Delivery System Reforms, Narrow Networks,

and the 3 R’s

Prepared October 2015

Table of Contents

Trend .................................................................................................................................................4

1. Altarum Institute Center for Sustainable Health Spending, Health Sector Trend Report: September

2015—Expanded Report Covering Second Quarter of 2015 ..................................................................... 4

2. Liz Szabo, USA Today, ‘Jaw-Dropping’: Medicare deaths, hospitalizations AND costs reduce ............. 5

3. Aon Hewitt, 2011 Health Insurance Trend Driver Survey...................................................................... 5

4. Heffernan Insurance Brokers, 2014 Health Care Trend Report ............................................................ 6

5. PwC Health Research Institute, Medical Cost Trend: Behind the Numbers 2016 (June 2015) ............. 6

6. Wells Fargo Insurance, Healthcare trend projections for 2016 (April 2015) ........................................ 7

7. Alice Chen & Dana Goldman, Health Care Spending: Historical Trends and New Directions (August

2015) ......................................................................................................................................................... 8

8. Robert Wood Johnson Foundation, Drop in Health Care Spending Due to Slowdown in Rx Spending

(August 2015) ............................................................................................................................................ 8

Health Status .....................................................................................................................................9

9. American Academy of Actuaries, Drivers of 2015 Health Insurance Premium Changes (June 2014) .. 9

10. Congressional Budget Office (CBO), Updated Estimates of the Effects of the Insurance Coverage

Provisions of the Affordable Care Act, April 2014 ..................................................................................... 9

11. Society of Actuaries, Indications of Pent-up Demand, New ACA enrollee use of preference-sensitive

services (April 2015) ................................................................................................................................ 10

12. John Bertko, National Institute for Health Care Management, What to Expect for 2015 ACA

Premiums: An Actuary Opens the Black Box ........................................................................................... 10

13. Arkansas Blue Cross and Blue Shield, Part II: Reason for Requesting Rate Increase (June 10, 2014)

................................................................................................................................................................ 11

14. Julia Lerche & Ken Ehresmann, Wakely White Paper, Considerations for 2016 Health Insurance

Rate Development, Rate Filing, and Rate Review (March 2015) ............................................................ 11

15. State Health Access Data Assistance Center, The First Insurance Claim of New ACA Enrollees

(August 2015) .......................................................................................................................................... 12

16. Milliman, What now? 2015 Individual Market Pricing: Morbidity and Other Considerations

(October 2013) ........................................................................................................................................ 12

Effect of the Penalty ......................................................................................................................... 13

17. Chabeli Herrera, Miami Herald, When paying the Obamacare penalty is cheaper than buying

insurance ................................................................................................................................................. 13

18. McKinsey Center for U.S. Health Reform, 2015 OEP: Insight into consumer behavior (March 2015)

................................................................................................................................................................ 14

19. Amitabh Chandra, et al., The New England Journal of Medicine, The Importance of the Individual

Mandate—Evidence from Massachusetts (January 2011) ..................................................................... 14

Delivery System Reform ................................................................................................................... 14

20. The Commonwealth Fund, The Affordable Care Act’s Payment and Delivery System Reforms: A

Progress Report at Five Years (May 2015) .............................................................................................. 14

21. The Journal of the American Medical Association, Association of Pioneer Accountable Care

Organizations vs. Traditional Medicare Fee for Service with Spending, Utilization and Patient

Experience (June 2015) ........................................................................................................................... 15

22. Centers for Medicare and Medicaid Services (CMS), Medicare ACOs Provide Improved Care While

Slowing Cost Growth in 2014 .................................................................................................................. 16

23. Tianna Tu, et al., Leavitt Partners, The Impact of Accountable Care: Origins and Future of

Accountable Care Organizations (May 2015) ......................................................................................... 16

24. Centers for Medicare & Medicaid Services (CMS), CMS announces Value-Based Insurance Design

Model to improve care and reduce costs in Medicare Advantage Plans (September 2015) .................. 17

25. Leslie Small, Medicare Advantage plans to test value-based insurance design model (September 1,

2015) ....................................................................................................................................................... 17

26. Julie Huppert, Express Scripts, First Look: 2015 Public Exchange Plan Rx Trends ............................ 17

27. Melinda Beck, Wall Street Journal, Pioneer Model Saved Medicare Nearly $400 Million in Two

Years (May 2015) .................................................................................................................................... 18

28. Bob Herman, Modern Healthcare, What Medicare’s value-based insurance test could mean for

commercial plans (September 3, 2015) .................................................................................................. 18

29. David Bodycombe, Managed Care, More Data in Health Care Will Enable Predictive Modeling

Advances (February 2013) ...................................................................................................................... 19

30. Dan Mangan, CNBC, Obamacare program generates ‘substantial’ Medicare savings (May 2015) . 19

Narrow Networks ............................................................................................................................ 20

31. McKinsey Center for U.S. Health Reform, Hospital networks: Evolution of the configurations on the

2015 exchanges (April 2015) ................................................................................................................... 20

The “3 Rs”—Reinsurance, Risk Adjustment, and Risk Corridors ......................................................... 20

32. Sarah Ferris, The Hill, $800M left over in ObamaCare reinsurance program (June 2015) ............... 20

33. Timothy Jost, Health Affairs Blog, Implementing Health Reform: New CMS Guidance and First-Year

Results (Northern Tribe v. Burwell Update) (June 2015) ......................................................................... 21

34. The Center for Consumer Information & Insurance Oversight, Proposed HHS Notice of Benefit and

Payment Parameters for 2015 ................................................................................................................ 22

35. Kaiser Family Foundation, Explaining Health Care Reform: Risk Adjustment, Reinsurance, and Risk

Corridors (January 2014) ......................................................................................................................... 22

36. Anthony Brino, Fewer reinsurance needs buoy higher payments (June 2015) ................................. 23

37. American’s Health Insurance Plans, Affordable Care Act Premium Stabilization Programs: How

Reinsurance, Risk Corridors, and Risk Adjustment Protect Consumers (November 2013) ..................... 23

38. Anthony Brino, Flawed data, calculations may skew state’s risk adjustment (January 2015) ......... 24

39. Doug Norris, et al., Risk Corridors under the Affordable Care Act—A Bridge over Troubled Waters,

but the Devil’s in the Details (October 2013) .......................................................................................... 25

40. Jason Siegel & Jason Petroske, Milliman Healthcare Reform Briefing Paper, When adverse selection

isn’t: Which members are likely to be profitable (or not) in markets regulated by the ACA (December

2013) ....................................................................................................................................................... 25

41. Doug Norris, Daniel Perlman & Hans K. Leida, Milliman Healthcare Briefing Paper, Risk Corridors

Episode IV: No New Hope (December 2014) ........................................................................................... 26

42. Shyam Killi & Aaron S. Wright, Milliman Healthcare Reform Briefing Report, Risk adjustment plus

risk corridors: Offsetting impact (January 2015)..................................................................................... 26

43. Mary van der Heijde & Jordan Paulus, Milliman White Paper, Top 10 notable issues related to the

federal risk adjuster ................................................................................................................................ 27

44. American Action Forum, The ACA’s Risk Spreading Mechanisms: A Primer on Reinsurance, Risk

Corridors and Risk Adjustments .............................................................................................................. 27

45. HighRoads, CMS Maximizes Reinsurance Protections (June 2014)................................................... 28

Trend

1. Altarum Institute Center for Sustainable Health Spending, Health Sector

Trend Report: September 2015—Expanded Report Covering Second Quarter of

2015

The study concludes that health price growth remained very low in the second quarter of 2015,

while health services grew only a minimal amount.

“Health price growth remained very low at 1.1% in Q2, with the services component growing at

a paltry 0.5%, but the latest data for August show an uptick.”

