This article applies only to plans within the state exchange.
Insurance companies (Insurers) who set foot into the state exchanges might not be able to proceed as planned. In a bulletin earlier this month, the US Department of Health and Human Services announced the proration results for 2014 Risk Corridor payments. Insurer’s claims totaled $2.87 billion, vastly exceeding the $362 million the Risk Corridor program received from insurers who set premiums accurately. The HHS says they will begin collection of Risk Corridor charges this coming November, and payments will be remitted beginning in December, 2015 to those who submitted claims.
With only 12.6% of insurer’s requests available for reimbursement from the Risk Corridor pool, where will the rest of the $2.87 billion come from?
In response to the apparent shortfall, the HHS asks to avoid thinking about a total loss or gain until the end of the three year program in the fall of 2017. The remaining claims for 2014 will be paid out of the anticipated 2015 collections, and 2016 collections if need be.
The Risk Corridor program is one of three provisions in the ACA that allows distribution of risk among health insurers until the marketplace matures. It’s designed to buffer insurers from high losses in the initial years, and keep rates stable and affordable. In a nutshell, when insurance carriers entered into the state exchanges, they couldn’t predict who would enroll and how healthy enrollees would be, so insurers approximated premiums, and the ACA promised to reimburse if the premiums didn’t cover the risk. The program is budget-neutral, so reimbursement money comes from other insurers who made a profit and pay into the Risk Corridor’s program pool.
One complication with the program that couldn’t be predicted was the Obama Administration allowing non-compliant policies to be renewed (Grandmothered plans). Risk Corridor payment estimates miss the mark if more of the healthier policies renew to non-compliant plans than purchase through the exchanges.
The ACA’s Risk Corridor program drew inspiration from a Medicare Part D program which began in 2006. The results of the Part D program almost seem mirror opposite of the ACA’s Risk Corridor. Part D’s first year garnered payments from 80 percent of insurers, with more than enough to offset the 20 percent who requested money. The Part D program still exists today, more than paying for itself – though the program’s main differentiator might be that it isn’t budget-neutral the way the ACA Risk Corridor is.
So what happens if there is a shortfall in 2016 since the ACA Risk Corridor is budget-neutral? The HHS says they will explore other sources of funding for the payments, possibly working with Congress. If that bridge can’t be crossed once we come to it, underfunding may lead to increased volatility in the industry.
A Standards and Poor’s report on the ACA Risk Corridor states that without the risk-sharing provisions working properly, “premium costs for consumers will be more inconsistent and insurance companies will have more-volatile operating performance and potential capital strain.” The Risk Corridor was supposed to limit risk so more insurers would enter the market, but the S&P report by Analyst Deep Banerjee states that insurers who lack scale and diversity will be crushed and won’t have the revenue cushions to absorb the impact of the missing corridor payments.
Already, co-ops around the country are planning to shut down, like the Kentucky Health Cooperative, with displaced enrollees eyeing open enrollment in November. Out of the 23 co-ops awarded startup loans due to the ACA – loans which totaled a few billion dollars from the CMS – 8 co-ops won’t be offering coverage in 2016.
Aside from co-ops, companies like the Wyoming Health Maintenance Organization (WINhealth) and Coventry Health Care have announced they will be withdrawing from state exchanges in 2016.
Health Insurance Cooperative Definition
ACA authorized Insurance co-ops serve as an alternative to private health insurance programs and are owned and controlled by the same policy holders that they insure. They are private non-profits and are still subject to a state’s insurance product laws. Insurance co-ops are similar to credit unions.
Health Insurance Exchange Definition
State-based health insurance exchanges aggregate policies from private insurance companies for consumers to choose from.