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Dealing with the uncertainty of the 3Rs

April 8, 2015 / 5 min read

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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.

Uncertainties

There 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:

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. 

Jurisdictional differences

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. 

Liquidity concerns

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 recommendation

Plante Moran recommends that your process for analyzing, recording, and disclosing the impact of the “3Rs” include:

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.

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