Colorado Health OP risk corridor payment shortfall

EDIT 10/7/15: Updated information from Colorado Health OP added at the end of this post.

EDIT 10/17/15: Updated with more details about the budget-neutrality of the risk corridor program. 

EDIT 10/20/15: On October 19, Colorado Health OP filed a lawsuit in Denver District Court, seeking an injunction and temporary restraining order to allow them to participate in the 2016 open enrollment period while working for the next few weeks to secure additional funding. But the effort was short-lived. By the end of the day on the 19th, the CO-OP had agreed to shut down at the end of the year, and will no longer push to be allowed to sell policies for 2016. The lawsuit has been suppressed by the Court, and Colorado Health OP CEO Julia Hutchins  – who fought hard to keep the CO-OP open – explained that the fight is over: “All I can say is that we will work with the Division of Insurance to wind down the company. There will be no further hearings. And no further comments from me.”

On October 1, health insurance carriers across the country received some bad news from the federal government. In December, carriers that had experienced higher-than-expected claims in 2014 were supposed to receive a total of $2.87 billion in risk corridors payments. Unfortunately, the risk corridors program is self-funded, which means that the money comes from other carriers that have experienced lower-than-expected claims. And in 2014, apparently very few carriers were in that position.

CMS expects to get just $362 million from carriers next month when risk corridor payments are collected. That’s 12.6% of the $2.87 billion that carriers have requested to offset higher-than-expected claims, which means each of those carriers has been told that payments in December will be just 12.6 percent of what they’re owed under the risk corridors program for 2014.

The good news is that the program lasts for three years, which means payments are expected again at the end of 2016 and 2017, and CMS has said thatColorado Health OP risk corridor payment shortfall they’ll make up the shortfall in the coming two years. But the bad news is that three years is a long time for a small health insurance carrier to sustain operations and maintain adequate reserves without receiving expected funding. And further bad news is that we can’t say for sure that the 2016 and 2017 payments (for 2015 and 2016 plan years) will be any better than this year.

We know that premiums are rising significantly in 2016. Nationwide, the average is about 12 – 14%. While much of that will be offset by premium subsidies for those who are eligible for them, they are a reflection of higher-than-expected claims costs in 2014 and the first few months of 2015 (rates for 2016 had to be filed by May 2015 in most states, although carriers in several states revised their rates later in the summer). It’s possible that claims might have leveled off or declined later in 2015, and there might be more carriers contributing to the risk corridors pot than withdrawing when the 2015 numbers get crunched. But we certainly can’t count on that.

Many experts are expecting “pent-up”demand for healthcare to level off by 2016, as many of the previously-uninsured have already obtained coverage in 2014 and 2015, and have tended to pre-existing health conditions already. But again, we can’t count on that, particularly with the rising cost of prescription drugs.

In Colorado, the risk pool for ACA-compliant plans should be helped in 2016 when the 190,000 residents who still have grandmothered (transitional) plans are transitioned to ACA-compliant coverage, including about 75,000 people in the individual market. That will no doubt help to lower overall claims in Colorado, since people who stayed on grandmothered plans tend to be relatively healthy (they were all able to obtain coverage when it was medically-underwritten). But the risk corridors program is national, and the majority of the states are allowing grandmothered plans to exist in 2016.

And while we’re talking about grandmothered plans… some critics have contended that carriers set their premiums artificially low in 2014 in order to gain market share, relying on the existence of the risk corridor program (along with risk adjustment and reinsurance) to bail them out if they ended up in the red. But to be fair to carriers in the majority of states where grandmothered plans were allowed, rates for 2014 had already been established well in advance of the “fix” that allowed transitional plans to continue to renew in 2014 and beyond. In fact, open enrollment for 2014 was already underway at that point. So carriers had based their rates (which in 2014 were basically just educated guesses, since there was no claims data for ACA-compliant policies on which to base numbers) on the existence of the risk corridors and also on the assumption that existing non-grandfathered plans would transition to ACA-compliant plans at the end of 2013 or at their renewal date in 2014. The extension of grandmothered plans pulled the rug out from under them, at a time when they had no ability to adjust rates accordingly.

In addition, the risk corridors program was not originally intended to be budget neutral; it could have received funding from the federal government in the event of a situation like we’re currently facing. But Republican lawmakers included language in last year’s Cromnibus legislation to require risk corridors to operate with only the funding collected from carriers with lower-than-expected claims. That legislation passed in December 2014, well after rates had been established for 2015 – which probably increases the likelihood we’ll face the same scenario next fall.

EDIT, 10/17/15: Many thanks to actuary John Barela for filling in a few details in the history of how the risk corridor program came to be budget-neutral.

In 2013, HHS released benefit and payment parameters for 2014, and indicated that risk corridors would not need to be budget neutral:
“The temporary risk corridors program permits the Federal government and QHPs to share in profits or losses resulting from inaccurate rate setting from 2014 through 2016.” They also said this: “The risk corridors program is not statutorily required to be budget neutral. Regardless of the balance of payments and receipts, HHS will remit payments as required under section 1342 of the Affordable Care Act.”

