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The Centers for Medicare and Medicaid Services (CMS) runs the ACA.  Their draft rule book for 2026 is out and they are seeking comments on lots of things.  One of the more intriguing elements is that there is interest in charging interest on risk adjustment.  Insurers who cover a population that is coded as healthy/cheaper than average pay insurers whose populations code as more expensive than the state average.  There is a substantial gap between when care is delivered and paid for and when these risk adjustment transfers are made.  Currently, that gap is interest free so low risk insurers effectively get a no-interest loan from high risk insurers while the high risk insurers have to front cash for the care that their patients need.  This is an incentive for insurers to not offer plans that are attractive to high cost/high risk adjustment enrollees.

CMS is thinking about this hard right now:

HHS typically announces State transfer amounts no later than June 30 of the year following the benefit year,  begins to collect charges in August of the year following the benefit year, and begins to make payments to issuers in the fall of the year following the applicable benefit year. This process means that issuers whose enrollees have higher-than-average actuarial risk do not receive their State transfer payments until the fall of the year following the benefit year. Over this same time period, issuers whose enrollees have lower-than-average actuarial risk are able to benefit from the availability of capital from the collection of premiums for investment…

in January 2016, the annual short-term Applicable Federal Rate (AFR) interest rate was 0.75 percent, whereas in January 2023 the AFR interest rate had increased to 4.50 percent….

For these reasons, we solicit comments on the impact of the time value of money on the HHS-operated risk adjustment program, including the impact of the time value of money on issuers’ assessment of actuarial risk and the incentives for adverse selection, and what possible solutions or mitigating steps we should consider to address the impact of the time value of money on the HHS-operated risk adjustment program in future rulemaking. ”

Right now, CMS just wants feedback rather than a specific number. We discussed this problem over the summer:

I think that ACA risk adjustment is imperfect and it is imperfect towards overpaying for low to no risk enrollees and underpaying for higher risk enrollees. We see narrow and restrictive networks that are attractive to low risk enrollees who only care about premium proliferate while broad networks, Platinum plans and PPOs are very rare. Those attributes are attractive to individuals with high risk….

Insurers with higher than average health risk rely on risk adjustment payments to make them whole. They face both the time value of money costs and the risk of not getting paid. These high risk insurers eat both types of risk. That makes, on the margin, trying to insure a high risk population with good networks and high value plans less attractive than bottom feeding with hyper skinny networks and restrictive products. Having CMS charge interest on the risk adjustment transfer would modestly re-align incentives so that the business case to offer broader networks and less restrictive plans gets a bit better.

Yes, this is technocratic tinkering, but if CMS is concerned about networks being too narrow and PPOs being rarely offered, it is this tinkering that changes the rules and incentives on the margin that will likely make it profitable for insurers to craft products that people who want bigger networks and richer benefits.

Making it more profitable to cover sick people Part 2Post + Comments (16)