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Health Care Exchange Announcements Show Some Mixed Results

The Healthcare Exchanges will enter their third year soon and news of late shows that the grand national experiment in subsidizing healthcare in the United States seems to be working – at least for now.

The Department of Health and Human Services (HHS) and the Centers for Medicare and Medicaid Services (CMS) announced this week that about 8 out of 10 returning consumers to the Exchanges will be able to buy a plan with premiums less than $100 dollars a month after tax credits; about 7 out of 10 will have a plan available for less than $75 a month. HHS and CMS note that the average rate increase across 30 of the largest markets in the federal Exchange (accounting for 60 percent of overall enrollees) is 6.3 percent. Across all markets in the 37 states that utilize the federal Exchange, the cost increase will average 7.5 percent (although increases did vary greatly across states). Pointing to the fact that consumer choice has been reasonably preserved, in 2016 over two thirds of counties will have three or more choices. The Exchange program, however, still seems negatively impacted by narrower networks in many areas than prior to the reform initiative.
By any definition, the results over the past two years must be judged a success (let’s forget the catastrophic IT launch). The rate death spiral predicted by many has not yet occurred. We put out there for consumption our slight caveat – “at least for now” – as there is one nagging data point that could be a harbinger of a future realignment in premiums in 2017. The concern revolves around one of the three Rs – risk adjustment, reinsurance, and risk corridors. “The three Rs?” Here is a brief refresher on the three premium stabilization programs and the troubling announcement on risk corridor payments that may raise questions about rates, plan choice, and coverage in the future.

Risk Adjustment: The permanent risk adjustment program seeks to correctly apportion revenue in and out of the Exchanges by assessing the relative risk of members in each plan and redistributing overall revenue. Non-grandfathered individual and small group plans (in and outside the Exchange) are part of the reconciliation process. Based on the Hierarchical Condition Categories (HCC) risk adjustment model in the Exchange, plans gain or lose premium dollars based on their overall risk score in comparison to the applicable rate region average. This reconciliation occurs about 6 months after the close of each calendar year. It is a revenue-neutral redistribution for the previous calendar year. Initially, the eligibility and claims submissions by plans left much to be desired. After some cleanup of such submissions, the redistribution of wealth occurred. CMS sees the program as a success; plans with high concentrations of members with high-cost disease states (e.g., HIV/AIDS), those with a high number of tertiary and specialty providers that attract higher risk individuals, and smaller plans who were impacted by poor risk selection all received redistributed premiums. Indeed, the HCC system is well proven in Medicare and seems to have been appropriately implemented in the Exchange world. Plans with good encounter processes should receive what they deserve and premium increases thus far have been relatively mild overall.

Reinsurance: The 3-year reinsurance program was set up for the 2014 through 2016 calendar years to provide funding to individual market issuers subject to the new Affordable Care Act market rules (in and out of the Exchange) that incur high claims costs for enrollees. This was meant as a stop gap against the anticipated high initial claims of previously uninsured persons rushing in to get coverage under Obamacare. The reinsurance program is funded by an assessment on almost all issuers nationwide and is paid back throughout the year to plans based on exceptionally high claims cost (that qualify at a given attachment point with plan co-insurance and global claim cap). In June, CMS announced that the assessment raised about $8.7 billion and that about $7.9 billion would be paid to about 500 plans. With claims not exceeding collections and a reasonable attachment point, another check mark for CMS.

Risk Corridors: The 3-year risk corridor program (2014 through 2016) was set up and comes into play after accounting for risk adjustment premium reallocation and re-insurance payments. This pertains only to the individual and small group qualified health plans (QHPs) on the Exchanges. Modeled after the Medicare Part D risk corridor program, the program implicitly limits risk of loss and too much gain by having the federal government share in the upside and downside when a plan’s medical claims and quality improvement “allowable costs” exceed a target. The target is based on the 80% minimum medical loss ratio mandated in the law.

The first 3% above or below the target is covered 100% by the plan (gain or loss). From 3% to 8% over/under the target, the federal government will either reimburse 50% of the loss or recoup 50% of the gain. An incremental 80% penalty or reimbursement applies for anything over/under 8% of the target. In essence, this is yet another way to redistribute the wealth among plans, this time based not on severity of population (as with risk adjustment) but based on a proxy for financial performance (claims cost). It was initiated to encourage plans to set reasonable premiums in the early years and not hedge too dramatically against the uncertainty of the uninsured population entering the system.

But will the risk corridor program really shelter certain plans from extreme gains and losses as intended? Maybe gains, but perhaps not losses. As announced with little fanfare in a very much understated October 1 memo (from CMS’ Center for Consumer Information and Insurance Oversight to QHPs), based on current 2014 data from QHP issuers’ risk corridor submissions, some issuers will pay $362 million in risk corridor charges (because their costs were below targets), but others have qualified for $2.87 billion in risk corridor payments (because their costs exceeded targets). Assuming full collections of risk corridor charges, this will mean plans owed money under the formula will receive just 12.6 cents on the dollar against what they planned on receiving. On reading the memo, a number of health plan executives likely thought they were reading a bankruptcy judge’s order. While financial analysts were slicing and dicing data and predicting a sizeable shortfall, in July CMS was still predicting enough penalty dollars to pay out issuers all of their money.

HHS will begin collection of risk corridor charges in November and will begin remitting risk corridor payments to issuers starting in December. Under the law, theoretically plans can “catch up” on missed payments next year, but the magnitude of the shortfall makes it unlikely they will ever be made whole.

Now this may or may not strictly equate to a loss in the truest sense and is dependent on actual plan performance. Suffice it to say, though, it likely breaks the back of some plans in the marketplace. While perhaps incidental and survivable to large national insurers, the pro-ration could be truly unsettling to small and medium size carriers from a solvency perspective. It, too, could impact the financial targets and therefore stock prices of some large carriers. The closure of a number of non-profit Co-Ops have already been blamed on the risk corridor payment shortfall.

What the overall impact will be is anyone’s guess. Plans and actuaries don’t set rates in a vacuum and likely foresaw some of this coming. Since bids for 2016 were due well before the pro-ration was announced, could it portend some negative fallout when 2017 bids and premiums are due next June? A federal appropriation or funding cannot seemingly come to the rescue to close the shortfall due to action taken by Congress in late 2014. Stay tuned.

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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