“[L]ow growth in health care prices . . . has not contributed to the acceleration in health

spending. This implies that the acceleration in spending is driven primarily by increased

healthcare utilization, although the reduction in uncompensated care, as more people have gained

insurance coverage,is also a contributor.”

“Prices for physician services in Q2 are actually 1.2% lower than they were in Q2 of last year,

caused by the discontinuation of enhanced Medicaid payments to primary care physicians. For

August 2015, the Health Care Price Index, at 1.2%, is the highest since April 2015.” With regard

to hospital price growth, “while still very low at 1.0%,” the report found that it is “the highest

since September 2014.” Similarly, prescription drug price growth, which was “moderating since

a historic high of 6.4% in December 2014, rose for the first time in August at 4.7%, up from

4.4% in July.”

Link: http://altarum.org/sites/default/files/uploaded-publication-

files/Altarum%20RWJF%20Trend%20Report%20September%202015.pdf

2. Liz Szabo, USA Today, ‘Jaw-Dropping’: Medicare deaths, hospitalizations AND

costs reduce

USA Today reported on July 28, 2015, that a new study in the Journal of the American Medical

Association conducted by Harlan Krumholz, a cardiologist at the Yale University School of

Medicine, found significant improvements in the last fifteen years in decreasing Medicare

deaths and the number of hospitalizations, while at the same time reducing hospital costs.

Krumholz attributes the data improvements to reforms in hospital care, reduced obesity rates,

cleaner air, and improvements in drugs for treating common health conditions.

“Mortality rates among Medicare patients fell 16% from 1999 to 2013 . . . equal to more than

300,000 fewer deaths a year in 2013 than in 1999.”

“Among [Medicare’s traditional] fee-for-service patients, hospitalization rates fell 24%, with

more than 3 million fewer hospitalizations in 2013 than 1999.”

Admitted patients were “45% less likely to die during their stay; 24% less likely to die within a

month of admission; and 22% less likely to die within a year.”

“Costs for hospitalized patients also fell by 15% among fee-for-service patients.”

Link: www.usatoday.com/story/news/2015/07/27/medicare-mortality-costs-study/30757669/.

3. Aon Hewitt, 2011 Health Insurance Trend Driver Survey

A study of core health trend experiences from 2008 to 2010 revealed that smaller health care

plans experience more variability in health care trends than larger plans and that there was no

strong relationship between trend in one period and subsequent periods.

“[I]t is clear from the chart that not all health plans experienced the same level of health care cost

increases. In general, smaller health plans experienced more variability in health care trends than

larger plans.”

“Carriers experiencing a very high or very low trend in a particular year were not substantially

more likely to experience a similarly high or low trend in a subsequent period.”

Link: http://www.aon.com/attachments/thought-

leadership/2011_Health_Insurance_Trend_Driver_Survey.pdf

4. Heffernan Insurance Brokers, 2014 Health Care Trend Report

This survey of health insurance companies prepared for employers by Heffernan Benefit

Advisory Services (“HIB”) revealed that actual trend predictions for 2011 and 2012 were

“significantly lower than the carrier trend projections for all products.”

“Across all products the national trend projections for 2015 are lower than both the 2014 and

2013 trend projections.” For dental, “the trend projection for the dental HMO was at a ten year

low in 2014, the trend projection for this product for 2015 has increased to the 2013 trend level.

The dental PPO however is projected to have the same increase as 2014. While steadily declining

in trend increases year over year, the dental indemnity product’s overall trend projection is 1%

lower than it was last year. In fact the trend increase for the dental Indemnity is 0.1% lower than

the trend increase for the Dental PPO.” For vision, “[t]he projected vision trend has significantly

decreased to 2.2%.”

“While projected trend estimates for 2015 remain lower than they had been at the beginning of

the decade, the increased fees and costs as well as the increased participation in employer

sponsored health plans means that employers may yet again face high renewal increases.”

Link: http://www.heffins.com/sites/default/files/Benefits/Trend-Report-2014.pdf

5. PwC Health Research Institute, Medical Cost Trend: Behind the Numbers

2016 (June 2015)

Predicting that medical cost trend will be 6.5% in 2016, a slight decrease from the 6.8% in 2015,

this report identifies the “deflating” factors for 2016 costs as the looming “Cadillac tax,”

technological advancements in virtual care, and new, more efficient health advisers, while the

expected “inflating” factors are specialty drugs and cyber security. The report further concludes

that the ACA has not had major direct impacts on spending in the employer-based insurance

markets.

“PwC’s Health Research Institute (HRI) projects 2016 medical cost trend to be 6.5%--slightly

lower than the 6.8% projected for 2015 . . . .”

“Only 4% of employers saw a significant impact from the $2,000 penalty imposed under the

law’s employer mandate.”

“With the Cadillac tax on the horizon, insurers and employers are under pressure to find cost-

effective ways to lower health spending. Insurers will offer more risk-based contracts to

providers and companies will find more ways to share costs with their employees to mitigate this

pressure.”

“Consumers value convenience and cost savings, and virtual care saves them time and money. . .

. As more insurers, providers and employers offer virtual options, the expected savings will help

slow the overall spending growth rate in 2016 and beyond.”

The report also explains in more detail new health advisers that allow members to “find out

where they stand in terms of how much they need to pay for a specific service, at a particular

setting, how much of their deductible they have used and what remains, and if there are any cash

rewards for a particular setting.” The insurers further save costs, for example, with Fallon Health,

which guides members to lower-cost facilities, “[e]ven though the plan pays the member $500, it

still saves money by moving away from high-cost hospitals and physician offices.”

Link: http://www.pwc.com/us/en/health-industries/behind-the-numbers/behind-the-numbers-

2016.html

6. Wells Fargo Insurance, Healthcare trend projections for 2016 (April 2015)

Wells Fargo Insurance released the results of its 2015 Spring Healthcare Trend Survey of more

than 65 insurance companies nationwide and concluded for 2015 that “[m]edical trends have

decreased the past couple of years but they remain in the high single digits, ranging from 7.2%

for HMO to 9.0% for Indemnity Fee-for-Service annually. That difference may seem

insignificant, but a difference in healthcare trends of 2.0% compounds to a 10.4% difference in

plan costs after just five years.”

Wells Fargo Insurance projects for 2016 that (1) “Costs trends in 2016 are expected to increase

for every product, relative to 2015, except for prescription drugs”; (2) “Cost trends for medical

expenses have more uncertainty than cost trends for prescription drugs”; and (3) “The projected

uptick in claims trend starting in 2016 appears startling, especially for HMOs, which are

projected to increase 8.6% in 2016 compared to 7.2% now”; and (4) “Looking more closely at

the other products, though, the cost increases are not escalating any faster than they have

decreased over the last year or two, so it seems plausible that market factors could accelerate

healthcare costs in an upward direction.”

More specifically with regard to prescription drugs, in 2016 “costs are projected to increase

again, but not as much as they will in 2015” in part because “patents for many brand name drugs

have recently expired” and “[e]xpiring patents will result in an increase in generic drug usage,

which should create future savings.” Additionally, the recent “[f]irst approved biosimilar drug . .

. could open the door to cheaper, yet still effective, drug therapies that would be used as

alternatives to high-cost specialty drugs.”

Link:

https://wfis.wellsfargo.com/insights/clientadvisories/pages/healthcaretrendprojections2016.aspx

7. Alice Chen & Dana Goldman, Health Care Spending: Historical Trends and

New Directions (August 2015)

This article provides an extensive history of historical trends in healthcare coverage since 1960.

In the final section, entitled the “Golden Era, 2002-2015,” the authors highlight several modern

trends that are leading to more efficient and less costly healthcare services.

