Tag Archives: reinsurance

Overview of reinsurance and high-risk pools in the individual market

While there is significant uncertainty regarding current healthcare reform legislation, reinsurance and high-risk pool (HRP) programs are likely to play a role in attempting to stabilize individual market enrollment and premiums. In this paper, Milliman consultants Fritz Busch and Paul Houchens examine the following issues related to reinsurance and HRPs.

• The historical uses of HRPs prior to the implementation of the Patient Protection and Affordable Care Act (ACA)
• The role of reinsurance under the ACA, including emerging state-based programs developed using Section 1332 State Innovation Waivers
• The proposed usage of reinsurance and HRP under the American Health Care Act (AHCA), as passed by the House on May 4, 2017
• Considerations for states that are examining the creation and deployment of these types of mechanisms

Financial analysis of ACA health plan issuers

The Patient Protection and Affordable Care Act (ACA) includes risk mitigation programs, also known as the 3 Rs, for individual and small group health insurance markets. The 3 Rs include a permanent risk adjustment program, a transitional reinsurance program for the individual market, and a temporary risk corridor program. The transitional reinsurance and temporary risk corridor programs span from 2014 through 2016, while risk adjustment is a permanent program. The intent of these programs is to mitigate adverse selection and enhance market stability. The 3 Rs also affect financial reporting, and ACA health plan issuers faced many challenges when estimating the financial impact of the 3 Rs on 2014 financial statements. Our research suggests that ACA health plan issuers developed 2014 financial statements in a particularly uncertain environment. In this paper, Daniel Perlman and Dave Liner summarize 2014 3R estimates compared with actual amounts published by the Center for Consumer Information and Insurance Oversight (CCIIO).

Rates changing on the ACA marketplace

Premium rates for plans in the 38 federally facilitated and state partnership health insurance marketplaces have increased overall in 2016 as compared with 2015. A new Milliman analysis shows states with fewer carriers tended to have higher rate increases. Other known factors that have contributed to overall rate increases include increases in the transitional reinsurance program’s attachment point and government fees. In this article, Milliman’s Samuel Bennett highlights each marketplace average rate and unique carrier change by state. Figure 1 below shows the comparisons between 2015 and 2016.

Figure 1: Individual Market Comparison Between 2015 and 2016

State Second-Lowest-Cost Silver Plan Premium Rate (27-year old)*
Number of Carriers Offering Plans in the State Percent
(c) = (a)/(b) – 1
2016 2015 2016(a) 2015(b)
Alaska $590 $449 32% 2 2 0%
Alabama $244 $216 13% 3 3 0%
Arkansas $244 $235 4% 4 3 33%
Arizona $189 $161 18% 8 10 -20%
Delaware $292 $247 18% 2 2 0%
Florida $237 $235 1% 8 9 -11%
Georgia $236 $228 4% 9 8 13%
Iowa $245 $217 13% 4 3 33%
Illinois $203 $192 6% 8 7 14%
Indiana $235 $268 -12% 8 8 0%
Kansas $217 $187 16% 3 4 -25%
Louisiana $290 $267 9% 4 4 0%
Maine $260 $263 -1% 3 3 0%
Michigan $212 $209 1% 12 12 0%
Missouri $257 $233 10% 6 6 0%
Mississippi $230 $255 -10% 3 3 0%
Montana $264 $196 35% 3 3 0%
North Carolina $318 $259 23% 3 3 0%
North Dakota $270 $248 9% 3 3 0%
Nebraska $272 $243 12% 4 2 100%
New Hampshire $215 $205 5% 5 4 25%
New Jersey $272 $259 5% 4 5 -20%
New Mexico $205 $163 26% 3 5 -40%
Nevada $235 $217 8% 3 4 -25%
Ohio $221 $218 1% 15 14 7%
Oklahoma $251 $185 36% 2 3 -33%
Oregon $226 $183 23% 10 10 0%
Pennsylvania $214 $193 11% 7 9 -22%
South Carolina $247 $223 11% 3 3 0%
South Dakota $270 $216 25% 2 3 -33%
Tennessee $236 $191 23% 4 3 33%
Texas $220 $211 4% 14 13 8%
Utah $245 $212 16% 4 6 -33%
Virginia $240 $230 4% 7 6 17%
Wisconsin $262 $251 5% 16 15 7%
West Virginia $294 $248 18% 2 1 100%
Wyoming $379 $359 6% 1 2 -50%
Hawaii*** $213 n/a n/a 2 n/a n/a

* U.S. Department of Health and Human Services Assistant Secretary for Planning and Evaluation (ASPE) premium rates represent the average monthly premiums prior to the application of tax credits.
** Percent change numbers represent those calculated by ASPE.
*** Hawaii started using the federal application system for its state-based individual medical marketplace in 2016. No 2015 data is available for comparison. Note that Hawaii only has one rating area, so no ASPE plan enrollment equivalent was needed to calculate the overall statewide average second-lowest-cost silver plan rate.

What effect will the CMS risk corridor receivables have on insurers?

The Centers for Medicare and Medicaid Services (CMS) recently announced that it would only distribute 12.6% of risk corridor receivables in 2015. This development may have negative financial consequences for insurers seeking a risk corridor receivable.

