Risk corridors and well capitalized insurers

Last December in one of the pieces that I really like, I noted that the risk corridor Rubio-con provisions would not kill PPACA. It would just shift the field towards well capitalized insurers that could wait a couple of years with massive funding gaps on the balance sheet.

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….
In the long run, the insurers will be made whole, or at least the creditors of the insurers that folded will be made whole. In the short run, the insurance markets got significantly less competitive as a dozen insurers folded and several more pulled products because they could not float the federal government another couple of years.

Several lawsuits have been filed by insurers to get the Risk Corridor money. The Department of Justice has responded to the suits with a motion to dismiss as the claims are not ripe yet. Theoretically the Department of Health and Human Services (HHS) could collect enough money to make everyone whole by the end of next spring. On a practical basis that is not going to happen but on a theoretical basis it could happen (much like I could hit a Kershaw curve with anything other than my torso).

And now we get some new news. HHS has issued a letter stating the obvious. 2015 collections are insufficient to make whole 2014 obligations so there will be no new money for 2015 risk corridor claims. Furthermore, HHS knows that the lawsuits are out there and they could be willing to talk and settle.

As in any lawsuit, the Department of Justice is vigorously defending those claims on behalf of the United States. However, as in all cases where there is litigation risk, we are open to discussing resolution of those claims. We are willing to begin such discussions at any time.

Everyone knows that eventually CMS will need to have the federal Judgement Fund (a permanent appropriation) pay up for the Rubio-con. It is just a matter of timing. For very large insurers the offer to settle is merely a calculation. Is the settlement package that they could get in a few months bigger or smaller than the settlement package they could get in the summer of 2017 minus the cost of the wait and any additional legal fees? Depending on the terms of the settlement, it is a simple calculation.

Where this is valuable is for the smaller and much less capitalized insurers. An early settlement would be a massive cash infusion to the balance sheets of the remaining co-ops. This cash infusion is an unanticipated windfall. Insurer balance sheets took a massive hit when the Rubio-con got signed into law as what was a 100% near cash equivalent turned into an uncertain asset with a large but unknown discount for the 2014 account receivable. In 2015 and 2016 once it became obvious how little risk corridor money was being collected, every insurer that thought they would qualify for risk corridor obligations had to budget as if they were to never receive anything from the risk corridors. Aggressive accountants may have been able to footnote the expectation that someday they might get something. But a footnote expectation would not count as an asset for state regulators.

If CMS settles and the Judgement Fund pays out, the co-ops are in far better shape as their capital cushion will have gotten so much thicker.

An early settlement won’t matter for my employer. It won’t matter for most of the Blues. It won’t matter for Cigna. It will matter for the little start-ups even if they don’t take 100% of the potential obligation as the settlement in order to get cash fast.