“From 2009 to 2013, the annual health expenditure growth rate has not exceeded 4%, a

phenomenon not experienced since the 1960s.”

“[T]he growth in Medicaid spending per enrollee has been well below the growth rate in the

medical care consumer price index, suggesting that Medicaid has been able to keep cost

increases below that of other sectors in the health system.”

The article attributes the slowdown in healthcare expenditures in part to “permanent changes in

benefit design,” including various insurance structures that incentivize patients “to utilize care

more efficiently, such as “value-based insurance design (VBID) plans which align patients’ out-

of-pocket costs with the value of the health services they receive.”

“Consumer directed health plans (CDHPs), introduced in the mid 2000s, may also have

contributed to the slowdown in health expenditures. These plans combine high deductible

coverage with tax-exempt savings accounts, which are used to pay for routine health care

expense. . . . There is robust empirical evidence that CDHPs effectively incentivize patients to

change their health care use and reduce costs in the first year after introduction.”

“Others attribute the slowdown to changes in the organization and delivery care, with the rise of

Accountable Care Organizations (ACOs) being perhaps the most popular.”

“Other studies have focused on the decline of health care prices over time. . . . “[T]he trend

toward tighter Medicare payment policies began in the middle of the 2000s. . . . Medicare

payments have risen below the relevant index of inflation each year . . . . Since private

payments tend to follow changes in Medicare fees, it is possible that tighter Medicare payment

policies created spillover effects in private payments as well.”

Link: http://www.nber.org/papers/w21501.pdf

8. Robert Wood Johnson Foundation, Drop in Health Care Spending Due to

Slowdown in Rx Spending (August 2015)

This article provides a summary of the report discussed elsewhere in this binder on the findings

of a nine month study conducted by the Altarum Institute Center for Sustainable Health

Spending.

“The health care spending growth rate slowed during the second quarter, with the quarterly

growth rate at 5.9 percent, a notch down from the estimated 6.6 percent estimated for the first

quarter. However, the two fundamental factors that are increasing health care spending growth

above the historical lows experienced during the 2009-2013 period are coverage expansion and

prescription drug spending. The relative falloff in Q2 spending is most likely attributable to the

continued slowdown in the growth of prescription drug spending in 2015.”

“If prescription drug spending growth continues to subside and the pace of coverage expansion

slows, the rate of health care spending growth may move closer to the historically low levels in

2009-2013.” The slowdown in coverage is described as “easy to predict,” but the “future trend in

prescription drug spending is far less certain.”

The study also found that growth in health services prices remained “very low” in the second

quarter of 2015.

Additionally, “job growth at hospitals continues at a healthy clip, with more than 15,000 jobs

added in July, higher than the monthly average of 12,000.”

Link: http://www.rwjf.org/en/library/research/2015/08/drop-in-health-care-spending-due-to-

slowdown-in-rx-spending.html

Health Status

9. American Academy of Actuaries, Drivers of 2015 Health Insurance Premium

Changes (June 2014)

This issue brief discusses several factors that it predicted in 2014 would impact the 2015 rates for

health insurance premiums, including observations that support the existence of pent up demand.

“In general, higher-cost individuals are more likely to enroll early during the open enrollment

period and in the first year of the program. Lower-cost individuals are more likely to enroll later

during the open enrollment period and perhaps in later years as the individual mandate penalty

increases.”

Link: http://www.actuary.org/files/2015_Premium_Drivers_Updated_060414.pdf

10. Congressional Budget Office (CBO), Updated Estimates of the Effects of the

Insurance Coverage Provisions of the Affordable Care Act, April 2014

In a report discussing many factors potentially affecting the 2015 rates, the CBO describes pent

up demand and states that it will likely lead to healthier enrollees in 2015.

“CBO and JCT anticipate that exchange enrollees in the future will be healthier, on average, than

the smaller number of people who are obtaining such coverage in 2014. Such an outcome would

be expected if people who are less healthy are more eager to obtain insurance, and it would be

consistent with enrollment and medical claims in Massachusetts after that state introduced

subsidized exchanges in 2006. That factor is expected to lower premiums in 2015 relative to

those in 2014.”

Link: http://www.cbo.gov/sites/default/files/cbofiles/attachments/45231-ACA_Estimates.pdf

11. Society of Actuaries, Indications of Pent-up Demand, New ACA enrollee use

of preference-sensitive services (April 2015)

This study used the rates of preference-sensitive services as evidence of the existence of pent-up

demand and that it was in fact an issue that would naturally subside over time.

“This paper would suggest that the overall increase in total cost of care due to these preference-

sensitive services alone is less than 3 percent.”

“A facet of pent-up demand is that it does not persist. Once the initial surge in use has passed,

the behavior of the population should subside into a more persistent, long-term pattern. . . . This

paper examines use of the sorts of care that would be more indicative of pent-up demand than

morbidity or delivery preference, but does not attempt to adjust for all the differences between

the two populations.”

“Preference-sensitive treatments represented a smaller portion of the total cost of all care for the

newly insured than for the continuously insured in the first quarter of 2014.”

“The first-quarter 2014 data are consistent with studies of Medicaid expansion populations—

which show that there is an initial high use of services that gradually tapers off over the year . . . .

Other studies have shown that later enrollees were younger and had fewer conditions.”

“Pent-up demand has been studies for years, and there is a consensus that it exists and that it is

transitory.”

Link: https://www.soa.org/Research/Research-Projects/Health/2015-pent-up-demand-health.aspx

12. John Bertko, National Institute for Health Care Management, What to Expect

for 2015 ACA Premiums: An Actuary Opens the Black Box

A retired actuary wrote this policy brief explaining the rate-setting process and factors to

consider for 2015, including pent up demand.

“Insurers must also consider the ‘pent-up demand’ that is expected as previously uninsured

enrollees take advantage of their new coverage. Most actuaries priced for this higher utilization

when they set 2014 premiums, but they are likely to project a smaller impact from this factor for

2015.”

“Consumers with these high initial needs would have obtained services early in 2014 and there

should be disproportionately fewer enrollees with unmet health needs in 2015, assuming those

with the most pressing needs enrolled in 2014.”

Link: http://www.nihcm.org/pdf/ACA_Premiums_2015_Bertko_EV2.pdf

13. Arkansas Blue Cross and Blue Shield, Part II: Reason for Requesting Rate

Increase (June 10, 2014)

Arkansas Blue Cross and Blue Shield explained the reason for requesting a rate increase in part

was due to less healthy people signing up for health insurance in 2014. Healthy people, on the

other hand, were more inclined to keep non-ACA compliant plans.

“And, while we are seeing just a few months of claims experience, it is clear that a pent up

demand existed for medical services—most likely from individuals who previously couldn’t

afford such care.”

“Health insurance premiums are affected by many factors, including who is enrolled in a health

plan—the number of healthy people and those with chronic medical conditions. So far in [] 2014,

it appears that many people who need ongoing medical attention have signed up for these

products, which increases the cost of premiums for everyone in ACA products.”

“Some people have kept their previous plans, making the combination of people enrolled in new

plans not as balanced as it could be. Those with more costly health care conditions are choosing

to transition to fully ACA compliant plans.”

Link:

http://www.arkansasbluecross.com/doclib/documents/members/rate%20increase%20notification

%20for%20metallic%20policies.pdf

14. Julia Lerche & Ken Ehresmann, Wakely White Paper, Considerations for

2016 Health Insurance Rate Development, Rate Filing, and Rate Review (March

2015)

This White Paper provides a succinct summary of the key considerations for insurers when

setting 2016 rates, including changes to the actuarial value calculator, a list of the maximum out-

of-pocket limits for different types of plans, and changes to prescription drug requirements. The

White Paper concludes with an overview of Trend, the 3 R’s, and other factors potentially

affecting 2016 rates.

