► Minuteman Health NewsroomOctober 5, 2015

Minuteman Health Position Statement on CMS Risk Corridor Annoucement

Boston 10/5/2015 - On Thursday, Oct. 1, the Centers for Medicare & Medicaid Services announced a payout of just 12.6 percent of the 2014 “Risk Corridor” disbursements owed to health plans nationwide. The purpose of this temporary, three-year program was to limit health plan losses or gains beyond an allowable range. Thus, if a company had a windfall profit it would pay into the Risk Corridor pool; if it suffered an unforeseen loss it would receive money from the pool. This was determined as a percentage of premium.

Minuteman impact
Minuteman lacked confidence that the program would work as forecast by CMS, and had subsequently not counted on the money in year-end public filings. Minuteman was owed only $281,088 for the 2014 plan year. We recorded this as required on our income statement, but on our balance sheet we categorized the Risk Corridor receivable as a “non-admitted asset”—a polite, insurance-speak way of saying we do not believe we will ever see the money. In short, for 2014 the Risk Corridor amount due Minuteman was immaterial and Minuteman did not count on receiving it.

Risk Corridor is not the real issue
The root problem is another federal program called “Risk Adjustment.” Risk Adjustment is not working as envisioned. Its intent was to have insurance companies with healthier members pay companies with sicker members. This is conceptually sound and works well in the private-sector market today. However, Risk Adjustment is not working as intended. It has created significant volatility in the market and has inadvertently penalized the very low-cost, high-efficiency plans the ACA originally sought to encourage.

Minuteman Risk Adjustment example
Minuteman was designed to be a narrow-network, lower-cost option for consumers. We’ve achieved this by contracting with providers offering high-quality, cost-effective care. All such models have historically attracted positive selection (healthier members), and under any risk adjustment model Minuteman could indeed pay out. From the beginning we have taken this into account by pricing to an average (or ‘1.0’ population), which would mean that if lower claims were generated due to a healthier population, the remaining premium dollars would be allocated to payout under the Risk Adjustment programs.

Risk Adjustment is not working in this fashion, however. Below is a link to a series of documents and studies that lay out some of the fundamental problems with the current methodology, and market average premium distortions. A few examples of the results:

  • For 2014, Minuteman paid out 71 percent of premium – effectively to Blue Cross.
    • This was down from an earlier government calculation indicating we would have to pay out over 100 percent of premium. (This is of course insane; we do have claims to pay.)
    • We had under 2,000 members, and only a few hundred for the whole year.
    • Forty percent of what Minuteman paid was simply due to the fact that our premiums are lower. That is, had Risk Adjustment data and methodology been sound (and they were not) then we paid an additional penalty because we are affordable.
  • For 2015, we are estimating that we will have to pay out 54 percent of premium.
    • Even with this, our August YTD financials showed us running at an 80 percent MLR overall (note – the Risk Corridor announcement will likely impact this going forward).
    • These estimates are on a much larger membership base of over 14,000 members.
  • For 2016 rates, we have again included a significant payout estimate to our competitors.
    • These issues are not affecting just Minuteman. Smaller, high-growth, lower-cost plans across the nation have been harmed by this initial Risk Adjustment methodology. These range from provider-sponsored health plans to ACA-expanded Medicaid plans, and from investor-funded startups to federally-backed coops. We will continue to work with these plans and CMS to help evolve the process to a more stable and logical conclusion.


Tying back to Risk Corridors
The faulty Risk Adjustment calculation is not covering the cost of new members at many smaller, newer plans. Under Risk Adjustment, many of these plans had unexpectedly higher losses in 2014. The Risk Corridor was designed to protect against such “shock losses,” but Risk Adjustment has bankrupted it. The following are factors bankrupting the Risk Corridor:

  1. Risk Adjustment has been shown to disproportionately impact health plans that are smaller, high-growth, narrower network, and with lower premiums (please see actuarial notes on our website at http://minutemanhealth.org/about-us/minuteman-memos).
  2. Due to issues regarding the availability of data, the Risk Adjustment methodology, and a distortion called the “market average premium,” smaller companies have ended up paying out significantly more money under Risk Adjustment than what the theoretical models had predicted possible. As stated above, Minuteman paid out 71 percent of premium in 2014.
  3. The Risk Adjustment money that the Davids pay to the Goliaths in the insurance market is a big percentage of the small companies’ revenues but a blip to the bigger ones. To Risk Corridor, this percentage is what matters. Since small companies lost a huge percentage of their revenue, they were told they would get a large payout from the Risk Corridor pool. But under Risk Adjustment large carriers took the smaller carriers’ cash while paying little to nothing into the Risk Corridor pool, because their winnings were tiny in percentage terms.
  4. The result: Risk Adjustment keeps score using dollars, but Risk Corridor keeps score using percentages. This gets completely out of balance when those paying into Risk Adjustment are smaller (and paying in dollars) while those receiving Risk Adjustment money are huge relatively immune to the impact in percentage terms.
    1. The actual results showed $360 million paid into the Risk Corridor pool, since it is driven by percentages. Small plans, forced to pay huge Risk Adjustment sums, filed Risk Corridor claims of $2.87 billion.
    2. Example: Five smaller carriers each have $100 million in premium and have to pay out $15 million each into Risk Adjustment. This drives them to lose on average $12 million each, of which the Risk Corridor pool was to repay them $6 million each – or $30 million total. But the Big Carrier in the market does not pay enough into the Risk Corridor pool to cover that sum. The Big Carrier received $75 million in Risk Adjustment from the five smaller carriers, but that was only 3.75 percent of the Big Carrier’s $2 billion annual revenues. As a result, the Big Carrier had to pay only $3 million into the Risk Corridor pool. In this example, the five smaller carriers would each get about 10 percent of what they were owed under the Risk Corridor program ($3 million of the $30 million). The Big Carrier walks away with $27 million in excess earnings.

The reality is that flaws in the Risk Adjustment formula forced smaller, high-growth, low-cost plans to subsidize their larger, pricier competitors. The Risk Corridor shortfall provided the second punch, since big companies did not have to pay much of their Risk Adjustment winnings.

Conclusion
As stated above, the 2014 Risk Corridor program was immaterial to Minuteman and the company assumed it would receive no money. But the radically poor results of Risk Corridor should serve as a wake-up call to the industry, state regulators, and CMS.

The bankrupting of Risk Corridor has been driven by small carriers bailing out larger ones. Risk Corridor is a 3-year program, and its deficiencies are important. But Risk Adjustment is meant to be a permanent program and getting it to work is vital. The Risk Adjustment program needs to be fixed in order to achieve the bi-partisan goal of lower-premium options for consumers and to minimize government spending.

The good news is that practical fixes are quite simple, as demonstrated by successful models in the private sector today. Health plans and CMS need to work together to update and upgrade Risk Adjustment. This will greatly improve the financial stability of the Risk Corridor program and the market overall.

 

 

Media Contact:
Jim Borghesani
617-833-9327

jim@pri-media.com
 

Lisa McTighe
Director of Member Outreach
855-644-1776

lisamctighe@minutemanhealth.org

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