In plan year 2018, HHS introduced the high-cost risk pool (HCRP) program to augment the existing Affordable Care Act (ACA) risk adjustment program, helping mitigate the costs associated with high-cost claimants. HCRP issuer charge trends exceed medical trends and are expected to continue at this level. As high-cost events and treatments increase in frequency, ACA issuers must consider how the HCRP interplays with their strategies.

Background

ACA risk adjustment transfers funds among issuers based on the risk level of their populations compared to the statewide market, focusing competition on quality and plan offerings rather than on issuer enrollees’ morbidity levels.¹ However, risk adjustment models generally underpredict the costs for very high-cost enrollees,² which can incentivize issuers to find ways to avoid these enrollees.

In plan year (PY) 2018, the U.S. Department of Health and Human Services (HHS) established the HCRP program.³ The HCRP functions like specific stop-loss insurance. HHS pools a fixed percentage of each enrollee’s medical and pharmacy claims above a certain threshold. The current threshold is $1 million with a coinsurance rate of 60%, meaning issuers recover 60% of costs above $1 million. HHS assesses the total nationwide cost of this program as a market-specific percentage of premium for all ACA issuers nationwide.⁴ Since the inception of the HCRP, HHS has dampened plan liability to reflect only 40% of costs above $1 million per enrollee when calibrating the HHS-hierarchical condition category (HCC) risk score model.

Historical results

The table in Figure 1 summarizes historical HCRP charges assessed to issuers by market.⁵

While initially low as a percentage of premium, the HCRP charge per member per month (PMPM) average annual trend is 12% for individual and 17% for small group, which is significantly higher than premium trends. If HCRP recoveries trended at the same rate as premiums, we would expect the HCRP charge as a percentage of premium to remain constant. As the HCRP parameters remain fixed at a $1 million threshold and 60% coinsurance rate, the recovery trends are leveraged. There are two reasons for this effect, best shown by examples:

• Assume an enrollee’s claim costs in year 1 are $1,100,000, with $100,000 over the HCRP threshold. All else equal, if medical trend is 10%, then costs for the same care the following year would be $1,210,000. The amount over the HCRP threshold would then increase 110% ($210,000 / $100,000 - 1), greatly exceeding the underlying trend of 10%.
• Assume another enrollee’s claim costs in year 1 are $950,000, which are less than the $1 million HCRP threshold. All else equal, if medical trend is 10%, then costs for the same care the following year would be $1,045,000, with $45,000 newly exceeding the fixed $1 million HCRP threshold. This has resulted in a higher percentage of issuers receiving HCRP recoveries each year as claim costs increase with trend, as Figure 2 illustrates.

HHS has not provided commentary on whether it plans to raise the HCRP thresholds and/or adjust the coinsurance in future years. In the absence of changes to HCRP parameters, leveraging will amplify underlying trends in claim costs, driving potentially significant increases in HCRP assessments.

Considerations for ACA issuers

State-level considerations

Unlike risk adjustment transfers, which are zero-sum at the state and market level, HCRP is zero-sum across the entire nation for each of the two ACA markets (individual⁷ and small group). This can lead to an imbalance at the overall state level.

Over the first six years of the HCRP program, two-thirds of states’ recoveries were less than 0.5% of premium in both the individual and small group markets, with the number of such states decreasing over time to under half in 2022. However, some states have significantly higher HCRP recovery levels almost every year, such as Alaska for individual and Wyoming for small group—with the HCRP recovery averaging 3.24% and 1.82% of premium, respectively. Other states have significantly lower (and sometimes zero) HCRP recoveries almost every year, such as Rhode Island for individual and Mississippi for small group. This variability among states is expected, given general volatility for smaller states as well as differences in reimbursement rates (e.g., high-cost hospital rates) and morbidity.