“[T]here is general consensus that the remaining uninsured population who may take-up

insurance in 2016 is generally healthier than the population of previously uninsured individuals

who have already entered the market . . . .”

“Unlike past years, most issuers will have experience for the newly enrolled population resulting

from the major coverage provisions of the ACA. Enrollment and claims data can be analyzed to

better estimate the impact of population changes on projected claims compared to the

information available for 2014and 2015rating.”

“This will be the first year for which many issuers have a full calendar year (2014) of claims

experience that reflect the major changes under the ACA. In considering this experience, issuers

and regulators will need to understand the distribution of enrollees based on when and how long

members were enrolled in coverage.”

Link: http://www.wakely.com/wp-content/uploads/2013/12/White-Paper-2016-Rate-

Considerations.pdf

15. State Health Access Data Assistance Center, The First Insurance Claim of

New ACA Enrollees (August 2015)

This research brief calls into question whether pent-up demand exists in all categories of new

ACA enrollees. Angela Fertig and Caroline Carlin of the Media Research Institute and Sharon

Long of the Urban Institute found that the first claim of new Medicaid enrollees displayed

patterns of utilization consistent with pent-up demand, but observed mixed evidence of pent-up

demand from the first claim filed by new enrollees with non-group coverage.

“Among those with any claims in the first 6 months, the first claim filed by new Medicaid

enrollees was significantly more likely to involve a new patient visit (20% vs. 14%) and a

diagnostic procedure (79% vs 53%) compared to ongoing employer plan enrollees. The first

claim filed by new individual plan enrollees was also significantly more likely to involve a new

patient visit (19% vs. 14%) but has the same probability of involving a diagnostic procedure

(52% vs. 53%) relative to ongoing enrollees in an employer plan.”

“Our analysis of the first claim in the first 6 months of coverage shows patterns of utilization

among new Medicaid enrollees that are suggestive of the presence of pent-up demand—more

rapid health care visits and more intense visits, as measured by any visit, new patient visits and

diagnostic procedures. However, if future analysis of longitudinal data shows consistently high

utilization among new Medicaid enrollees over time, this group may simply be higher-risk than

our comparison group of ongoing employer plan enrollees. In contrast, we find mixed evidence

of pent-up demand for new individual plan enrollees relative to the comparison group. The time

until first visit is longer, but the first visit is more likely to be a new patient visit for those with

new individual coverage, compared to those with ongoing employer coverage.

Link: http://www.shadac.org/share/grant/pent-health-care-demand-after-aca-does-it-exist-and-

will-it-go-away

16. Milliman, What now? 2015 Individual Market Pricing: Morbidity and Other

Considerations (October 2013)

This article discusses the impact of the reduction of federal transition reinsurance, rising ACA

health insurer fees, morbidity changes, and the wear off of pent-up demand.

Generally with regard to reinsurance payment, “ [i]f individual market growth is significant in

2015, the transitional reinsurance program payments into the individual market may well go

down more than 40% on a per-member basis, simply because the $6 billion budget will be spread

across a larger individual market in 2015 relative to 2014. As a result, actuaries need to estimate

the size of the (non-grandfathered) individual health insurance market in 2015.”

“Actuaries estimate that the reinsurance program has reduced premiums by 10% to 15% in 2014,

so slimming it down will have a certain and material impact on pricing in 2015.”

Regarding health insurer fees, “to accurately estimate their share of the $11.3 billion 2015

insurer fee, insurers will not only need to estimate their own premium volume for 2014, but also

that of the entire 2014 health insurance market, taking into consideration the impact of the size

and profit status factors on the overall market.”

For morbidity estimates using actual 2014 data, “[i]t is important to note that, due to the ACA

risk adjustment program, assumptions regarding the morbidity of the entire 2014 individual

market are necessary for pricing—not just one particular insurer’s members. While the latter is

valuable, it does not provide a complete picture.” As certain factors “drive increased

participation in the market in 2015, overall morbidity is generally expected to improve, which

will help to mitigate rate increases.” The article poses further questions and issues to consider

when assessing an insurer’s morbidity rates.

For pent up demand, “[m]any believe that the impact of pent-up demand lasts a year or less.

Thus, as the proportion of the 2015 population that was previously uninsured is expected to

decrease—as many uninsured individuals will have obtained insurance in 2014 thanks to ACA—

the impact of pent-up demand on claim costs is also expected to decrease relative to 2014. This

should help to mitigate 2015 rate increases in the individual market.”

Link: http://us.milliman.com/insight/2013/What-now-2015-individual-market-pricing-

Morbidity-and-other-considerations/.

Effect of the Penalty

17. Chabeli Herrera, Miami Herald, When paying the Obamacare penalty is

cheaper than buying insurance

In this article dated May 15, 2015, Herrera reports that the penalty in 2014 was set a low enough

percentage that 2-4% of consumers opted to pay the penalty instead of obtaining health

insurance, but this is likely to change in 2015 when the penalty increases.

“The Obamacare fee is still small enough this year — $95 or 1 percent of household income in

2014, whichever is greater — to make it worthwhile for people like Denig to opt out of health

coverage.”

“The U.S. Department of Health and Human Services estimated earlier this year that 2 to 4

percent of consumers would pay the penalty, but final numbers have not yet been released by the

Internal Revenue Service.”

“That’s likely to change, though, when the penalty nearly quadruples next year and then spikes

to $695 or 2.5 percent of household income, whichever is greater, in 2016.”

Link: http://www.miamiherald.com/news/local/community/miami-dade/article21105861.html

18. McKinsey Center for U.S. Health Reform, 2015 OEP: Insight into consumer

behavior (March 2015)

The results of a survey of thousands of individuals are depicted in graphs and charts. The survey

found that 12% of the ACA market was newly insured in 2015 and that 70% of the newly

insured population was considered a “low health risk.”

Of the newly insured, 62% signed up for health insurance because “someone told me I would

have to pay a penalty if I didn’t get coverage.” Twenty percent of the newly insured polled

reported that they were unaware of the penalty.

Of the “persistently uninsured” population, defined as someone who was uninsured in 2014 and

2015, 41% were unaware of the penalty.

Link:

http://healthcare.mckinsey.com/sites/default/files/McKinsey%20Reform%20Center_2015%20O

EP%20Consumer%20Survey%20Insights.pdf

19. Amitabh Chandra, et al., The New England Journal of Medicine, The

Importance of the Individual Mandate—Evidence from Massachusetts (January

2011)

The findings of this study of the role of the individual mandate in health care reform in

Massachusetts support the existence of pent up demand and that healthy enrollees will increase

once the penalty goes into full effect.

“When the mandate became fully effective at the end of 2007, there was an enormous increase in

the number of healthy enrollees and a far smaller bump in the enrollment of people with chronic

illness.”

Link: http://www.nejm.org/doi/full/10.1056/NEJMp1013067

Delivery System Reform

20. The Commonwealth Fund, The Affordable Care Act’s Payment and Delivery

System Reforms: A Progress Report at Five Years (May 2015)

This progress report from The Commonwealth Fund provides a more detailed overview of the

delivery system reforms implemented through ACA and the accountable care organizations

(“ACOs”). The report found that improvements are estimated to have saved billions of dollars in

health care costs. The report further details the reforms implemented through ACA for provider

payment, and highlights how the law “reduced overpayments to private plans administering

Medicare benefits through the Medicare Advantage program,” and targeted “quality programs

that lead to inefficiencies and jeopardize patient health.” The reforms include long term plans

that have encountered some “delays and hiccups” in implementation, but “may soon make

greater strides possible.”

