Tag Archives: risk corridors

Transitional policies result in higher medical loss ratios

A new Milliman analysis shows that the percentage of transitional policy members in a state’s health exchange market appears to correlate with higher medical loss ratios. In the analysis, Milliman consultants Erik Huth and Jason Karcher quantify the effect that transitional policies had on issuers’ 2014 individual market performances and how it may result in 2017 rate increases for transitional states.

Here’s an excerpt:

The table in Figure 3 shows that issuers in transitional states had higher 2014 loss ratios but appear to not have taken large enough 2015 and 2016 rate increases to achieve profitable 2016 loss ratios (assuming 2014 to 2016 significant cost savings are not realized in other ways). Although issuers’ 2017 rate increases will reflect their 2015 experience and updated projections, there is potential for transitional states to see higher rate increases in 2017.

Figure 3

The graph in Figure 4 shows the 2014 ACA loss ratio and the average 2014 to 2016 statewide QHP base rate change for each state. The gray line represents an illustrative 2014 to 2016 rate increase needed to target an 85% 2016 loss ratio given the 2014 loss ratio and assuming a 5% annual claim trend. For example, a state with an 85% 2014 loss ratio would require a 10.25% 2014 to 2016 rate increase to target an 85% 2016 loss ratio (i.e., 5% annual rate increases to cover the 5% annual claim trend to maintain the 85% loss ratio). States well underneath the line indicate a possible need for higher 2017 increases than states closer to the line. Keep in mind that projected 2016 loss ratios are merely illustrative. There are many factors that will affect a state’s overall 2016 loss ratio and required 2016 and 2017 rate increases, such as, but not limited to, changes in experience and statewide morbidity levels, wear-off of pent-up demand, provider contracting, claim trends, population migration and characteristics, and product and issuer mix. These values also represent a statewide composite, while specific issuers could have materially different results than the average.

Figure 4

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).

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.

Risk adjustment plus risk corridors: Offsetting impact

To mitigate risks to insurers during the transition to new health insurance rules, the Patient Protection and Affordable Care Act (ACA) includes three premium stabilization programs: the risk adjustment program, the transitional reinsurance program, and risk corridors (the three Rs). The accounting guidance and rules surrounding risk corridors are continually evolving, and there is significant uncertainty in the estimates of the three Rs and their impact on financial statements. Offsetting interactions of the risk adjustment program and risk corridors is key. Milliman consultants Aaron Wright and Shyam Kolli provide perspective in this healthcare reform paper.

Transitional policy for canceled plans brought into focus

In November 2013, President Barack Obama extended canceled health insurance policies sold in the small group and individual markets for one year. The three-part series below addresses subsequent federal guidance concerning the administration’s transitional policy for canceled health plans, including changes to the risk mitigation programs of the Patient Protection and Affordable Care Act (ACA).

President Obama’s transitional policy for canceled plans
The president’s announcement that health insurance issuers would be permitted to renew certain canceled health insurance policies raises new questions for the individual and small group marketplaces in 2014.

Update on canceled plans: Will changes to 2014 reinsurance and risk corridor programs provide financial relief?
Proposed modifications to the risk corridor and reinsurance programs are designed to stabilize the fledgling reformed markets on and off the exchanges.

Canceled plans, part III: An extension, an expansion, and more changes to 2014 rules
Premium rates filed for 2014 might not cover claims costs if healthier individuals retain their noncompliant plans rather than seeking coverage in the ACA-compliant market.

Update on canceled plans: Will changes to 2014 reinsurance and risk corridor programs provide financial relief?

On November 14, 2013, the president announced changes to healthcare reform, including the potential reinstatement of certain canceled health policies, as well as suggesting that changes might be made to the federal risk corridor program. Since then, the administration has provided more specifics on the proposed changes to the risk corridor calculations. In addition, they also proposed significant changes to the federal reinsurance program and extended deadlines for the filing of 2015 premium rates.

All of these changes are clearly designed to stabilize the fledgling reformed markets on and off the exchanges—and in particular to reduce the chances that insurers might exit the exchange markets or increase premium rates dramatically in 2015.

Will these changes to 2014 reinsurance and risk corridor programs provide financial relief for insurers? This paper by Doug Norris and Hans Leida offers some perspective.