At that point – when carriers were setting rates for 2014 – it looked like risk corridors would be there to prop up any carriers that suffered unexpected losses due to under-pricing for 2014, regardless of how many carriers ended up in the black.

But a year later, things were looking different. This paragraph was in the final benefit and payment parameters for 2015 that HHS released in March 2014:

“We are finalizing the risk corridors adjustment policy as proposed. Consistent with our proposal, we are adding a definition of “adjustment percentage” to § 153.500, and are amending the definitions of risk corridors “profits” and “allowable administrative costs” in § 153.500 to account for the adjustment percentage. We are also adding a definition of “transitional State” to § 153.500. Finally, we are adding paragraph (e) to § 153.530 to require health insurance issuers in the individual and small group markets to submit enrollment data for the risk corridors adjustment. We are making a conforming change to § 153.530(d) to clarify that the July 31st submission deadline for risk corridors data does not apply to the enrollment data specified in § 153.530(e). We project that these changes, in combination with the changes to the reinsurance program finalized in this rule, will result in net payments that are budget neutral in 2014. We intend to implement this program in a budget neutral manner, and may make future adjustments, either upward or downward to this program (for example, as discussed below, we may modify the ceiling on allowable administrative costs) to the extent necessary to achieve this goal.” (underline emphasis mine)

Keep in mind that this was nearly at the end of the 2014 open enrollment period. People were already enrolled, and rates were long-since locked in for the year. HHS indicated that they had made several adjustments to the risk corridors program, and they expected those adjustments to make the program budget neutral. But they said they might adjust the program again in future years.

But then in late 2014, the Cromnibus Bill eliminated the possibility of federal funds being used to make up shortfalls in the risk corridors program. Some members of Congress have insinuated that the risk corridor shortfall is somehow a failure on the part of Obamacare. But they are being disingenuous on this issue. Without Congressional action in late 2014 to cement the fact that risk corridors had to be budget neutral, HHS would have had flexibility on the issue. At this point, they have none.
It’s also important to note the time frame of all this. Rates for 2014 were set in the spring of 2013, when risk corridors were explicitly expected to NOT be budget neutral. The transitional (grandmothered) plan “fix” was announced in November 2013 (after open enrollment had begun and rates were locked in), allowing pre-2014 plans to continue to renew after January 2014. Then in early 2014, the transitional plan fix was extended to allow non-compliant plans to renew as late as October 2016. Transitional plans help existing carriers, since it makes it easier for them to keep customers who were medically underwritten at the time their coverage was purchased, and tend to be relatively healthy. But the extension of transitional plans harms new start-ups – like Colorado Health OP – who don’t have any pre-2014 members.
Carriers provided coverage throughout 2014, and some of them got taken to the cleaners in the process. In March 2014, HHS said they expected the adjustments they had made to make risk corridors budget neutral, but in hindsight, they were obviously incorrect. Then at the end of the year, Congress cut off the ability for the risk corridors program to receive federal funding, despite the fact that premiums for 2014 had been set back in early 2013, when the federal funding under the risk corridor program was very much expected.
Fast forward almost a whole year later, and carriers are expecting to get their risk corridor payments in December 2015. Data is submitted to HHS in the summer, and on October 1, they announced the results of their data crunching: carriers will only get 12.6% of what they’re owed. And there’s nothing HHS can do about it, because of the Cromnibus bill.

So that’s the back story on the risk corridors shortfall, which is currently impacting health insurance carries all across the country to the tune of $2.5 billion.

Colorado Health OP risk corridor payment shortfall

Here in Colorado, our CO-OP is feeling the pinch as a result of the risk corridor shortfalls, after being notified that they won’t be receiving $10 million that they’re owed under the program. Colorado Health OP garnered significant market share this year, with 40% of Connect for Health Colorado’s private plan enrollees choosing Colorado Health OP. The CO-OP currently has 80,000 members in Colorado.

Certainly, they are not the only carrier that’s going to get a lower risk corridor payment than expected; the Division of Insurance told me that they are

reviewing the impact [of the lower risk corridor payment] to all Colorado insurance carriers and their finances, because they are getting less money than they expected…It is possible this will impact the ability of some to meet state-mandated capital requirements, but we need to see how the numbers look.  Under Colorado law, the Division has mechanisms for Colorado-based insurance companies that allow for increasing oversight if certain financial thresholds are not met, which all Colorado carriers are subject to.  But no actions have been taken in regards to any carrier, as we are still reviewing this information. 