More than 400 ACOs participating in the reforms “serving nearly 7.2 million beneficiaries, or 14

percent of the Medicare population . . . exceeded expectations.”

“ACOs in the Shared Savings Program showed some improvement on most of the 33 quality

measures—from diabetes care to depression screening—compared with other Medicare

providers.”

“Evaluation results show that in the initiative’s first year, spanning October 2012 to September

2013, the practices generated enough savings to cover most of the $20 per-member, per-month

care management fee paid on average by CMS (although not enough to produce net savings

overall). While there was considerable variation in performance among the seven participating

U.S. regions, across all markets emergency department visits decreased by 3 percent and hospital

admissions by 2 percent after year 1. Significant effects on quality were few.”

“A major theme emerging from these efforts to transform primary care is the critical role of

technical and financial support in building the capacity of physician practices to function as

medical homes.” “[F]ederal investments have stimulated unprecedented collaboration and

dialogue among payers, both private and public, and providers on how to reorganize primary

care at the local level to achieve the aims of reform.”

Link: http://www.commonwealthfund.org/~/media/files/publications/issue-

brief/2015/may/1816_abrams_aca_reforms_delivery_payment_rb.pdf

21. The Journal of the American Medical Association, Association of Pioneer

Accountable Care Organizations vs. Traditional Medicare Fee for Service with

Spending, Utilization and Patient Experience (June 2015)

This study found that the Pioneer Accountable Care Organization (ACO) Model was more cost-

efficient and resulted in the same quality of patient care.

“In the first 2 years of the Pioneer ACO Model, beneficiaries aligned with Pioneer ACOs, as

compared with general Medicare FFS beneficiaries, exhibited smaller increases in total Medicare

expenditures and differential reductions in utilization of different health services, with little

difference in patient experience.”

Link: http://jama.jamanetwork.com/article.aspx?articleid=2290608&resultClick=3

22. Centers for Medicare and Medicaid Services (CMS), Medicare ACOs Provide

Improved Care While Slowing Cost Growth in 2014

CMS reported millions of dollars in savings from health care reforms such as the Pioneer

Accountable Care Organization (ACO) Model and the Medicare Shared Savings Program.

“During the second performance year, Pioneer ACOs generated estimated total model savings of

over $96 million and at the same time qualified for shared savings payments of $68 million.

They saved the Medicare Trust Funds approximately $41 million.”

“Pioneer ACOs achieved lower per capita growth in spending for the Medicare program at 1.4

percent, which is about 0.45 percent lower than Medicare fee-for-service.”

“58 Shared Savings Program ACOs held spending $705 million below their targets and earned

performance payments of more than $315 million as their share of program savings. One ACO in

Track 2 overspent its target by $10 million and owed shared losses of $4 million. . Total net

savings to Medicare is about $383 million in shared savings, including repayment of losses for

one Track 2 ACO.”

Link: https://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2014-Fact-sheets-

items/2014-09-16.html

23. Tianna Tu, et al., Leavitt Partners, The Impact of Accountable Care: Origins

and Future of Accountable Care Organizations (May 2015)

This report begins with a background on different types of systems reforms over the last few

decades and concludes that recent delivery system reforms have successfully reduced costs and

improved quality of care.

“Both commercial and public ACOs have seen success at reducing costs and improving quality,

which will encourage more ACOs to enter the market in the near future.”

“As of November 2014, Medicare ACOs in both the Pioneer and MSSP initiatives have together

generated $877 million in savings, $460 million of which has been returned to the ACOs as part

of their shared savings contract.”

“While savings generation is varied, overall, Medicare ACOs continue to improve on quality

scores year over year, and have maintained a higher average performance than other Medicare

FFS providers on corresponding measures.”

Link: http://www.brookings.edu/~/media/research/files/papers/2015/05/12-aco-paper/impact-of-

accountable-careorigins-052015.pdf

24. Centers for Medicare & Medicaid Services (CMS), CMS announces Value-

Based Insurance Design Model to improve care and reduce costs in Medicare

Advantage Plans (September 2015)

CMS issued a press released on September 1, 2015, announcing a new Value-Based Insurance

Design Model that will begin in select states in January 2017 and is intended to further reduce

health care costs.

“The goal of the model is to improve beneficiary health, reduce the utilization of avoidable high-

cost care, and reduce costs for plans, beneficiaries and the Medicare program. The model focuses

on Medicare Advantage enrollees with the chronic conditions of diabetes, congestive heart

failure, chronic obstructive pulmonary disease (COPD), past stroke, hypertension, coronary

artery disease, mood disorders, and combinations of these categories.”

Link: https://www.cms.gov/Newsroom/MediaReleaseDatabase/Press-releases/2015-Press-

releases-items/2015-09-01.html

25. Leslie Small, Medicare Advantage plans to test value-based insurance

design model (September 1, 2015)

This article reports on the new Value-Based Insurance Design Model that will begin in seven

states in January 2017 and is intended to encourage enrollees to use “high-value clinical

services” that are “the most likely to improve their health, and consequently, keep costs down.”

“The goal is to encourage these enrollees to use ‘high-value clinical services’ that are the most

likely to improve their health, and consequently, keep costs down.”

“[R]esearch seems to support these models, as a 2014 study suggested that insurers can apply

value-based design to high-deductible plans in order to improve care and lower costs for

enrollees with chronic conditions. Similarly, value-based insurance design can help insurers cope

with the high costs of specialty medications.”

Link: http://www.fiercehealthpayer.com/story/medicare-advantage-plans-test-value-based-

insurance-design-model/2015-09-01

26. Julie Huppert, Express Scripts, First Look: 2015 Public Exchange Plan Rx

Trends

This study discusses trends in prescriptions and medication use and discusses how healthier

people are predicted to be entering the market in 2015 to “achieve a more balanced risk pool.”

“While high-cost specialty medication use in exchange plans grew significantly between March

1, 2014 and March 1, 2015, we may be seeing the start of a new chapter with this program,

where healthier Americans who use fewer prescription medications are engaging with these

plans, helping plans achieve a more balanced risk pool, which will help them sustain benefit

offerings in the future.”

Link: http://lab.express-scripts.com/insights/government-programs/first-look-2015-public-

exchange-plan-rx-trends

27. Melinda Beck, Wall Street Journal, Pioneer Model Saved Medicare Nearly

$400 Million in Two Years (May 2015)

The Wall Street Journal reports that, according to the Centers for Medicare and Medicaid

Services (“CMS”), the Pioneer Accountable Care Organization model saved Medicare nearly

$400 million over two years and is the “first alternative-payment model certified to cut costs

while improving health-care quality.” As a result, the Pioneer model is “eligible to be expanded

to [a] larger group of Medicare beneficiaries,” and CMS officials “are seeking to include parts of

the Pioneer program in new options for the next group of ACOs, including assigning patients to

the group in advance, rather than retrospectively.”

Health and Human Services Secretary Sylvia M. Burwell is quoted in the article as stating that “‘

[t]his is a crucial milestone in our efforts to build a health-care system that delivers better care,

spends health-care dollars more wisely, and results in healthier people.’”

CMS researchers further found that “the 600,000 patients in Pioneer ACOs spent, on average,

$36 less per month in 2012 and $11 less per month in 2013 than comparable non-affiliated

patients.” The Pioneer patients reported “fewer hospitalizations, used fewer tests, procedures

and imaging services” and had “more timely care and better communication with clinicians.”

Link: http://www.wsj.com/articles/pioneer-model-saved-medicare-nearly-400-million-in-two-

years-1430748437

28. Bob Herman, Modern Healthcare, What Medicare’s value-based insurance

test could mean for commercial plans (September 3, 2015)

Medicare Advantage’s proposed value-based insurance design (“VBID”), set to start on January

1, 2017, and last for five years, has high potential to reduce health costs while also improving the

quality of care.

