Dealing with the uncertainty of the 3Rs
If you are a health insurance provider, you have certainly felt the pain of estimating, recording, and evaluating the impact of the risk-sharing provisions of the Affordable Care Act, commonly known as the “3Rs”. While these provisions were put in place to soften the volatility of rate setting and high risk enrollees, the following “3Rs” have also been riddled with complications and uncertainty.
- Risk Adjustment Program (R1)
This is the only permanent program of the three provisions. The risk adjustment program was designed to transfer funds to plans serving higher risk populations from those plans covering a healthier, less costly membership pool within the same market. The government will compare the average risk scores of enrollees in each plan with average risk scores of enrollees in fully insured plans throughout each state, once all the data is reported by health plans. This process may result in plans either paying into this fund or receiving payments which are funded from other plans.
- Transitional Reinsurance Program (R2)
A temporary program, the transitional reinsurance program, provides funding to insurers in the individual market that incur high claims costs for their enrollees. Plans are required to pay various assessments and costs into this program, and are eligible for some reimbursement for their individual populations to the extent that specific claims exceed a prescribed threshold.
- Risk Corridor Program (R3)
The risk corridor program, which is the most controversial of the 3Rs, is also a temporary program in effect through 2016. The purpose of this program is to provide protection to qualified health plans against inaccurate rate setting in the first few years of the exchanges in the individual and small group markets. The program can limit an issuer’s losses and gains based upon an analysis of a plan’s allowable costs against a target. This program could also result in plans either having to pay into the fund or receiving payments back, depending on their ultimate experience compared to the target allowable cost measures outlined in the ACA.
UncertaintiesThere are myriad issues and concerns that health plans have been evaluating in this initial year of implementation of these programs. Significant concerns have surrounded the following issues:
- The reliability of data used in determining estimates,
- Jurisdictional differences, and
- Potential collectability issues for receivables related to these programs (particularly in the risk corridor program) and any liquidity issues that this might cause for certain plans.
Availability and accuracy of data
One of the primary requirements in order to determine a reasonable estimate of amounts payable or receivable under these programs is the ability to accumulate relevant and accurate data. Risk adjustment is the primary program where there is some difficulty in obtaining accurate data; and the ultimate amount calculated as payable or receivable for the risk adjustment program is also a component of the calculation for the risk corridor program and medical loss ratio rebate calculations. This creates some dependency on the risk adjustment amounts being accurate in order for the risk corridor and MLR rebate calculations to also be accurate. The most challenging component of the risk adjustment calculation is obtaining the marketwide risk scores of enrollees within each state. To the extent that reliable data is not available, plans may not want to record any receivables for these programs, and some plans have also decided not to record payables, which may lead to financial results that aren’t truly indicative of their ultimate settlement. Some plans will be winners, and some plans will be losers when it comes to these risk-sharing provisions. The amounts themselves will not be fully known until sometime this summer, when they are calculated by CMS.
Each state differs in the availability of reliable market data. Within a certain state, a consultant, actuary, or health plan may be able to determine a reasonable average market risk score for individuals, but not for small groups. Additionally, the ability to aggregate the data necessary may depend on the willingness of the health plans within each state to participate in marketwide studies. Several consulting firms nationwide have performed studies to accumulate this data in an effort to assist health plans in implementing these programs. However, certain plans may make up a significant portion of the market share, in which case it’s not beneficial for them to participate, leaving the other plans within their market in the dark as to where they stand in comparison.
Collectability and/or impairment
From a statutory standpoint, presuming that the calculations of these programs meet the requirements outlined in the applicable accounting guidance, receivable balances associated with these programs are allowed to be reflected as an admitted asset. However, a recent study issued by Citigroup through the third quarter of 2014 indicated that the risk corridor program is significantly underfunded on a national level, causing some impairment concerns surrounding receivables related to this program. This study noted that for the health plans in their sample there were $755 million (estimated to be $1.2 billion through December 31, 2014) of risk corridor receivables recorded, but less than $1 million reported in risk corridor payables through September 30, 2014. The risk corridor program, unlike risk adjustment, is reliant upon federal funding as this program was not intended to be fully funded with payments made into the program. However, the federal appropriations set aside to fund the risk corridor settlement payments were removed from the most recent federal budget, causing a significant stir within the industry. On the other hand, in the most recent Q&A from CMS, they have stated that all amounts will be paid, even if 2014 amounts are paid with 2015 assessments. Debate still rages about the ultimate collectability of these receivables, including the expected time frame for collection.
Depending upon the financial health and stability of the health plan, the delayed collection (or non-collection) of these receivables, if significant, could cause liquidity issues for those smaller or start-up plans that are relying on the stabilization provided by these provisions. Health plans should continue to analyze cash flow projections for all scenarios to ensure preparedness, no matter what the outcome.
Plante Moran process recommendationPlante Moran recommends that your process for analyzing, recording, and disclosing the impact of the “3Rs” include:
- Communication with state regulators
- Evaluation of data quality
- Actuarial support
- The analysis of collectability and liquidity challenges
- Full and transparent disclosure
As the ultimate calculation and/or settlement of balances owed to or from each health plan for 2014 will not be resolved until sometime this summer (or even later with respect to collectability), it remains to be seen how health plans will fare when it comes to these programs. What we do know is that there will not be a consistent approach, a consistent methodology, or a consistent conclusion with regards to calculating and reporting these amounts as of December 31, 2014.