BOSTON—Minuteman Health (www.minutemanhealth.org) today announced that it posted a $270,000 year-to-date accounting profit through September 30, including a premium deficiency reserve (PDR) release of $19.1 million, compared to a $12.7 million loss over the same period last year, when there was no PDR.
These results are particularly noteworthy because year-to-date Minuteman has also reserved $18.3 million as a reserve against potential future Risk Adjustment payouts. This represents fully 27 percent of total premiums.
“A Risk Adjustment reserve of that size is truly astonishing,” said CEO Thomas Policelli. “More concerning, however, is the uncertainty around Risk Adjustment. For companies focused in the individual and small group insured markets, these are turbulent times. The great variable in today’s financial statements is not hospital services or increasing drug costs or anything related to normal insurance issues; it is this federal Risk Adjustment formula. That greater volatility, in turn, forces premiums up. No other fixes to health care premium costs will be fully successful while Risk Adjustment works as it does today, and some proposed fixes, like widening age-banding, will inadvertently worsen the market if RA is not fixed as well.”
Minuteman has long been highlighting how federal Risk Adjustment has not worked as intended. “The first fundamental problem with the formula is that some members—particularly newer ones and ones that elect to purchase Bronze plans—are scored as being healthier than they really are. The second major problem is that members, after being scored as healthier than they are, are then penalized because they chose to purchase a less expensive health insurance option,” Policelli said. “This so-called ‘Market Average Premium’ adjustment is a reverse–Robin Hood element that means that those who buy a less expensive product are forced to subsidize those who can afford more expensive products available in the state. Basically, the Risk Adjustment program is a tax on Minuteman and on our members for being efficient.”
Given this volatility, Minuteman has raised RA reserves quickly and plans on releasing them slowly if that proves warranted. Throughout 2016 Minuteman has maintained its significant 27 percent of premium Risk Adjustment reserve despite a modest uptick in medical claims. Approximately 75 percent of that amount is estimated to be driven by being scored as healthier—which again is different from actually being that much healthier—and 25 percent of it is due to the ‘Market Average Premium’ subsidy to more expensive insurers. Minuteman will continually revisit the RA reserve as more data becomes available.
Timing of the Risk Adjustment Program Materially Impacts Assumptions
The timing of the Risk Adjustment program means that all health plans must make significant assumptions when drafting their financials and setting premium rates. The government-driven calendar that drives Risk Adjustment works as follows:
“This schedule means that that MHI—and every carrier in the market—will have to make assumptions regarding 2016 RA transfer liabilities long before having actual data regarding 2016 RA amounts,” said Policelli. For the 2015 year, MHI assumed that it would need $17.6 M as a reserve for RA payout, and actual results came in 6% lower at $16.6 M.
The Future of the Risk Adjustment Program and Impact on Minuteman
There are several changes to Risk Adjustment that may be made in the coming months, Policelli said. The Obama Administration has recognized that the Risk Adjustment program needs to be modified, and it released new proposed program rules on 9/6/2016, with public comments due on 10/6/2016. Hundreds of thousands of pages of comments were submitted by insurers across the country, and final rules are expected before the end of 2016.
State-based solutions are also now possible. The Obama Administration issued an Interim Final Rule that provides states with flexibility to modify Risk Adjustment to mitigate unplanned market volatility. Thus far, only New York has taken advantage of this new rule. Massachusetts tried to implement its own changes to limit the destabilizing impact of the Risk Adjustment program in 2015, before the Obama Administration allowed for such flexibility. It is unclear whether Massachusetts will pursue further market-stabilizing efforts.
The incoming Trump Administration has made stabilizing healthcare markets a top priority. Addressing both the Risk Adjustment Program and the medical loss ratio rules could help stabilize the market and relieve upward pressure on premiums.
Policelli said that any one of these changes could significantly alter Minuteman’s Risk Adjustment transfer liability going forward. However, given the uncertainty of potential changes, Policelli said the company is presuming from a financial standpoint that none will happen.
