Hookers and Blow after the Risk Corridor

A few weeks ago, I thought that the Center for Medicare and Medicaid Services (CMS) guidance on how insurers should accrue risk corridor payments to the year earned and then re-calculate any MLR obligations was both a defensible  decision using standard accounting practices and an invitation to solve the question of whether a marginal dollar should go to more hookers or better blow with the answer of BOTH!

Another other option CMS could adopt was to say that risk corridor funds should be accrued to the years that they were supposed to be paid and then have MLR recalculated for those years.

This is the track that CMS proposes to do.  It is a logical pathway.  The risk corridor obligations were generated in 2014-2016, so when they finally arrive into the insurers’ vaults, they should be credited to those years. This is straightforward accounting.  MLR calculations will be run and any payments that are now owed will be paid….

We know that insurers lost massive amounts of money from 2014-2016 on the ACA individual market.  Raw MLRs were in the high 90s and at times well over 100 where claims were greater than premium revenue.  There were a few profitable insurers that kicked in miniscule MLR rebates.  But there were not many insurers that lost enough money to be RC receivable AND also had ACA MLRs just above the refund line.  A big cash infusion for those few insurers will generate MLR rebates that will eventually go into consumers’ hands.  However, the more likely scenario for insurers that are now receiving RC funds after the favorable Supreme Court ruling will be that they lost a massive amount of money in 2014-2016 which generated the RC receivable and in the process of losing a massive amount of money, their MLRs were wicked high.  So once the RC money lands and accrues to the correct years, the re-estimated MLRs are still above the refund limits. At that point, the RC money is free cash flow to the insurer.

Wakely, an actuarial consulting firm that is highly engaged in the ACA individual market, just released an issue brief with their estimate of the distribution of risk corridor payments:

Based on our findings, Wakely estimates that approximately $298 million (or 2.4% of total additional RC recovery payments) additional MLR rebates will be distributed as a result of the adjustment to the 2015-2018 MLR filings due to retroactive RC payments.

One way of looking at this is that this is a massive distribution of hookers and blow.

The other way to look at it is that insurers lost billions from 2014-2016 and the RC payments still have them, on net, still losing billions but just not as many.