New ACA disruption and sabotage news was reported last night by the Wall Street Journal health care team.
The Administration is suspending risk adjustment payments for at least 2017 and 2018.
The Trump administration is expected to suspend an Affordable Care Act program that plays a key role in the health law’s insurance markets, a move that could deal a financial blow to many insurers that expect payments.
The suspension of some payouts under the program, known as risk adjustment, could come in the wake of a recent decision by a federal judge in New Mexico, who ruled that part of its implementation was flawed and hadn’t been adequately justified by federal regulators, people familiar with the plans said.
The Centers for Medicare and Medicaid Services, which oversees the program, may at least temporarily suspend the payments insurers expected to receive this fall, stemming from their 2017 business, and next fall, which would have reflected their 2018 business, the people said…
For 2016, risk-adjustment transfers were valued at 11% of total premium dollars in the individual market, according to a CMS report.
The biggest question is what does “suspension” mean. Is it a couple of weeks? If so, this is not that big of a deal. If it is several months/years this could be a big deal.
The lawsuit that is referenced in the article is from a small New Mexico insurer that contends that the HHS decision to make risk adjustment revenue neutral was arbitrary and capricious. A judge agreed with them. HHS, partially as a response to the suit and before the decision was issued had future proofed themselves from this judgement by including a very long and detailed discussion of their reasoning behind the revenue neutrality assumption for 2019 risk adjustment.
This only applies to 2017 and 2018. I don’t think this will have first order impact on 2019 rates as RA should be paid and insurers are not allowed to build into future rates bumps that compensate for bad prior years. They can use the experience of bad prior years to color actuarial assumptions (going from optimistic to pessimistic morbidity assumptions) that may lead to “overshoots” like we have seen this year but 2017-2018 risk adjustment shenanigans can not inform future rates.
Risk adjustment moves money from insurers with populations that code as healthier than the state wide average to insurers with covered populations that code as sicker than the state wide average. It is designed to minimize cherry picking incentives. If risk adjustment is suspended for several months/years, we need to think about three groups of insurers and states.
The important thing to remember is that although 11% of premiums moved in 2016 due to RA, the impact was not uniform across the country. Some insurers had no net flows in or out, and other insurers had 20% or more of their premium leave or enter their accounts due to risk adjustment.
1) Insurers that are the only insurer in the state for 2017 and 2018. They have no risk adjustment obligations coming or going. This is merely a curiosity for them.
This can also apply to overwhelmingly dominant insurers in states with two or more insurers. The dominant insurer (like BCBS-North Carolina) may have some RA exposure but it is small one way or another where an RA miss might be the financial equivalent of an abnormal flu season.
2) Insurers that are in a net RA payable position in 2017 and 2018. These are insurers like Centene and Oscar. They need to monitor the situation but RA suspension is not a bad thing for them as they get to hold onto their cash for longer. The amount of cash can be minor to very significant. Insurers that aggressively sought to cover a healthy population at low actuarial values could see 20% or more of their earned premiums unexpectedly sit in their accounts for far longer.
3) Insurers that are in a net RA receivable position. These are the insurers that we need to worry about. RA receivables are counted on the balance sheet as high quality cash-like assets. If the RA suspension is short term (a few weeks) then this is no big deal except for the ulcers of finance directors.
The problem will be if state regulators or firm auditors tell insurers to treat 2017-2018 RA receivables like the risk corridor receivables and either write them off entirely or apply a very significant discount and quality degradation. Well capitalized insurers can survive that hit. Smaller insurers tend to have thinner cushions. They may go out of business or be seized by the state regulators.
The second order effect is that some of these insurers may look at the chaos and decide that even if they can survive a long term capital hit, the ACA market is not worth the headaches and risk and then they would withdraw.
This is a still breaking story so things will change.