As a result, the company anticipates booking a ‘Premium Deficiency Reserve’ for 2017. This non-cash accounting charge would be made in Q4 of 2016, and would be consistent with the approach Minuteman used last year. The 2017 PDR would reflect the direct and indirect losses that Risk Adjustment may drive if Minuteman is forced to continue to inappropriately subsidize more expensive insurance companies. “The Company will continue to engage in efforts to mitigate the impact of the Risk Adjustment program through innovative product design, responsible rate setting, provider and consumer engagement, and other efforts,” Policelli said. “The fact remains, however, that the current Risk Adjustment methodology is driving up volatility and therefore forcing premiums up. This is exactly opposite what Risk Adjustment should be doing, and consumers are paying higher prices as a result.”
Illustration of Risk Adjustment Program Dysfunction
Minuteman provided the following information to illustrate the dysfunctional impact of the Risk Adjustment program on Minuteman. The first illustration is an example of a “perfect world” in which the Risk Adjustment program would be fulfilling its policy goal. For purposes of the hypothetical: all hospitals charge the same amount for all services; the Risk Adjustment formula has no bias against new members or those selecting lower-priced plans; all insurance products sell identical plans with identical provider networks; and all insurers have priced appropriately and charge the same premiums. For the sake of this example, presume that this uniform premium translates to $100 per member per month (PMPM) and the federal claims target of 80% for the individual market is met.
Minuteman stresses that the first illustration is not the way Risk Adjustment is working in reality. In its second illustration, using the same format as above, Minuteman demonstrates how its actual claims plus Risk Adjustment transfer liabilities exceed the federal and state claims targets:
“The critical element in Minuteman’s financials today is that we have not yet decreased the Risk Adjustment reserves. The medical loss ratio and overall per member per month claims remain well within market norms, and we hope that we are being conservative by not yet reducing our Risk Adjustment reserves as claims increase,” said Policelli. “If Risk Adjustment were to work correctly, such automatic re-balancing should be the natural result. If that were the case, it would bolster MHI’s reserves and possibly allow Minuteman to dividend earnings to our members in the future. However, without additional data to support such a reduction, we have elected to keep RA reserves high for the moment. Given the volatility RA has imposed, that seems prudent and appropriate. We will revisit as we move forward.”
Policelli pointed out that Minuteman has fulfilled its mission of increasing health care competition and providing affordable plan choices for consumers. The company is offering the lowest-cost plans at every metallic tier level on the New Hampshire federal exchange and is offering competitive rates to Massachusetts consumers, Policelli said.
“Regardless of the administration or the rules that are in place, our mission is and always will be to provide our customers with a lower-cost health insurance plan that is high in value and that provides adequate access to high-quality care. We stand ready to work with anyone to keep health care effective and affordable,” Policelli said.
Minuteman Health, Inc. is non-profit health maintenance organization (HMO) committed to removing inefficiencies from today’s health insurance system to provide high-quality care, cut administrative costs and reduce premiums for individuals and businesses in Massachusetts and New Hampshire.
Minuteman Health’s In-Plan Provider network includes over 11,300 hospitals, physicians, and specialists who provide high quality care at lower costs in Massachusetts and New Hampshire. Updates on Minuteman Health’s evolving provider network can be found at www.minutemanhealth.org.
Minuteman is marketed in Massachusetts through its website, brokers, Health Services Administrators (www.HSAinsurance.com) and the Massachusetts Health Connector. It is marketing in New Hampshire through its website, brokers, and the Federal Healthcare Exchange.
CHOICES members are non-profit as well as investor-owned, health system-sponsored and independent, and newer entrants as well as companies with decades of experience as members of their local communities. The group came together to examine what gaps may exist between the policy intent and the practical reality of the ‘3Rs’ programs today. Such gaps are to be expected in any launch of a new methodology, and CHOICES looks forward to continuing to work productively with CMS to replace old assumptions with the current data.
CHOICES founding members include Minuteman Health, Health New England (Massachusetts), HealthyCT (Connecticut), Land of Lincoln (Illiniois), Melody Health Care (Colorado), New Mexico Health Connections, Evergreen Health (Maryland), Bright Health Plans (Minnesota), Cox Health Plans (Missouri), Medical Associates Health Plans (Iowa), and the National Alliance of State Health CO-OPS (NASHCO).
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