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Risk Adjustments for ACA Business
Estimating risk adjustment transfer payment accruals for ACA business is challenging under the best of circumstances because the amount of the accrual depends on the company’s own risk level relative to that of the rest of the market. Additionally, the recent changes4 to the error rate calculation and the application of the results of the risk adjustment data validation (“RADV”) program adds greater uncertainty to the estimation of 2020 risk adjustment accruals. Due to the economic impact of COVID-19, many individuals lost their employer-sponsored health coverage due to layoffs and business closures so there was a higher than usual level of movement of participants from the group market and into the individual and Medicaid markets. Additionally, due to the pandemic, some state exchanges established special enrollment periods to allow mid-year enrollment without requiring demonstration of a usual qualifying event. These factors may have a significant impact on the risk scores of specific health carriers, as well as the overall average risk score of the state. Combined with the uncertainty of the risk associated with the claims incurred in November and December and reported after the end of the year, the calculation of the risk adjustment transfer accrual as of December 31, 2020 may be even more challenging.

Additionally, as stated above, several states experienced an increase in the number of carriers offering ACA products. In some states, where new carriers have entered the market, risk scores of existing companies may be significantly different from prior years, which means that existing companies as well as new companies may have a hard time estimating risk adjustment accruals based on historical data in that state or in other states with similar demographics.

Premium Deficiency Reserves
Companies are required to establish a premium deficiency reserve (“PDR”) whenever “the expected claims payments or incurred costs, claim adjustment expenses and administrative costs exceed the premiums to be collected for the remainder of the contract period…”5 . Since 2021 premiums for Medicare Advantage and ACA products were finalized in the Spring and summer of 2020, the potential impact of the pandemic on claims was largely uncertain and many did not adjust premiums to reflect additional claims due to COVID-19. Additionally, as stated above, ACA premiums decreased nationwide between 2020 and 2021. Additionally, with the current surge in COVID-19 cases emerging in the fourth quarter of 2020 and expected to last into 2021, the 2021 premiums may be deficient, particularly in the Medicare Advantage market, which has felt the brunt of the claims since the virus affects a disproportionate number of older persons. However, depending on its availability and efficacy in vulnerable populations, the impact of the newly approved vaccine may dampen the increase in claims, particularly in the second quarter of 2021.

As stated above, the impact of risk adjustment on net premiums is difficult to estimate and may have a significant impact on projected premiums used in the PDR formula.

Additionally, in some states, new entrants in the ACA market may have gained significant market share from returning carriers, which may result in actual enrollment for 2021 being significantly different from the estimates used in pricing. For some returning carriers, lower enrollment may result in deficient premiums and a PDR would need to be established. New carriers generally experience deficient premiums until their enrollment has grown to support fixed expenses. As stated earlier, a recent study from the Kaiser Family Foundation indicated that benchmark premiums declined by more than 2% nationwide. Therefore, it is prudent for carriers to perform a comprehensive analysis to determine if a PDR is indicated as of year-end 2020. ASOP No 42, Health and Disability Actuarial Assets and Liabilities Other Than Liabilities for Incurred Claims6, provides guidance for actuaries developing or reviewing premium deficiency reserves. The American Academy of Actuaries Discussion paper on premium deficiency reserves is also a good resource7.

Due to the current uncertainty relating to the adequacy of 2021 premiums in the ACA and Medicare Advantage markets, it is also prudent for companies to update the PDR calculation at least quarterly during 2021 and maybe into 2022, so that the appropriate level of PDR can be established and or maintained.

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[4] The final rule, issued by the Centers for Medicare and Medicaid (“CMS”) on November 24, 2020 can be found here: https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/CMS-9913-F.pdf
[5] Statement of Statutory Accounting Principles (SSAP) No. 54, Paragraph 19.
[6] http://www.actuarialstandardsboard.org/asops/health-and-disability-actuarial-assets-and-liabilities-other-than-liabilities-for-incurred-claims/
[7] https://www.actuary.org/sites/default/files/files/publications/Health_Discussion_Paper_on_Premium_Deficiency_Reserves_0703.pdf

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