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You are here: Home / Anderson On Health Insurance / Balance sheets, risk adjustment and risk corridors

Balance sheets, risk adjustment and risk corridors

by David Anderson|  July 8, 20166:12 am| 7 Comments

This post is in: Anderson On Health Insurance, C.R.E.A.M.

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The Land of Lincoln Co-op in Illinois is scrambling to stay solvent as they got hit with a larger than expected risk adjustment charge. They have reached an interesting strategy as reported by the St. Louis Post Dispatch:

Illinois Department of Insurance Acting Director Anne Melissa Dowling wrote in a June 30 letter to the federal government that she had ordered Land of Lincoln Health not to pay until it gets what it’s owed by the feds — nearly $73 million — under a separate provision of the Affordable Care Act.

The order “is designed to prevent an immediate liquidation” of Land of Lincoln Health, Dowling wrote. Making the payment would trigger further state action and could legally obligate regulators to put the company under state supervision…

Land of Lincoln Health filed a lawsuit last month in the U.S. Court of Federal Claims in Washington, claiming the federal government had shortchanged it of risk corridor payments, a temporary provision of the health care law meant to help unprofitable insurers. At least four other insurers have filed similar claims.

Land of Lincoln is most likely getting hit with the risk adjustment double whammy.

So the co-ops that are getting hit with significantly higher than projected risk adjustment outflows will be getting hit with a double whammy. An immediate adjustment to CY-15’s balance sheet and then a future adjustment to accommodate higher CY-16 risk adjustment net outflows.

The co-ops due to the transformation of their start-up capital from grants into loans and the the reduction of the total loan pool available are very thinly capitalized entities in the best conditions. Incumbent insurers (like Mayhew Insurance) have very deep excess reserves.

This matters because if the Risk Corridors paid out in full, Land of Lincoln would be fine. They would have received the approximately $81 million dollars that they are owed for policy year 2014 risk corridors. That would be a solid cash or near cash asset where face value would be the balance sheet value. So in that scenario, they could absorb an incremental multi-million dollar hit for policy year 2015 risk adjustment and then a catch-up hit on their accrual for policy year 2016 risk adjustment liability. It would not be pleasant, but the balance sheet could absorb the hit.

However Land of Lincoln had to write off $73 million dollars in risk corridor money due to the Rubio-con appropriation restriction. That reduced their reserve capital to just above minimum requirements where the state regulators get very worried about the ability of an insurer to pay all potential obligations. If there were no negative shocks to the balance sheet between the last review date and when Land of Lincoln could win a case in the Court of Federal Claims where they would receive a face value bookable asset of $73 million, they could survive. However higher than expected risk adjustment payments are a negative shock to the balance sheet. And if the balance sheet eats up the minimum needed reserves, the state will shut down the insurer.

This is not unexpected. It is what happens to thinly capitalized insurers. Well capitalized incumbents don’t care that their risk adjustment liabilities came in high or low if it knocks out competitors:

That is good news in the long run for well capitalized insurers. It is bad news for everyone else.

Well capitalized insurers can wait years to get $100 million dollar payments while using other cash reserves to cover the degradation of the risk corridor account receivable on the balance sheet. However, waiting several years and using other reserves is not feasible for co-ops and other smaller start-ups and new entries to the insurance market. As I explained in October, the co-ops counted on quick payment in full to meet cash reserve requirements.

until the Cromnibus, the risk corridor payments were seen as near cash and counted as high quality reserves. However the Cromnibus applied a large but unknown discount to those claims on Federal payments. That means the state regulators started to worry that in oh-shit scenarios, the smaller insurers could not pay off all incurred claims. And once state regulators start to worry, they shut down insurers that they worry about.

I don’t think Land of Lincoln will win a pissing match with the Federal government for a very practical reason that supersedes legal reasons. The feds have the ability to stop payment of advanced premium tax credits and cost sharing reduction subsidies until the risk adjustment obligation is made whole. If Land of Lincoln’s cash and reserve position is precarious, a few weeks of no federal cash flow will force the co-op to burn through their ready cash and eat into their reserves. Even if they can get a judge to agree with their theory, state regulators are highly likely to step in before all excess reserves are exhausted.

So dead man walking.

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7Comments

  1. 1.

    Cermet

    July 8, 2016 at 9:49 am

    You should have one comment, at least. Interesting post – like all of yours and rather useful. Just too much happening right now.

  2. 2.

    Richard Mayhew

    July 8, 2016 at 10:10 am

    @Cermet: Agreed on all points, and this is something I wrote last night before Dallas and had scheduled for a pre-coffee posting this morning.

  3. 3.

    burnspbesq

    July 8, 2016 at 11:45 am

    This is an area of law about which I know basically nothing. How strong is the co-op’s case? Might DOJ concede on answer?

  4. 4.

