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You are here: Home / Anderson On Health Insurance / Risk corridors and well capitalized insurers

Risk corridors and well capitalized insurers

by David Anderson|  September 13, 20168:04 am| 9 Comments

This post is in: Anderson On Health Insurance

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Last December in one of the pieces that I really like, I noted that the risk corridor Rubio-con provisions would not kill PPACA. It would just shift the field towards well capitalized insurers that could wait a couple of years with massive funding gaps on the balance sheet.

That is good news in the long run for well capitalized insurers. It is bad news for everyone else.

Well capitalized insurers can wait years to get $100 million dollar payments while using other cash reserves to cover the degradation of the risk corridor account receivable on the balance sheet. However, waiting several years and using other reserves is not feasible for co-ops and other smaller start-ups and new entries to the insurance market….
In the long run, the insurers will be made whole, or at least the creditors of the insurers that folded will be made whole. In the short run, the insurance markets got significantly less competitive as a dozen insurers folded and several more pulled products because they could not float the federal government another couple of years.

Several lawsuits have been filed by insurers to get the Risk Corridor money. The Department of Justice has responded to the suits with a motion to dismiss as the claims are not ripe yet. Theoretically the Department of Health and Human Services (HHS) could collect enough money to make everyone whole by the end of next spring. On a practical basis that is not going to happen but on a theoretical basis it could happen (much like I could hit a Kershaw curve with anything other than my torso).

And now we get some new news. HHS has issued a letter stating the obvious. 2015 collections are insufficient to make whole 2014 obligations so there will be no new money for 2015 risk corridor claims. Furthermore, HHS knows that the lawsuits are out there and they could be willing to talk and settle.

As in any lawsuit, the Department of Justice is vigorously defending those claims on behalf of the United States. However, as in all cases where there is litigation risk, we are open to discussing resolution of those claims. We are willing to begin such discussions at any time.

Everyone knows that eventually CMS will need to have the federal Judgement Fund (a permanent appropriation) pay up for the Rubio-con. It is just a matter of timing. For very large insurers the offer to settle is merely a calculation. Is the settlement package that they could get in a few months bigger or smaller than the settlement package they could get in the summer of 2017 minus the cost of the wait and any additional legal fees? Depending on the terms of the settlement, it is a simple calculation.

Where this is valuable is for the smaller and much less capitalized insurers. An early settlement would be a massive cash infusion to the balance sheets of the remaining co-ops. This cash infusion is an unanticipated windfall. Insurer balance sheets took a massive hit when the Rubio-con got signed into law as what was a 100% near cash equivalent turned into an uncertain asset with a large but unknown discount for the 2014 account receivable. In 2015 and 2016 once it became obvious how little risk corridor money was being collected, every insurer that thought they would qualify for risk corridor obligations had to budget as if they were to never receive anything from the risk corridors. Aggressive accountants may have been able to footnote the expectation that someday they might get something. But a footnote expectation would not count as an asset for state regulators.

If CMS settles and the Judgement Fund pays out, the co-ops are in far better shape as their capital cushion will have gotten so much thicker.

An early settlement won’t matter for my employer. It won’t matter for most of the Blues. It won’t matter for Cigna. It will matter for the little start-ups even if they don’t take 100% of the potential obligation as the settlement in order to get cash fast.

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Reader Interactions

9Comments

  1. 1.

    Steeplejack (tablet)

    September 13, 2016 at 9:35 am

    Is all of this going to be on the midterm?

  2. 2.

    Steeplejack (tablet)

    September 13, 2016 at 9:39 am

    I kid, I kid. Keep up the good work, Mayhew. Don’t let the lack of comments make you think that people aren’t reading. I know you are getting heard in the wonkosphere, and you make this stuff understandable to laypeople better than anyone else I have found.

  3. 3.

    Richard Mayhew

    September 13, 2016 at 9:51 am

    @Steeplejack (tablet): Quiz tomorrow.

    That is always one of the challenges I have. I’m really writing for two very different audiences. The first is the general Balloon Juice audience with some national blogosphere pick-up. On a good day that is an audience of 30,000 to 50,000 people and on a really good day, that is an audience of 150,000 people.

    And the other audience are members of a very narrow but very technical wonkosphere of a couple thousand people total of which a few hundred read me everyday and most are aware of me through a quick skim once a week. Some of these posts (especially my APTC hacking ones) are aimed solely at that audience with the goal of levering whatever influence I have to achieve policy changes that I want.

    So I’m not counting comment counts as a metric of readership especially for my very deep dive posts/obsessions as that is not a viable nor valuable metric of what I’m aiming for.

  4. 4.

    MomSense

    September 13, 2016 at 10:05 am

    Ugh, I have a feeling this will not work out well for my co-op. At the last open enrollment, they were not accepting new customers.

  5. 5.

    Steeplejack (tablet)

    September 13, 2016 at 10:06 am

    Cool. I have passed on links to a few journalism contacts I still have, and I’m sure others are doing the same.

  6. 6.

    Richard Mayhew

    September 13, 2016 at 10:30 am

    @MomSense: Maine would probably benefit greatly from a massive cash infusion — this would be good news for your co-op

  7. 7.

    MomSense

    September 13, 2016 at 10:38 am

    @Richard Mayhew:

    Thank you.

  8. 8.

    patrick II

    September 13, 2016 at 11:35 am

    During the campaign Rubio was so proud of his ability to damage Obamacare he bragged of it often. The fact that he did it by hurting small businesses, Republicans ostensible best friends, he did not mention, nor does it seem to matter.
    I saw a lady interviewed on tv who was the head of one of these small companies that were going broke from lack of funds caused by Rubio’s intercession. The employees were packing up and they were closing the office. She blamed Obama.

Comments are closed.

Trackbacks

  1. The "We're Ten!" Edition of the Health Wonk Review says:
    September 21, 2016 at 11:27 pm

    […] at Balloon Juice, Richard Mayhew gives us an update on the risk corridor situation, and what an early settlement would mean for insurers of varying sizes (you can read more about the […]

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