The Colorado Division of Insurance is decertifying the state’s largest nonprofit health co-op because of concerns that it might not be able to pay all of its claims next year.
The decision means more than 82,000 members will now have to shop for new insurance during open enrollment.
The DOI took action after Colorado HealthOP learned it would receive considerably less money than expected from a federal risk-based reimbursement program known as “risk corridor.”
Charles Gaba does a really good job of explaining what is happening with the smaller and newer insurers. They are getting kicked hard by the Cromibus provision that held the risk corridors had to be revenue neutral.
in other words, the “losers” are owed about $2.9 billion for 2014 losses, but there’s only about $360 million available to pay them, or around 12.6 cents on the dollar….
The “Cromnibus” bill, as you may recall, was passed at the last minute in December 2014 as a way of keeping the federal government open for awhile. One of the ugly parts included, insisted upon by the House Republicans, was a provision specific to the ACA’s risk corridor program which prevented the federal government from covering the difference if “winners” came up short. Instead, they were reduced to crossing theif fingers and hoping that payments in would be higher, making it a moot point.
Unfortunately, that didn’t happen. They only had $362 million come in, but owe $2.87 billion. The U.S. federal government is basically having to dole out “I.O.U.” cards for the $2.5 billion difference, promising to pay the balancenext year or the year after…if 2015 and/or 2016 end up resulting in net “profits” for the program.
As you can imagine, this isn’t going over too well.
In 2013 when co-ops were making their intermediate term budgets, they were counting on federal risk corridor money to cover any losses that they had. Those losses could be intentional losses as they priced low to buy market share in the first few years to cover the infrastructure and start up costs of a new insurance company. The losses could also be unintentional if they were covering more sick people than they projected. More likely, the losses were a combination of the two.
So as 2014 wound down, the co-ops were counting on large payments from the risk corridor program. At that time, they could book the risk corridor payment as a hard asset at 100% of face value minus any time discount. The federal government is a good entity to have owing an insurer money as the feds pay. That hard asset would be easily transformed into liquid cash or as short term collateral.
State regulators have a mission to make sure there is no chance in hell of an insurance company going bust with outstanding claims unpayable. The state regulators rely on very large cash and capital reserves to make sure that in a three or four sigma event, the insurance company is still able to pay off all claims incurred up until the drop-dead date. Mayhew Insurance routinely carries four to six months of cash or near cash as the go out of business bankruptcy reserve. The Blues and other larger carriers can get away with a little less proportional cash as their size smooths fluctuations better than a medium sized insurer. Smaller insurers whose risk pools are not too deep need more cash on hand to cover the unexpected.
Up until the Cromnibus, the risk corridor payments were seen as near cash and counted as high quality reserves. However the Cromnibus applied a large but unknown discount to those claims on Federal payments. That means the state regulators started to worry that in oh-shit scenarios, the smaller insurers could not pay off all incurred claims. And once state regulators start to worry, they shut down insurers that they worry about.