HHS-Operated Risk Adjustment Methodology

Starting with coverage beginning in 2014, individuals and small businesses are able to purchase private health insurance through reformed markets that encourage competition on quality and value. The Affordable Care Act established a permanent risk adjustment program to minimize the negative effects of adverse selection and help level the playing field between insurance companies, thereby fostering a stable, vibrant market in which issuers are rewarded for providing high-quality, affordable coverage, not for offering plans designed to attract the healthy and avoid the sick. The program applies to non-grandfathered health plans in the individual and small group markets, inside and outside the State-based Marketplaces and the Federally facilitated Marketplaces (the Marketplaces). The risk adjustment program is intended to achieve this goal by mitigating the effect of risk selection on premiums by transferring premium revenue from plans with below-average actuarial risk to plans with above-average actuarial risk. Such a transfer mechanism is an essential component of the insurance market reforms implemented by the Affordable Care Act.