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Bad News Trickling In on Exchanges

Bad News Trickling In On Exchanges

In a recent blog post, we told you that although the first two years of the Exchange seemed to be shutterstock_268699718-balloon-target.jpgpointing toward success, there were some signs of rough roads ahead. This month brought yet another announcement that shows the tenuous foundation of the Affordable Care Act (ACA).

The Department of Health and Human Services (HHS) and the Centers for Medicare and Medicaid Services (CMS) continue to tout the success of the ACA, including that 8 out of 10 returning consumers to the Exchanges in 2016 will be able to gain coverage for less than $100 a month after tax credits. They also note that the oft-predicted insurance rate death spiral has not taken hold and premium hikes have been relatively modest over the past three years.

As discussed at length in our October 29 blog post, the short-funding of the risk corridor program has meant the exit of a number of smaller size insurers, including half of the non-profit co-ops set up under the law, and raised solvency concerns for others. These plans were relying on payments of $2.87 billion because their expenses well exceeded targets under the coverage law. Payments in the program, though, were capped in 2014 at just $362 million. Thus, they received about 13 cents on the dollar to cover potential losses. In an effort to assuage plans and forestall further exits or scale backs moving forward, HHS issued a memo on November 19, 2015 stating that it intends to pay these obligations in the future. Exactly how this will occur is anyone’s guess and there are substantial financial and political barriers to do so. Risk corridor payment penalties in 2015 and 2016 will be very unlikely to provide funding to make up the 2014 proration. So where does CMS cobble together $2.5 billion? Notwithstanding the GOP-dominated Congress’ love of private enterprise, appropriating payments would mean propping up a program it is out to kill.

We also predicted that while the short funding was survivable for large, publicly traded insurers, it could well unsettle financial targets and stock prices for them. Sure enough, on Nov. 19, 2015, United Healthcare, the largest insurer in the country, announced it was reducing earnings by $425 million for 2015 in part due to low enrollment and high utilization in the Exchange plans throughout the country. It immediately scaled back individual marketplace marketing moving forward and warned it could leave Obamacare altogether for 2017. Bids for that year are due in mid-2016. An exit could mean 540,000 insureds would need to find new plans and smaller insurers likely could not handle the volume or the potential financial risk. United Healthcare is currently one of the two lowest cost Silver plans (the most common plans for those receiving subsidy assistance to limit their overall costs) in 40% of the nation’s federal Exchange marketplace covering 38 states.

As we had indicated, while things were looking good, some important data points for the first year of the Exchange had not yet come in for us to render a definitive conclusion. When plans filed rates for year two of the Exchange in mid-2014, they had little or no financial data to go by – it was a huge financial guess! When plans filed for year three in mid-2015, they had a reasonable picture of first year costs (they were high). However, they did not yet have a clear picture of the additional revenue they would actually get through the three premium stabilization programs – risk adjustment, reinsurance, and risk corridors – set up to stabilize the system. The huge risk corridor shortfall clearly was the most problematic.

Despite the premium stability thus far, a potential United Healthcare exit and further analysis by plans of the impact of the risk corridor results could spell trouble in year four and beyond for the following: (1) overall plan participation; (2) access to important providers; and (3) premiums.

Some estimates suggest that plans collectively lost over 10% in year one of the Exchange, or over $4 billion. This data point, along with the fact that the reinsurance and risk corridor programs go away in 2017 (only risk adjustment stays), suggest a realignment of premiums is coming down the road.

Marc Ryan

Marc S. Ryan serves as MedHOK’s Chief Strategy and Compliance Officer. During his career, Marc has served a number of health plans in executive-level regulatory, compliance, business development, and operations roles. He has launched and operated plans with Medicare, Medicaid, Commercial and Exchange lines of business. Marc was the Secretary of Policy and Management and State Budget Director of Connecticut, where he oversaw all aspects of state budgeting and management. In this role, Marc created the state’s Medicaid and SCHIP managed care programs and oversaw its state employee and retiree health plans. He also created the state’s long-term care continuum program. Marc was nominated by then HHS Secretary Tommy Thompson to serve on a panel of state program experts to advise CMS on aspects of Medicare Part D implementation. He also was nominated by Florida’s Medicaid Secretary to serve on the state’s Medicaid Reform advisory panel.

Marc graduated cum laude from the Edmund A. Walsh School of Foreign Service at Georgetown University with a Bachelor of Science in Foreign Service. He received a Master of Public Administration, specializing in local government management and managed healthcare, from the University of New Haven. He was inducted into Sigma Beta Delta, a national honor society for business, management, and administration.

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