Working Paper: NBER ID: w22519
Authors: Timothy J. Layton; Thomas G. McGuire
Abstract: Two of the three elements of the ACA’s “premium stabilization program,” reinsurance and risk corridors, are set to expire in 2017, leaving risk adjustment alone to protect plans against risk of high-cost cases. This paper considers potential modifications of the HHS risk adjustment methodology to maintain plan protection against risk from high-cost cases within the current regulatory framework. We show analytically that modifications of the transfer formula and of the risk adjustment model itself are mathematically equivalent to a conventional actuarially fair reinsurance policy. Furthermore, closely related modifications of the transfer formula or the risk adjustment model can improve on conventional reinsurance by figuring transfers or estimating risk adjustment model weights recognizing the presence of a reinsurance function. In the empirical section, we estimate risk adjustment models with an updated and selected version of the data used to calibrate the federal payment models, and show, using simulation methods, that proposed modifications improve fit at the person level and protect small insurers against high-cost risk better than conventional reinsurance. We simulate various “attachment points” for the reinsurance equivalent policies and quantify the tradeoffs of higher and lower attachment points.
Keywords: No keywords provided
JEL Codes: I11; I13; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| modifications to the transfer formula (F16) | mathematical equivalence to a conventional actuarially fair reinsurance policy (G22) |
| modifications to the risk adjustment model (C52) | mathematical equivalence to an actuarially fair reinsurance policy (G22) |
| modifications to the risk adjustment model (C52) | improved fit of payments at the person level (G50) |
| modifications to the risk adjustment model (C52) | better protection against high-cost risks (G52) |
| using a modified transfer formula with a $1 million attachment point (G52) | reduction in the risk of ruin from 53% to 43% (D81) |
| proposed modifications (Y20) | better fit for payments to costs (D61) |
| proposed modifications (Y20) | lower risk of ruin for smaller insurers (G22) |
| integrating reinsurance features into the risk adjustment framework (G22) | enhanced stability of the health insurance marketplace (G52) |