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.