Colorado Health OP confirmed that they have enough money to pay all claims for current enrollees, and they’re still actively preparing for 2016’s open enrollment that begins November 1. Their annual revenue is currently about $250 million, so the $10 million shortfall in the risk corridors payment is only about four percent of their annual revenue. But Colorado Health OP explained that the $10 million they are owed by the federal government was earmarked for their reserves, which are required under Colorado law (EDIT: I confirmed with the DOI that the CO-OP is held to the same standards as every other carrier in the state in terms of reserves – they do not have different standards because they’re a CO-OP and a new carrier in the market). Colorado Health OP clarified in a Facebook comment that they either need the state accountants to still consider the 2014 risk corridor payment (which is currently in the form of an IOU) as a 2015 receivable, or else they need the federal government to come up with an alternative way of producing the cash this year – as opposed to waiting to see if there’s an overage next year or the following year.

But Congress has already said that the risk corridors program must be budget neutral – ie, the only money it can pay out is the money that is paid in by other insurers. At the same time, however, insurers were told that “risk corridors collections will be sufficient to pay for all risk corridors payments.” Clearly, that was a huge over-promise, and leaves health insurance carriers – particularly smaller, start-up insurers like CO-OPs – in the lurch.

But Colorado Health OP is fighting back. They’ve created a letter that members and the general public can use to communicate with Congress members and let them know how important the CO-OP is to the people of Colorado. If you haven’t contacted Senators Bennett and Gardner and/or your Representatives, it only takes a minute to do so using the Colorado Health OP form. It’s possible that Congress may decide to loan money to the risk corridors program, although given the acrimonious nature of congressional proceedings regarding healthcare reform, it’s certainly a long shot.

For now, what should Colorado Health OP enrollees do?

Many of our clients are enrolled in Colorado Health OP plans, and we know there’s a great deal of worry about the future of the plan. The concern is not limited to the Colorado Health OP risk corridor payment, as there are other carriers in Colorado that are also going to be short-changed when the risk corridor payments are doled out in December. But Colorado Health OP is leading the fight to get those funds, and putting themselves very much in the public eye while doing so.

If you’re enrolled in a Colorado Health OP plan, don’t panic. The CO-OP has funds on hand to pay claims for all of their current members, and as noted above, the risk corridor shortfall is a tiny fraction of their overall annual revenue. They are doing everything they can to maintain the required level of reserves, and it’s possible that the DOI will be able to work out something to keep them viable even if the risk corridor payment doesn’t come until next year or the year after (higher rates next year will help too).

So there is not an immediate worry that the CO-OP will become insolvent if they don’t get the risk corridor payment they’re owed [and as an aside, Colorado has a fund that is established specifically for the purpose of paying claims for insureds whose health insurance carriers become insolvent].

Members who have coverage in 2015 should pay close attention to updates from Colorado Health OP (and the other carriers in the state as well) and the Division of Insurance. Open enrollment begins in a few weeks, and it will be easier at that point to see how all the available plans in Colorado stack up against one another. By that point, we should also have more information from the DOI regarding the status of carriers that are being adversely impacted by the risk corridor shortfall.

Until then, carry on as usual. Rest assured that although the ACA limits open enrollment to one window per year, there’s an exception for people who lose coverage mid-year. So if any carriers were to stop offering coverage in 2016 – even if it’s after open enrollment ends – their members would be allowed to select from any other carrier offering coverage in the area.

EDIT, 10/7/15: On October 7, 2015, we received an email from Colorado Health OP with detailed updates. Overall, things are looking pretty good, and it appears that CO-OP plans will still be available in Colorado in 2016, despite of the risk corridor payment shortfall. The following points are directly quoted from Colorado Health OP:

  • Our intent is to move forward with selling plans for 2016—our rates are set and extremely competitive for both Q4 2015 and 2016.
  • While we are upset about not receiving $10 million that was owed to us under the risk corridor program, we have more than enough money on hand to pay for administration, claims and broker commissions for the remainder of 2015 and all of 2016.
  • What is being called into question is whether we will have the reserve levels the state requires when we file our annual 2015 financial statement in March of next year.
  • This is an unexpected short-term capital impairment that we intend to solve.  Even without the risk corridor payment, we are projected to have a positive net income in 2016 and will be building capital reserves.
  • Our business model is sound and financial performance is much better than we projected it would be at the beginning of this year.
  • We have a strong cash position—even if the federal receivables do not materialize, we have more than enough cash flow to fund claims and operations in the future.
  • We are working through the numbers with State and Federal regulators and independent actuaries.  We will better understand the reserve impact next week.
  • We have several, very real options for securing additional reserves, which include private investment and reinsurance options.
  • We will be more in a position to answer all your questions after October 15.
  • In the meantime, we are conducting business as usual and moving forward with plans for 2016 and fully servicing members.
About Louise Norris

Louise Norris has been writing about health insurance and healthcare reform since 2006. In addition to the Colorado Health Insurance Insider, she also writes for healthinsurance.org, medicareresources.org, Verywell, Spark by ADP, and Boost by ADP. Follow on twitter and facebook.

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