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 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:
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:
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.
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.
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