    Ol' Chicago Al

    July 8, 2016 at 12:19 pm

    I am a longtime BJ reader and am commenting here for the first time, because I am a former customer of Land of Lincoln.

    The ‘co op’ model sounded good to an old hippie like me, and there was all kinds of nice publicity at Land of Lincoln’s launch, as well as chances to vote for the board of directors and other feel-good measures. But I should have known that trying to build something so complicated on a reservoir of good feeling and federal largesse was not going to work.

    From the time we signed up with LoL (note: I ain’t laughing) in Dec 2014 until now, when I am still trying to get a claim from last year properly settled, they have been horrible to deal with. Not in the same bland, indifferent, corporate way as a Blue Cross, but in a way that suggests their whole operation has been chaotic from the beginning. And we haven’t been the worst served, by a long shot. Just look at the yelp! reviews. Lots of people had their plans cancelled because LoL had not set up their bill payment system properly, and they were left without coverage. Claims payments were screwed up. Paperwork was messed up–I got a letter from them with my proper ID number and address but someone else’s name on it. (I wonder how many HIPAA violations they’ve made.) EOB notices were filled out wrong, suggesting that whoever handled the claim didn’t understand how it worked, and so on. There was incompetence at these most basic, most visible things, and god knows what is going on on a larger scale. It would not surprise me to learn they had lost chunks of funding due to not filing for it on time.

    Early this year, I filed an appeal of a claim I felt they’d paid incorrectly. It took two tries before I got a form letter acknowledging that they’d received the appeal, and saying that they’d make a decision within 60 days. It’s now 120 days and nothing. At around 60 days I started calling, and while I got helpful-sounding people like Shante, who said ‘thank you for your patience, I’ll look into this and call you tomorrow,’ I never got a response, and of course no call back from Shante. So after 90 days, I filed a complaint with the Illinois Dept of Insurance, which has a very well organized site and office. Checking with people there on the phone, I could practically hear their eyes roll at the mere mention of Land of Lincoln. One told me, ‘Well, as long as they’re around, we have job security.’ Latest is that LoL requested more time to respond, but that was only until 6/30, and apparently they have not done so.

    I could go on, but I’ll spare you. The bottom line is: like it or not, health care insurance as we know it is a business, and even before the problems with the risk adjustment payments, Land of Lincoln was very bad at it.

  5. 5.

    Richard Mayhew

    July 8, 2016 at 1:55 pm

    @burnspbesq: IANAL —

    Really depends on how interested HHS is in working with the co-ops. If they think that the co-op in question is dead no matter what, I don’t think they’ll bend. If HHS thinks that this is merely a liquidity problem and not a solvency problem, something could be worked out, I think.

  6. 6.

    Robert Fallon

    July 12, 2016 at 9:38 am

    Article fails to mention two important facts. 1. Congress changed the law that prohibits the payout of risk corridor funds. A law sponsored by Senator Rubio required that payments out of the risk corridor program could only be paid out of risk corridor payments in. Since far more plans claimed risk corridor funds than paid risk corridor amounts, there were no funds available. If the administration were to agree to the Land of Lincoln demand, they would go directly against the will of the Congress. I am sure the Administration would have love to pay the Risk Corridor payments, but were prohibited.

    Second, the risk corridor program and the reinsurance program ends this year. While they did not receive risk corridor payments, they did receive millions in reinsurance payments. In 2017, Land of Lincoln will need to break even without reinsurance and the risk corridor program. It is highly unlikely that they can survive in 2017 without a massive rate increase. Such a rate increase will likely result in a substantial loss in enrollment. So, as a previous commenter wrote, they like virtually all co-ops, are “dead men walking.”

    The best thing that the administration and the division of insurance can do is to put Land of Lincoln into receivership.

  7. 7.

    Richard Mayhew

    July 12, 2016 at 10:07 am

    @Robert Fallon:

    This matters because if the Risk Corridors paid out in full, Land of Lincoln would be fine. They would have received the approximately $81 million dollars that they are owed for policy year 2014 risk corridors. That would be a solid cash or near cash asset where face value would be the balance sheet value. So in that scenario, they could absorb an incremental multi-million dollar hit for policy year 2015 risk adjustment and then a catch-up hit on their accrual for policy year 2016 risk adjustment liability. It would not be pleasant, but the balance sheet could absorb the hit.

    However Land of Lincoln had to write off $73 million dollars in risk corridor money due to the Rubio-con appropriation restriction.

    Agreed that any of the co-ops in a world of no reinsurance and no risk corridors have a tough road to hoe. In a 2013 planning meeting, the co-ops would have assumed that they could have burned through some of their excess capital to figure out risk adjustment with risk corridors and reinsurance as a three year glide path and cushion. Reinsurance has been there (if anything it has paid out a little bit higher than expected) but the risk corridors disappeared and risk adjustment is a tough business.

    I figure 5 or 6 co-ops will offer plans for 1/1/18

    That addresses your point #1

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