Affordable Care Act risk adjustment: overview, context, and challenges.

Beginning in 2014, individuals and small businesses will be able to purchase private health insurance through competitive marketplaces. The Affordable Care Act (ACA) provides for a program of risk adjustment in the individual and small group markets in 2014 as Marketplaces are implemented and new market reforms take effect. The purpose of risk adjustment is to lessen or eliminate the influence of risk selection on the premiums that plans charge and the incentive for plans to avoid sicker enrollees. This article--the first of three in the Medicare & Medicaid Research Review--describes the key program goal and issues in the Department of Health and Human Services (HHS) developed risk adjustment methodology, and identifies key choices in how the methodology responds to these issues. The goal of the HHS risk adjustment methodology is to compensate health insurance plans for differences in enrollee health mix so that plan premiums reflect differences in scope of coverage and other plan factors, but not differences in health status. The methodology includes a risk adjustment model and a risk transfer formula that together address this program goal as well as three issues specific to ACA risk adjustment: 1) new population; 2) cost and rating factors; and 3) balanced transfers within state/market. The risk adjustment model, described in the second article, estimates differences in health risks taking into account the new population and scope of coverage (actuarial value level). The transfer formula, described in the third article, calculates balanced transfers that are intended to account for health risk differences while preserving permissible premium differences.