Risk Corridors and buying future Medical Loss Ratio rebate rights

Yesterday, the Supreme Court ruled that the federal government can’t renege on paying insurers $13 billion dollars from risk corridors (RC) that were in effect from 2014 to 2016. These risk corridors are part of the ACA. They were designed to remove some of the risk insurers faced when pricing a brand new market of guaranteed issued, community rated insurance with a price linked subsidy system. Actuarial uncertainty over who would sign up and how sick would the average and marginal enrollee look like was real. The risk corridors were designed for the federal government to pay out if the insurers as a class suffered from the winner’s curse where the most optimistic projection won the pricing battle and got all the membership that was far sicker/more expensive than the optimistic bid. If insurers as a class were too pessimistic and priced too high, the federal government would have gotten paid.

Insurers as a class were too optimistic. They underpriced premiums of plans that people actually purchased for the actual claims level. They took massive losses in 2014-2016. The federal risk corridors were expected to pay out $13 billion to cover some of the losses. However the December 2014 Cromnibus tried to renege on the deal by saying that the risk corridor program had to be revenue neutral. The government only paid out a small fraction of 2014 claims and nothing on 2015 or 2016 claims. The insurers sued and won.

Risk corridor claims will get paid out of the federal Judgement Fund sometime this summer. This leads to an interesting oddity. Depending on the situation, these funds may pass through insurers and head straight to 2020 policy holders in the fall of 2021.

What?

Medical Loss Ratio (MLR) regulation requires insurers to spend at least 80% of their qualified revenue on qualified claims over a rolling three year period. There is a fairly strong argument made by Christen Linke Young at the Brookings Institute that a risk corridor pay-out will hit active insurers books as a current year revenue line that will be included in the MLR calculation.

Under current regulations, risk corridors payments are considered revenue in the year in which they are received. If the risk corridors program had operated on the statutory schedule, those payments would have been received in the same time period in which insurers were incurring significant losses on high health care claims, so MLR rebates would generally not have been triggered. Today, however, insurers would receive a bolus of risk corridors payments at a time when they are already profitable, and some may be operating close to the 80% MLR threshold. This could incent some insurers with specific patterns of prior year revenue and costs to offer somewhat lower premiums to avoid having to pay MLR rebates.

A big RC payment this summer would increase the denominator (qualified revenue) without changing the numerator (qualified claims). MLR would mechanically shrink.

We have been following MLR fairly hard on Balloon-Juice for a couple of years. Kaiser Family Foundation expects about $2 billion in MLR rebates for the individual ACA market to be paid out Fall 2020 for the 2017-2019 time frame.

This is because 2017 was a normally priced year, 2018 was massively underpriced and 2019 was slightly underpriced. 2020 before COVID and now before risk corridors looked to be similar to 2017 in being a normally priced year.

MLR rebates are paid to the policy holders in proportion to their share of the gross premiums of that their policy generated in the last year of the three year look back period. Given this structure, it is quite feasible for someone who received large premium tax credits and purchased a zero net premium plan in 2019 to effectively be paid to purchase insurance between the combination of 2019 premium tax credits and a 2020 MLR rebate check for the 2017-2019 period.

Assuming that risk corridor payments from the Judgement Fund hit the books as current year revenue, there is a possibility of even more people getting effectively net negative premiums for 2020. Absent COVID, we would have expected 2021 MLR rebates to be substantial as the 2018-2020 calculation period would have been structurally similar to the current 2017-2019 calculation period that is generating $2 billion in MLR rebates for the ACA market. However between the possibility of COVID-19 leading to lower expenses as inpatient procedures have been deferred to 2021 and now risk corridor payments hitting the books, MLR rebates have the potential to be huge. If an individual or a family can sign up for a zero premium bronze plan, that buys both catastrophic protection against medical events and a property right to MLR rebates that would be distributed in 2021. These rebates have the potential to be large and widespread and a zero premium bronze plan is a one way option with little downside.