“A new test within the Medicare Advantage program will lower out-of-pocket costs for

chronically ill patients who seek high-value services and providers. Supporters hope the project

will lead to changes in federal law and become a template for all health plans with sizable cost-

sharing, which have become the standard offering from employers and insurers.”

“[Congress. Rep. Diane Black (R. Tenn.)] voted multiple times to repeal the ACA and said the

law ‘is built on a grand deception.’ Nevertheless, Black said in a statement, ‘VBID holds the

potential to vastly improve delivery of care and will allow providers to lower costs for certain

high-value services and treatments that are clinically proven to promote better health

outcomes.’”

Link: http://www.modernhealthcare.com/article/20150903/NEWS/150909976

29. David Bodycombe, Managed Care, More Data in Health Care Will Enable

Predictive Modeling Advances (February 2013)

This article explains that better data collection techniques and access to more data will lead to

advancements in Predictive modeling (“PM”), which in turn will improve overall health care.

After going into more specifics about each of these categories, the article concludes that “[t]he

promise of predictive modeling for population health management can be achieved as long as

HCOs understand its inherent shortfalls and focus on maximizing benefits such as enhanced

clinical decision support and highly personalized health plans. Collaboration is key to successful

predictive modeling.”

The article credits “ACA-influenced trends” with affecting how health care organizations use

PMs, including (1) “Increased adoption and use of electronic health records (EHRs), including

enhanced access to EHR data, such as family history, lab results, prescription utilization, prior

successful/unsuccessful treatments, and treatment compliance”; (2) “Enhanced emphasis on

population-based patient care management”; and (3) “An intense focus on clinical, operational,

and financial performance and cost rather than cost alone.”

Link: http://www.managedcaremag.com/archives/1302/1302.predictive_model.html

30. Dan Mangan, CNBC, Obamacare program generates ‘substantial’ Medicare

savings (May 2015)

According to this article, the Health and Human Services Secretary Sylvia Burwell reported

savings due to Obamacare programs, including the Pioneer program, designed to reduce

Medicare costs and improve patient outcomes of $300 per Medicare beneficiary per year during

2012 to 2013. The article explains how ACOs work and provides a brief overview of the

background of HHS’s program. While the article notes that results are still mixed, it highlights

many of the Pioneer program’s achievements.

“An Obamacare program designed to hold down Medicare costs and improve patient outcomes

generated more than $384 million in savings in its first two years of operation.”

“The department called savings that have been realized so far ‘substantial’ for a program that

currently serves more than 600,000 beneficiaries in Medicare, the federally run health-care

coverage system that primarily serves senior citizens.”

Link: http://www.cnbc.com/2015/05/04/obamacare-program-generates-substantial-medicare-

savings.html

Narrow Networks

31. McKinsey Center for U.S. Health Reform, Hospital networks: Evolution of the

configurations on the 2015 exchanges (April 2015)

A 2015 study by the McKinsey Center found that narrowed-network plans continue to result in

lower premiums and net savings. Median premiums in 2015 were 15% to 23% higher for broad-

network than narrowed-network plans.

“Furthermore, among all re-filed 2014 plans, narrowed-network plans had a smaller median

premium increase [in 2015] than broad network plans (4% vs. 8% respectively).”

“Seventy percent of the lowest-price plans this year, compared with 66% last year, are based on

narrowed networks.”

Insurance plan designs can further lower narrowed-network premiums. “Within the silver tier,

64% of narrowed-network plans are part of health maintenance organizations (HMOs) or

exclusive provider organizations, compared with 43% of broad-network plans. Similarly, 56% of

silver-tier narrowed-network plans have limited out-of-network (OON) coverage, compared with

37% of broad-network plans.

Co-branded plans are more likely to have ultra-narrow networks and had 12% lower median

premiums than provider-led plans.

Link: http://healthcare.mckinsey.com/sites/default/files/2015HospitalNetworks.pdf

The “3 Rs”—Reinsurance, Risk Adjustment, and Risk Corridors

32. Sarah Ferris, The Hill, $800M left over in ObamaCare reinsurance program

(June 2015)

The Hill reported on June 30, 2015, that the federal government had announced that the

reimbursement program had $800 million remaining in its reimbursement fund for health

insurers in 2015, a sign that marketplaces under ObamaCare needed less assistance than

expected.

“The federal government announced Tuesday that it has $800 million remaining in its

reimbursement fund for health insurers this year, a sign that marketplaces under ObamaCare

needed less life support than expected.”

“The Obama administration paid out a total of $7.9 billion in its reinsurance program in 2014,

less than the $8.7 billion it collected in payments. The rest will carry over into the next two

years.”

“Nearly all of the 484 health insurers that paid into the pool will be receiving some money back.”

Link: http://thehill.com/policy/healthcare/246601-800m-left-over-in-obamacare-reinsurance-

program

33. Timothy Jost, Health Affairs Blog, Implementing Health Reform: New CMS

Guidance and First-Year Results (Northern Tribe v. Burwell Update) (June 2015)

Timothy Jost reported on June 30, 2015, data regarding the successful completion of the first

year of the risk adjustment and reinsurance programs. He updated this report on July 7, 2015,

with information regarding the SHOP Exchange Program, which continues to grow and will

potentially make better coverage available to small employers and their employees.

“[T]he big news is that two incredibly complex programs [reinsurance and risk adjustment] that

play a key role in encouraging insurers to accept high-cost patients and to discourage insurers

from risk selection seem to have come off without serious technical problems. It is quite a

contrast to last year’s launch of the exchanges and a testimony to the effectiveness of the current

management of CMS and its relationship with insurers.”

“The reinsurance program was supposed to collect $10 billion for 2014 and to pay insurers

offering ACA-compliant (non-grandfathered or grandmothered) plans in the individual market

80 percent of the cost of claims that exceeded $45,000 up to a cap of $250,000. In fact the

program only collected $8.7 billion, but total claims equaled only $7.3 billion, so the program

will pay out 100 percent of the claims between the $45,000 threshold and $250,000 cap.”

“Four hundred and thirty-seven insurers will receive reinsurance payments. Excess funds

collected will be used to enhance reinsurance payments for 2015 or 2016.”

“The risk adjustment program will transfer 10 percent of funds in the individual market, 6

percent in the small group market, 21 percent in the catastrophic market, and 2 percent in states

with merged markets. The report lists for each insurer subject to the risk adjustment program

how much the insurer will pay or receive in the individual and small group market.”

“Blue Cross of California will receive $401 million in reinsurance payments but owe $182

million in risk adjustment contributions in the individual market. The California Blue Shield

plan, on the other hand, will collect $363 million in reinsurance and $135 million in individual

market risk adjustment funds.”

“While many insurers will receive, or in some cases, pay relatively small net amounts, for some

insurers massive amounts of money are involved.”

“As of May 2015, approximately 85,000 Americans have 2015 coverage through the SHOP

marketplaces through approximately 10,700 small employers. These totals do not include

employers that enrolled their employees in 2014 but have not renewed for 2015.”

Link: http://healthaffairs.org/blog/2015/07/01/implementing-health-care-reform-first-year-

results-from-reinsurance-and-risk-adjustment-programs/

34. The Center for Consumer Information & Insurance Oversight, Proposed

HHS Notice of Benefit and Payment Parameters for 2015

The proposals from HHS regarding adjustments to the reinsurance program in 2015 confirm that

HHS is estimating greater payments for insurers from the contribution fund.

“We are proposing to decrease the reinsurance attachment point from $60,000 to $45,000 for the

2014 benefit year due to updated estimates that allow for greater payments from the contribution

fund.”

