Tag Archives: Scott Katterman

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.

2016 HHS risk adjuster coefficient updates

The U.S. Department of Health and Human Services (HHS) finalized an update to the risk adjustment model coefficients used to determine the payment transfer amounts for the 2016 Patient Protection and Affordable Care Act (ACA) market. The impact of these changes depends on each carrier’s mix of enrollees. But there are several consistent themes when comparing the updated coefficients with the current ones. For example, carriers that enroll a disproportionate share relative to the market of sicker or higher-risk individuals are likely to receive higher-risk transfer payments. And carriers that enroll a disproportionate share of healthier individuals are likely to receive lower transfer payments or will have to pay higher amounts to other carriers. Milliman consultants Hans Leida and Scott Katterman provide some perspective in this healthcare reform paper.

2015 individual market pricing: Morbidity and other considerations

There are several known regulatory and market changes that will affect the pricing of plans sold on the state exchanges in 2015. Items such as the reduction in the federal transitional reinsurance program and increases in the Patient Protection and Affordable Care Act (ACA) insurer fees will influence pricing. Lack of morbidity data related to new populations of insureds creates a level of uncertainty when pricing risk beyond 2014. However, there are ways to gain additional understanding on morbidity for 2015 pricing compared to the approaches used for 2014.

In this new article, Scott Katterman discusses how insurers can take advantage of data sources to gain some perspective into future pricing. Here is an excerpt from the article:

Reduction of federal transitional reinsurance
To ease the transition to a guaranteed issue environment, ACA includes a federal reinsurance program to help mitigate the risk of extremely high-cost individuals entering the individual market. While the reinsurance program will be a significant help to insurers in 2014, its impact will shrink over time. The budget allocated for reinsurance payments will drop from $10 billion in 2014 to $6 billion in 2015. All else being equal, this will reduce reinsurance payments to individual health plans by 40%. Actuaries estimate that the reinsurance program has reduced premiums by 10% to 15% in 2014, so slimming it down will have a certain and material impact on pricing in 2015.

The bottom-line impact of this shift will depend on the size of the individual market in 2015. If individual market growth is significant in 2015, the transitional reinsurance program payments into the individual market may well go down more than 40% on a per-member basis, simply because the $6 billion budget will be spread across a larger individual market in 2015 relative to 2014. As a result, actuaries need to estimate the size of the (non-grandfathered) individual health insurance market in 2015.

There are reasons to think the market may increase materially, such as increasing tax penalties for remaining uninsured in 2015, as well as organic growth of the market as knowledge of and familiarity with the exchanges increases.

Cohort studies: estimating morbidity using actual 2014 data
A technique that we believe will be useful to many carriers is examining the risk scores of cohorts of the individuals which make up their 2014 insured populations. Risk scores based on prescription drug data are likely to provide the most accurate estimates, since that data will be far more complete at that point compared to medical claims data. Prescription drug risk scores can be calculated for each enrollee based on the few months of 2014 data that will be available. These partial-year risk scores can then be adjusted based on analyses of risk score development and completion patterns from prior years, taking into consideration potential differences in completion patterns for new vs. existing enrollees. These adjustments will allow comparisons of 2014 risk scores to prior year risk scores on a more “apples to apples” basis.

Once risk scores are estimated, the membership can be split into cohorts of new vs. existing members for both 2014 and prior year data. Comparisons can then be performed to help answer the following questions:

• How has the overall risk score of our 2014 population changed compared to 2013?
• How do the risk scores of new 2014 enrollees compare to existing members?
• How do the risk scores of new 2014 enrollees compare to new enrollees in 2013 and prior years?
• Has our existing member block risk score increased significantly due to lapses of younger/healthier individuals?

The answers will be very valuable when developing 2015 premium rates.