Tim Layton & Tom McGuire Help Develop Change in Marketplace Plan Payment Policy

May 17, 2017

Calculator Pen PaperIn a paper published in the American Journal of Health Economics, Tim Layton and Tom McGuire laid out potential changes that could be made to the ACA Marketplaces to protect against high-cost cases. This paper helped develop a change in the plan payment policy in the Marketplaces that implements within-market reinsurance via the risk adjustment transfer formula, effectively pooling any individual costs exceeding $1 million across all insurers in the market.

High levels of risk and uncertainty faced by insurers can lead to higher premiums or even deter some insurers from entering the market.  When the Marketplaces were introduced, they included reinsurance and risk corridors in order to weaken these concerns. However, these concerns remain due to the volatility of these markets, suggesting that more permanent policies to limit insurer risk may be beneficial. Additionally, these policies combat more systematic and permanent incentives for insurers to design their products to avoid certain unprofitable groups.

Layton and McGuire proposed simple and feasible modifications to the risk adjustment transfer formula that would reduce insurer risk. They successfully showed that a modification of the transfer formula is mathematically equivalent to a conventional reinsurance policy and that specific forms of this modification actually protects plans better against risk than the current system.

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