“We are proposing the following 2015 uniform reinsurance payment parameters: an attachment

point of $70,000, a reinsurance cap of $250,000, and a coinsurance rate of 50 percent. We also

propose that if reinsurance contributions collected for a benefit year exceed the requests for

reinsurance payments for the benefit year, we would increase the coinsurance rate on our

reinsurance payments (or make other modifications to reinsurance parameters) to ensure that all

of the contributions collected for the 2014 benefit year are expended for claims for that benefit

year.”

“These changes maximize the benefits of the reinsurance program in 2014 and 2015 by investing

more of the funds collected for the program sooner.”

Link: https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/proposed-2015-payment-

notice.html

35. Kaiser Family Foundation, Explaining Health Care Reform: Risk Adjustment,

Reinsurance, and Risk Corridors (January 2014)

The Kaiser Family Foundation released in January 2014 explains in detail the “3Rs”—risk

adjustment, reinsurance, and risk corridors—and how these programs at the time were designed

to work. The report includes several diagrams and charts as wells as a breakdown of the

calculation of payments and costs for each program.

“The ACA’s risk adjustment program is intended to reinforce market rules that prohibit risk

selection by insurers.”

With regard to reinsurance, the goal of the program is “is to stabilize individual market

premiums during the early years of new market reforms.” “Eligible insurance plans will receive

reinsurance payments when the plan’s cost for an enrollee crosses a certain threshold, called an

attachment point. HHS proposes to set the attachment point (a dollar amount of insurer costs,

above which the insurer will be eligible for reinsurance payments) at $45,000 in 2014 and

$70,000 in 2015.”

“The ACA’s temporary risk corridor program is intended to promote accurate premiums in the

early years of the exchanges (2014 through 2016) by discouraging insurers from them from

setting them high in response to uncertainty about who will enroll and what they will cost.” A

qualified health plan (QHP) “with claims falling below its target amount by 3%–8% pays HHS

in the amount of 50% of the difference between its actual claims and 97% of its target amount.

A QHP with claims falling below its target amount by more than 8% pays 2.5 percent of the

target amount plus 80% of the difference between their actual claims and 92% of its target.”

Link: https://kaiserfamilyfoundation.files.wordpress.com/2014/01/8544-explaining-health-care-

reform-risk-adjustment-reinsurance-and-risk-corridors1.pdf

36. Anthony Brino, Fewer reinsurance needs buoy higher payments (June 2015)

In an article released June 18, 2015, Brino reports that the reinsurance program received less

extraordinary claims than feared leaving “more money to spread around” and coverage increases

by HHS to 100% for eligible individual market plans.

“The Department of Health and Human Services was ‘pleased to announce’ that the national

coinsurance rate for the transitional reinsurance program’s 2014 benefit year will be increased

from 80 percent to 100 percent for eligible individual market plans. The covered costs are for

claims in between $45,000 and $250,000, and payments will be coming in August, the agency

said.”

“’This should be good news for insurers, many of which have been anticipating receiving less in

risk corridor programs than they had hoped for because Congress has limited payments under

that program to the funds that are actually collected from insurers,’ wrote Washington and Lee

law professor Timothy Jost, in Health Affairs. ‘It also indicates, moreover, that insurers have

been receiving fewer high-cost claims than had been anticipated, which should help them to

stabilize premiums.’”

“Early on, it was clear to the Commonwealth Fund and others that the ACA’s 3R’s helped keep

premiums down in 2014 and moderated likely increases in 2015.”

Link: http://www.healthcarepayernews.com/content/fewer-reinsurance-needs-buoy-higher-

payments#.VgxDGpf1Isk

37. American’s Health Insurance Plans, Affordable Care Act Premium

Stabilization Programs: How Reinsurance, Risk Corridors, and Risk Adjustment

Protect Consumers (November 2013)

This issue brief explains the three interconnected risk management programs created by the

ACA, reinsurance, risk corridors, and risk adjustments (collectively the “3Rs”) and provides

more details regarding how these programs will create confidence in the new marketplaces and

stability in premiums for consumers.

“The reinsurance program will help health plans meet the needs of high-cost enrollees while

making individual market premiums more affordable for consumers. The Department of Health

and Human Services (HHS) estimates that the reinsurance program will reduce premiums in the

individual market in 2014 by 10-15 percent compared to what they would have been absent this

program.”

“Like the reinsurance program, the risk corridors program is a temporary measure designed to

ease the transition between the old and new marketplace and help stabilize premiums for

consumers. As health plans gain more experience setting premiums in this new market over time,

the protections provided by risk corridors will become less critical for protecting market

stability.”

“By spreading risk across all health plans in a state, risk adjustment promotes market stability as

it protects consumers with complex medical conditions. Preventing adverse selection will lead to

a more robust marketplace and more affordable coverage options for consumers.”

“Because of the increased uncertainty with the www.healthcare.gov website and the change in

treatment of 2013 policies, the 3Rs will play a more critical role in creating a stable market for

consumers. Consumers’ decisions to continue their 2013 policy, purchase an ACA-compliant

policy, or forego coverage in 2014 may necessitate adjustments to the 3Rs. Without additional

support, consumers may face higher premiums and fewer choices in future years.”

Link: http://www.ahipcoverage.com/wp-content/uploads/2013/11/ACA-Premium-Stabilization-

Programs-3.pdf

38. Anthony Brino, Flawed data, calculations may skew state’s risk adjustment

(January 2015)

The Massachusetts Association of Health Plans (MAHP) registered concerns about

overpayments in the risk adjustment program and inaccurate data used by larger insurance

companies to assess risk adjustment.

“Blue Cross Blue Shield of Massachusetts officials are comfortable with the risk adjustment

formula as it stands today. BCBS chief actuary Andreana Santangelo told the Boston Globe that

their membership includes a significant percentage of individuals with chronic conditions, co-

morbidities and at high risk of acute illness. Santangelo also said that the nonprofit company is

actually losing money currently without the risk adjustment program. MAHP, however, believes

a one-year moratorium is needed to prevent the likes of Blue Cross from being over-

compensated for its riskier membership pool — in part because the data being used in the

calculations may not be sufficient.

“Officials at the Massachusetts Connector have acknowledged that risk adjustment simulations

for the second and third quarters of 2014 ‘were impacted by significant inaccuracies in the data

being extracted from the all payer claims database,’ as MAHP’s Pellegrini told the Governor.

‘Such errors would significantly affect both the calculation of plans’ average actuarial risk and

the market-wide risk score.’ Moreover, she added, the ‘overall scope of the identified

discrepancies is still unknown to MAHP and our member plans.’”

Link: http://m.healthcarepayernews.com/node/25636/47

39. Doug Norris, et al., Risk Corridors under the Affordable Care Act—A Bridge

over Troubled Waters, but the Devil’s in the Details (October 2013)

This article explains in detail the multiple factors impacting the calculations of the risk corridors

and the complications that may arise for insurers, including incentives to underprice plans.

“Issuers may be able to readily model their own risk score, but will find it difficult to model the

overall market risk score (which is just as important in the risk adjustment calculation), and the

risk adjustment transfer payment feeds into the risk corridor calculation, which populates the

MLR formula.”

“Because of the risk-sharing nature of the program, it could provide an incentive for an issuer to

price its plans competitively (with reasonable but aggressive assumptions), and if its price ends

up being too low to cover costs, it will share that burden with HHS, while at the same time

gaining market share.”