HCRP recovery consistency by issuer

We reviewed historical HCRP recovery patterns by Health Insurance Oversight System (HIOS) issuer ID and observed the following, which may be helpful in estimating future HCRP recoveries within ACA rate filings when recoveries in the experience year are known but recoveries in the projection year (two years after the experience year) are unknown. Please see the table in Figure 3 for additional details. Note that this table excludes issuers that exit the market before each time period.

• 84% of issuers that have an HCRP recovery in a given year (for example, 2020) will have an HCRP recovery two years later (2022 in this same example). However, given the volatility of HCRP recoveries in magnitude, more than half of issuer-level HCRP recoveries will increase or decrease by at least 50% over a two-year period.
• 73% of issuers that do not have an HCRP recovery in a given year will also not have an HCRP recovery two years later.

Figure 3 suggests that issuers with an HCRP recovery in a given year are likely to have an HCRP recovery again in future years, and issuers without an HCRP recovery are likely to continue without a recovery.

Additional funding sources

Through prior research, we have analyzed high-cost claimants and assessed the effectiveness of both the risk adjustment program and HCRP in reimbursing carriers for these claimants. Typically, high-cost enrollees have multiple conditions, but risk adjustment and HCRP recoveries are insufficient to fully cover their claims. This is not entirely surprising as these programs, consistent with most regression models, intend to account for average, not extreme, costs within each measured class.

Fortunately for issuers, there may be additional funding sources to consider when evaluating profitability of high-cost claimants. Currently, 20 states have approved state innovation waivers (also known as 1332 waivers), of which 17 are granted the opportunity to implement state-specific reinsurance programs.⁸ The parameters of state reinsurance programs can vary widely and intend to target moderately costly claimants, but all provide some additional funding for high-cost claimants. Reviewing state reinsurance parameters annually is important, as states with a 1332 reinsurance waiver may modify their reinsurance parameters each benefit year.

Consider the following examples of a claimant with $2 million in total paid claims in the 2025 benefit year:

• Under Wisconsin’s program, the state will pay 48.28% of a claimant’s claims between $45,000 and $142,000.⁹ In this example, an issuer with a $2,000,000 claimant would receive $46,831.60 from Wisconsin (48.28% * [$142,000 - $45,000]) and $600,000 through the federal HCRP (60% * [$2,000,000 - $1,000,000]) for a total of $646,831.60 in reimbursements.
• Under North Dakota’s program (RAND), the state will pay 75% of a claimant’s claims between $100,000 and $1,000,000.¹⁰ In this example, an issuer with a $2,000,000 claimant would receive $675,000 from RAND (75% * [$1,000,000 - $100,000]) and $600,000 through the federal HCRP (60% * [$2,000,000 - $1,000,000]) for a total of $1,275,000 in reimbursements.

Aside from the federal risk adjustment and HCRP, state reinsurance programs are just one example of how issuers fund claim costs associated with high-cost claimants. Issuers with concerns about high-cost claimants in states without reinsurance programs have other options too. Issuers may seek an external commercial reinsurance contract, which can increase the reimbursement of high-cost claimants. Issuers could also explore provider risk-sharing arrangements, which can reduce an issuer’s exposure to extreme risk by sharing the risk with providers.

Alternatively, issuers can take a more proactive approach to claim management and reducing claim variability, by implementing care management programs, administering patient outreach initiatives, and increasing member education.

Incorporating the HCRP into ACA strategy

Prudent issuers should consider the dynamics and interplay among the incidence and characteristics of high-cost events, the HCRP, and risk adjustment to mitigate financial risk while ensuring proper quality and care coordination:

