This paper was updated on November 22, 2023.

Oliver Wyman Actuarial recently authored a report for the Blue Cross Blue Shield Association, a federation of 35 separate US health insurance organizations and companies, providing health insurance to more than 106 million Americans. The report analyzed publicly available data to determine whether the risk adjustment system of the Affordable Care Act (ACA) is functioning as intended.

The ACA was signed into US law in 2010 with the goal of reforming the individual health insurance market by prohibiting issuers from denying coverage or charging higher premiums to those with pre-existing conditions or expected high claims. To ensure the success of this reformed market, the ACA authors recognized the need for an effective risk adjustment system. Such a system would transfer funds from issuers with low-cost claimants to those with high-cost claimants, so that issuers would compete based on the cost and quality of the insurance policies they offer, rather than their ability to avoid high-cost individuals.

ACA risk adjustment is effective – with room for improvement

Using publicly available data to evaluate the current risk adjustment system, Oliver Wyman Actuarial’s Ryan Schultz, Peter Kaczmarek, and James Bao, find that the system does move funds from issuers with low-cost claimants to those with high-cost claimants, as intended. They also find that the system does not disadvantage small issuers, nor does it disadvantage issuers that are new to either the individual ACA market or new to a particular state. However, the risk adjustment system underpays for high-cost claimants, which could lead to upward pressure on costs and premium rates for some issuers.

The report further suggests that some issuers' financial difficulties in the individual ACA market may be the result of underpricing, rather than the risk adjustment system. The authors caution against making changes to the risk adjustment system to specifically favor new or small issuers, as this would be unworkable, would increase the complexity of the market and could cause existing issuers to reconsider their participation in the market.