Link:

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ve

d=0CB0QFjAAahUKEwi10O2u2LDIAhXF1R4KHRDaDQw&url=https%3A%2F%2Fwww.soa

.org%2Flibrary%2Fnewsletters%2Fhealth-watch-newsletter%2F2013%2Foctober%2Fhsn-2013-

iss73-norris.aspx&usg=AFQjCNFsiL7pOLHOuraCnLXTg0yCFmIWzQ

40. Jason Siegel & Jason Petroske, Milliman Healthcare Reform Briefing Paper,

When adverse selection isn’t: Which members are likely to be profitable (or not)

in markets regulated by the ACA (December 2013)

The report predicts that the implementation of the “3Rs,” including transitional reinsurance, risk

corridor programs, and a permanent risk adjustment mechanism, will result in increased

incentives for providing health insurance to newborns, elderly, and female patients, and

essentially the exact opposite outcome one would expect without these programs.

“Newborns and the elderly are the most profitable segments after building in the impact of the

3Rs. Notice that these same members would result in losses in the absence of the 3Rs.”

“The implementation of the 3Rs could create an incentive to attract and maintain a block of

business that is demographically older and more female than one’s competitors.”

“While these results are counterintuitive, remember that individuals with the lowest risk score

are not always those with the lowest claim costs. Among members with any particular medical

condition there will certainly be some with high costs for which a health plan will lose money,

and others with the low costs for which the plan would make money. When we composite results

over all members diagnosed with each of the conditions handled by the HHS model, we find that

for most of these conditions the plan will make money on average.”

Link: http://us.milliman.com/uploadedFiles/insight/2013/adverse-selection-aca.pdf

41. Doug Norris, Daniel Perlman & Hans K. Leida, Milliman Healthcare Briefing

Paper, Risk Corridors Episode IV: No New Hope (December 2014)

This December 2014 briefing paper focuses on risk corridors, providing an overview of the

program and analysis of the potential impact of proposed regulations. Several observations and

conclusions from the article relate to how the risk corridor may affect insurers’ rates.

“The appropriation in question is for fiscal year 2015 (ending September 30, 2015), which is

when risk corridor payments for program year 2014 will be made.”

The article highlights “methods by which any shortfalls [in the risk corridor program] could be

covered,” including “the user fee that the Centers for Medicare and Medicaid Services (CMS)

collects directly to cover the cost of the federally facilitated exchanges.”

“Insurers may also need to price QHPs [qualified health plans] more conservatively in 2016 now

that risk corridors have become even more uncertain.”

“Some insurers have already assumed that risk corridors would not be fully funded when setting

rates last spring, which could serve to increase 2015 premiums and dampen any 2016 impact to

some degree.”

Link: http://www.milliman.com/uploadedFiles/insight/2014/risk-corridors-episode-iv.pdf

42. Shyam Killi & Aaron S. Wright, Milliman Healthcare Reform Briefing

Report, Risk adjustment plus risk corridors: Offsetting impact (January 2015)

This report prepared in January 2015 to assist actuaries in considering the combined impact of

the “3Rs,” and more specifically “to illustrate the synergistic effect of risk corridors and risk

adjusters compared with the effect of each element separately.”

“By recognizing these offsetting impacts, the appointed actuary may be more confident with

determining liabilities to be included in the annual statement and classification of the actuarial

opinion. Based on the hypothetical scenarios we ran, the range of impact on balance sheets from

potential variability of the combined effect of risk adjuster and risk corridor payments is

substantially smaller compared to the variability of either the risk adjuster or risk corridors by

themselves.”

“Taken alone, there is the potential for significant variability in both the risk adjustment program

and the risk corridor estimates. However, as shown in Figures 1 to 4 above, when combined, the

impact of the variability in the risk adjustment can be substantially offset by the risk corridor

estimate, depending on full or partial payout.”

Link: http://us.milliman.com/uploadedFiles/insight/2015/risk-adjustment-plus-corridors.pdf

43. Mary van der Heijde & Jordan Paulus, Milliman White Paper, Top 10

notable issues related to the federal risk adjuster

This White Paper details how risk adjustment is calculated by HHS, compares the methodology

to calculation in different states, and concludes with an assessment of how risk adjustment can

lead to cost-savings for insurers.

“If issuers can effectively treat conditions, they can reduce claim costs while also receiving a set

risk transfer payment.”

“Insurers that are cost-effective in treating illnesses may find an advantage by receiving more in

risk transfer payments than it costs to treat that condition.”

Link: http://www.milliman.com/uploadedFiles/insight/2015/federal-risk-adjuster-

considerations.pdf?lng=%27A=0

44. American Action Forum, The ACA’s Risk Spreading Mechanisms: A Primer on

Reinsurance, Risk Corridors and Risk Adjustments

In an overview of the “3Rs” published January 9, 2015, the American Action Forum details

several specific mechanisms in the ACA that will benefit insurers and reduce risks.

“In order to improve the incentives for insurers to participate, the ACA includes three risk

spreading mechanisms: temporary reinsurance, temporary risk corridors, and permanent risk

adjustment, all of which address potential risk pool issues by limiting the amount an insurance

company can lose by participating in the marketplace.”

Regarding risk corridors, “[w]hen a plan’s costs are 92-97 percent, or 103-108 percent of the

allowable amount 50 percent of the plan’s gain or loss is shared with HHS. If the costs are below

92 percent of above 108 percent, 20 percent of that gain or loss is shared. For 2015, these

parameters will be shifted by two percentage points, increasing the ceiling payments and raising

the floor on profits.”

“Ultimately, HHS acknowledged through regulation that while it believes the program will be

budget neutral, it recognizes the requirement of the ACA to make payments to those issuers with

risk corridors ratios above 103 percent.”

“HHS indicated in final regulation that the ACA requires HHS to provide payments in-full to

issuers, and the final rule states that the agency will provide other sources of funding if the

program’s funds are insufficient – according to “the availability of appropriations.”

Link: http://americanactionforum.org/research/the-acas-risk-spreading-mechanisms-a-primer-on-

reinsurance-risk-corridors-a

45. HighRoads, CMS Maximizes Reinsurance Protections (June 2014)

Reporting on HHS’s final rule for exchange and insurance market standards for 2015,

HighRoads highlights several changes by CMS that should maximize reinsurance protections in

the long run and result in increased payments. For the reinsurance program, CMS lowered the

attachment points for reinsurance payments in 2015 and lowered the threshold at which payers

became eligible for reinsurance payments in 2015. For the risk corridors program, CMS,

increased the ceiling on allowable administrative costs and the floor on profits.

“In its final rule for exchange and insurance market standards for 2015 and beyond, the Centers

for Medicare & Medicaid Services (CMS) assured viability of reinsurance, risk corridors and risk

adjustment programs in face of sequestration and budget neutrality. CMS also increased the

ceiling on administrative costs and lowered the attachment points for reinsurance payments in

2015.”

“In coordination with the Office of Management and Budget (OMB), the Department of Health

and Human Services (HHS) has determined that the reinsurance and risk adjustment funds that

are sequestered at 7.3 percent in fiscal year 2015 will become available for payment to issuers in

FY 2016 without further congressional action.”

“CMS also finalized a proposal to lower the threshold at which payers become eligible for

reinsurance payments in 2015 from $70,000 to the 2014 level of $45,000. This rule will keep in

place protections so that reinsurance payments start once a customer has made $45,000 in

claims.”

“Additionally, in a move that will increase payments to plans and reduce assessments, CMS

increased the ceiling on allowable administrative costs (currently set at 20 percent) and the floor

on profits (currently set at 3 percent) by 2 percent in the risk corridors calculation. In doing so,

CMS hopes to account for uncertainty and changes in the market prior to and during benefit year

2015.”

“CMS is essentially maximizing reinsurance protections in the long run by changing the payment

threshold level.”

Link: http://www.highroads.com/newsroom/cms-maximizes-reinsurance-protections/