• HCRP recoveries and risk adjustment receivables are unlikely to cover costs for high-cost enrollees individually. While this is a normal risk of insurance, ACA issuers enrolling populations with higher medical needs need to understand their risk properly. Even an ACA issuer with a relatively healthy population could experience catastrophic claims.
• Implementing methods that help control spending for potential high-cost enrollees is more effective in managing the claim burden associated with these enrollees than relying on ACA programs alone. Effective care management, disease management, and hospital contracting are essential, both before and after the HCRP threshold. A good starting point is to evaluate whether any current enrollees incurred high claims recently (e.g., greater than $1 million in the past year) and, if so, to incorporate measures to manage these enrollees’ care and costs.
• Prescription drug spending can be the source of high claims that cause individual members to have claims over the HCRP threshold. While the HCRP currently does not consider prescription drug rebates, issuers should incorporate expected rebates into their analyses. Additional pharmacy management programs may mitigate catastrophic pharmacy costs.
• A well-structured commercial ACA reinsurance contract should incorporate the HCRP. For example, issuers may target a different coinsurance before and after the HCRP attachment threshold. Issuers ignoring the HCRP may inadvertently purchase more coverage than they need, paying unnecessary reinsurance premiums.
• Issuers need to incorporate appropriate HCRP projections into their premium rates and ensure that all valid HCRP-eligible claims are accepted to the EDGE server prior to the deadline.

Conclusion

The HCRP is becoming a larger component of ACA premiums over time, as recoveries and charges trend higher than medical trend due to leveraging. Issuers should consider historical state-specific and issuer-specific results when projecting future HCRP results. They should also consider the HCRP when developing ACA pricing and strategy to understand the dynamics of high-cost claimants, to mitigate risk, and to maximize the chance of success. Although the HCRP is a valuable federal program for insurers managing high-cost claimants, those concerned about the costs associated with such claimants may explore additional protective measures.

Caveats and Limitations

The analysis in this paper is based on data from a variety of sources, including publicly available data and our interpretation of guidance from the Centers for Medicare and Medicaid Services (CMS). We have not audited or verified this data and other information. If the underlying data or information is inaccurate or incomplete, then the results of our analysis may likewise be inaccurate or incomplete.

Our findings will change if CMS changes the current HCRP parameters. We do not have access to detailed claims data used by CMS in determining HCRP recoveries and charges. We used a sample from a large nationwide dataset of ACA membership to develop all summaries at the claimant level.

Guidelines issued by the American Academy of Actuaries require actuaries to include their professional qualifications in all actuarial communications. Madison Pendleton and Cameron Gleed are members of the American Academy of Actuaries and meet the qualification standards for performing the analyses in this report.

¹ The full text of the regulation is available at https://www.govinfo.gov/content/pkg/FR-2013-03-11/pdf/2013-04902.pdf.

² CMS (March 24, 2016). March 31, 2016, HHS-Operated Risk Adjustment Methodology Meeting. Retrieved January 7, 2025, from https://www.cms.gov/cciio/resources/forms-reports-and-other-resources/downloads/ra-march-31-white-paper-032416.pdf.

³ The full text of the regulation is available at https://www.govinfo.gov/content/pkg/FR-2016-12-22/pdf/2016-30433.pdf. The HCRP program was announced in 2016 and was implemented in 2018.

⁴ Premium charges are calculated separately for individual (including catastrophic, non-catastrophic, and merged market plans) and small group markets.

⁵ CMS. Premium Stabilization Programs. Retrieved January 7, 2025, from https://www.cms.gov/CCIIO/Programs-and-Initiatives/Premium-Stabilization-Programs.

⁶ These PMPMs are illustrative and represent the average PMPM across all issuers. The actual PMPMs will be different for each issuer—higher for issuers with higher premiums and lower for issuers with lower premiums.

⁷ Individual includes merged markets as well.

⁸ CMS. Patient Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2026; and Basic Health Program. Retrieved October 8, 2024, from https://public-inspection.federalregister.gov/2024-23103.pdf.

⁹ Wisconsin OCI. Wisconsin Healthcare Stability Plan. Retrieved October 9, 2024, from https://oci.wi.gov/Pages/Consumers/HealthcareStabilityPlan.aspx.

¹⁰ North Dakota Insurance Department. Reinsurance Association of North Dakota. Retrieved January 7, 2025, from https://www.insurance.nd.gov/companies/reinsurance-association-north-dakota.