Empirical Characteristics of Affordable Care Act Risk Transfer Payments

Abstract

Under the Affordable Care Act (ACA), insurers cannot engage in medical underwriting and thus face perverse incentives to engage in risk selection and discourage low-value patients from enrolling in their plans. One ACA program intended to reduce the effects of risk selection is risk adjustment. Under a risk adjustment program, insurers with less healthy enrollees receive risk transfer payments from insurers with healthier enrollees. Our goal is to understand the elements driving risk transfers. First, the distribution of risk transfers should be based on random health shocks, which are unpredictable events that negatively affect health status. Second, risk transfers could be influenced by factors unique to each insurer, such as certain plans attracting certain patients, the extent to which carriers engage in risk selection, and the degree of upcoding. We create a publicly available dataset using Centers for Medicare and Medicaid Services data that includes insurer risk transfer payments, costs, and premiums for the 2014-2017 benefit years. Using this dataset, we find that the empirical distribution of risk transfer payments is not consistent with the lack of risk selection as measured by the ACA risk transfer formula. Over all states included in our dataset, at least 60% of the volume of transfers cannot be accounted for by a purely normal model. Because we find that it is very unlikely that risk transfer payments are caused solely by random shocks that reflect health events of the population, our work raises important questions about the causes of heterogeneity in risk transfers.