In his article “Headwinds cause 2014 risk corridor funding shortfall,” Milliman actuary Scott Katterman examines the causes underlying the program’s funding shortfall and considers its implications for 2015 and 2016. He also highlights how June’s reinsurance recoveries actually eased the risk corridor’s shortfall.

Here is an excerpt:

The 2014 risk corridor funding shortfall also puts 2015 and 2016 risk corridor receivables at an increased risk of being underfunded. This is because HHS has stated that funds collected in 2015 and 2016 from insurers in a risk corridor payables position would first be used to fund any remaining 2014 receivables before being used on 2015 or 2016 receivables. To the extent that funding shortfalls continue over the next two years and budget neutrality remains in place, 2015 and 2016 receivables will not be fully funded.

Here are a few additional considerations insurers should account for in evaluating the future collectability of risk corridor receivables:

1. The language in the Cromnibus [“continuing resolution” (CR) and “omnibus” spending] bill is currently limited to 2014 risk corridor amounts because it governs the federal fiscal year in which those amounts will be paid. If different language is enacted for 2015 and 2016, then the collectability of risk corridor receivables becomes less of an issue. However, given the current political sensitivity surrounding the risk corridors, it may be more likely that budget neutrality is here to stay. Even if budget neutrality remains in place in future years, it is possible that HHS may find other sources of funds to draw on to fund risk corridor receivables.

2. To the extent that 2015 and 2016 ACA market-wide enrollment levels come in lower than expected, the transitional reinsurance program should be paid out at higher-than-expected levels on a per member basis, similar to 2014. This should mitigate some of the resulting excess costs in the market, although the impact will be dampened compared to 2014 results due to the phase-out of the reinsurance program as mandated by the ACA.

3. With many insurers having very limited ACA experience data when setting 2015 premium rates, underestimated market-wide cost levels could still be a significant risk in the 2015 market. Because markets tend to favor lower-priced plans, as described in the previous section, this could contribute to future funding shortfalls.

On the other hand, most insurers had significantly more knowledge on ACA market costs when setting 2016 premiums, although the effects of the transitional policy will continue into 2017. Insurers were also wary of the implications of risk corridor budget neutrality and the possible lack of protection for plans in 2016. As a result, the risk of underestimating market-wide costs should be lower in 2016, at least in markets where regulators allowed insurers to adjust rates to appropriate levels.

4. The asymmetry of the risk corridor algorithm described previously will continue to skew market results, tending to increase receivables compared to payables.

Will the increase in the coinsurance rate offer insurers relief?

The Centers for Medicare and Medicaid Services (CMS) recently announced that the 2014 transitional reinsurance program’s coinsurance rate would be 100% rather than 80% as originally stated. This is good news for insurers in the health exchange’s individual market whose reimbursement requests will be paid in full (and then some). In this article, Milliman’s Daniel Perlman, Doug Norris, and Hans Leida discuss the financial implications this change could have on insurers.

For issuers of ACA-compliant plans in the individual market, the increased coinsurance has a fairly obvious direct positive impact on 2014 financial performance: more will be collected than many issuers likely assumed when preparing annual statements for 2014. Any issuer that had computed its transitional reinsurance recovery accruals at year-end 2014 based upon the originally announced coinsurance parameter will now receive an additional 25% (because 100% / 80% = 1.25) given the change in coinsurance. The impact of this change will vary significantly by insurer, but could be material in relation to overall individual ACA market claim costs for many insurers. It may not be uncommon to see reductions in net paid claims of 2% to 4% as a result of this change.

The CMS announcement suggests that the reimbursement requests made by insurance companies may be low enough that the transitional reinsurance program could pay 100% of the coinsurance rate and carry a surplus into 2015. The authors estimated that this surplus would be between $1 billion and $2 billion. In fact, based on new information released by CMS on June 30, 2015, it is now known that the surplus carried forward will be approximately $1.8 billion, in the range the authors predicted.

If, even after the increase in coinsurance, total payouts are less than the $9.7 billion in reinsurance assessments collected, there will be additional funds to roll forward into 2015. These additional funds could help create the same (or similar) outcome for the 2015 plan year by increasing the size of the reinsurance pool by any amount carried forward from 2014. (This could conceivably happen for the 2016 plan year as well, for similar reasons.)

Is there a surplus available to carry forward to 2015, and if so, how big is it? We don’t know for sure…however…[there may be] somewhere between $1 billion and $2 billion unspent.

…The bottom line is that there would be more money available to make reinsurance payments for the 2015 plan year. This is good news for issuers of ACA-compliant individual market plans. However, issuers should be cautious about relying on further enrichment in the 2015 program parameters, as (among other concerns) it is possible that the current parameters have already assumed some amount of carryover.

Possible changes to Medicare Part D reinsurance programs

The Medicare Payment Advisory Committee (MedPAC) has previously suggested changes to the Medicare Part D reinsurance and risk corridor program. But several factors—the current state of the Part D market, recent attempts to curtail Medicare spending, and large increases in reinsurance payments—may increase the likelihood that MedPAC and the Centers for Medicare and Medicaid Services (CMS) will implement changes to Part D. Putting these changes in place will not necessarily result in decreased program spending and could cause an increase in the prevalence of private-sector reinsurance in the Part D market. Milliman’s Nicholas Johnson provides perspective in this paper.