Over the weekend, Modern Healthcare’s Nona Tepper wrote a story on the failures of Bright Healthcare and Friday Health Plans have an impact on other ACA insurers:
Financially struggling Bright Health Group is short $380.2 million owed to exchange carriers in Alabama, Colorado, Florida, Illinois, Nebraska, Texas, Oklahoma, Utah and Virginia, CMS wrote in a notice. Bankrupt Friday Health Plans owes $741 million to insurers in Colorado, Georgia, Nevada, New Mexico, North Carolina, Oklahoma and Texas. Bright Health and Friday Health are the sole insurers unable to contribute to the $9.24 billion risk-adjustment program this year.
Risk Adjustment is used to minimize the incentive insurers might have to only chase healthy enrollees. In a state, health insurers with populations that code as healthier than state average send money to health insurers whose populations code as sicker than the state average. Each state is disconnected from any other state. Transfers are delayed by 10 months from the end of the year where the transfer responsibility is accrued. Insurers who are owed money from 2022 would be expecting that money to show up just about now. Insurers that owe money for 2022 would need to make those payments now as well.
Bright and Friday went BOOM!
This means that money other insurers were counting on is officially not showing up. And these consequences are highly localized. The Texas ACA individual market had approximately $1.7 Billion dollars in transfers going from low risk insurers to high risk insurers. Friday and Bright were on the hook for $1.3 billion or ~75% of the total payables.
Now there is nothing wrong with being a net payer for risk adjustment as long as the cash is there. The cash is not there. Friday and Bright paid some of that $1.3 billion dollars but are skipping out of town for a good chunk of the revenue that they owe.
The losers in this case are the Texas insurers that were covering sicker than average populations. They were counting on this risk adjustment revenue to cover claims. Now the big insurers have reserves that can eat a shock. But the medium and small insurers are likely having the state regulators getting nervous about their capital cushion. Nervous regulators are not good for ongoing no hassle business operations.
The VC backed insurers that attempted to buy marketshare without a concern of profitability have created two forms of systemic screwing in the risk adjustment system. The current implosion and non-payment of RA payables is the most obvious. The second form of systemic screwing in risk adjustment is that the VC backed insurers were more than happy to lose a lot of money to enroll low cost, low risk enrollees. Their premiums were artificially low because the VCs and then the IPO funding rounds were being lit on fire to buy membership with the hope that enough scale could allow them to do something with whatever their claimed secret sauce was.
This is problematic.
Risk adjustment for the ACA has a key assumption. It assumes the state wide sum of premiums collected is sufficient to cover expected costs. There are errors. There are surprises. There are systemic mispricing too low and too high (although MLR regulations bind here). But the key assumption is that every insurer is trying to at least break even net of risk adjustment. However the VC backed insurers were happy to light money on fire to price premiums low and gobble up low risk membership. Other insurers got the high risk membership with intentionally depressed state wide premium. The transfers were deliberately light, so the VC insurers were offloading some of their membership acquisitions costs to other insurers that were trying to be profitable in a given year.
I am not sure what the solutions are, but the system is inviting a finance bro hack attack and we should minimize those attack surfaces.
gene108
Can you clarify what you mean by membership acquisition costs? Im not familiar with how this works with insurers
TeezySkeezy
A stupid society we live in where health insurance and “finance bro hack attack” have anything to do with each other.
dnfree
Just…WOW.
Somehow this reminds me of Alan Greenspan in the big crash of 2008. I had not formerly realized he was an Ayn Rand free market apostle. The assumption that people will act with enlightened interest for the institution is not justified.
From a Guardian article :
During a feisty exchange on Capitol Hill, he told the House oversight committee that he regretted his opposition to regulatory curbs on certain types of financial derivatives which have left banks on Wall Street and in the Square Mile facing billions of dollars worth of liabilities.
“I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms,” said Greenspan.
As the crisis continued to depress global stockmarkets, the US treasury secretary, Henry Paulson, also offered a partial confession, admitting he ought to have anticipated a meltdown in the US mortgage industry widely blamed for triggering the crisis. “I could have seen the sub-prime crisis coming earlier,” he told the New York Times. He added: “I’m not saying I would have done anything differently.”
pluky
In my ‘discussions’ with State insurance regulators about rate filings I was submitting, their focus had been on making sure the proposed rates weren’t excessive. Seems time to modify this, especially for new marketplace entrants, to include a check that proposed rates are also reasonably adequate.
Barbara
To put this in English, an insurer with a healthier than average pool would in theory calculate an insurance premium level with a net RAT pay out to other insurers with a sicker membership base. The impact of that calculation would have the effect of raising an insurer’s premiums to offset the required payments to those other insurers at the back end.
So at least in theory, a more accurate RA assumption would have meant a higher premium and likely lower enrollment.
The problem for regulators is that although they are supposed to ensure that rates are reasonable, they are naturally reluctant to require a carrier to raise rates. The “interlinking” of insurers through statewide risk adjustment has not been sufficiently internalized as a regulatory imperative that might require regulators to rein in a carrier who doesn’t mind losing a lot of money.
Barbara
@pluky: Well, yes, rates are not supposed to be excessive but the other core regulatory function of insurance regulators is to ensure financial solvency. An insurer who is blithe about losing money has always been a serious risk to the system.
TF79
“The VC backed insurers that attempted to buy marketshare without a concern of profitability…” can you expand on this? I would have assumed that VC’s in general would be hyper-focused on profitability at the exclusion of all else. Are they taking a loss in the short-run in exchange for long-run market power or something?
Barbara
@TF79: Not really market power, so much as building a strong base of membership. The problem with the ACA is that it is so price sensitive that as soon as they might have tried to cash in that membership would have walked away. Maybe some of them hoped to be bought by national carriers that struggled with an ACA strategy. This was very clearly the strategy of many MA plans between 2007 and 2011. Scale up fast, and cash out.
To be honest, none of these companies have said or done things that make me think they actually understand what it means to run a health insurance business.
Another Scott
I’ve read you, and Mayhew, enough over the years to know that that’s not true.
Yeah, 218-60-1-5 is a heavy lift to get there.
Thanks.
Cheers,
Scott.
taumaturgo
Why is our healthcare system so convoluted? Who is benefiting from this? Why we spend more $$ per capita than every other developed country, for far worse results? Why do we pay a premium, deductibles, out of pockets maximums and co-pays? Why do we need to choose between healthcare and bankruptcy? Why can we eliminate the middleman that’s taking 10 to 20% as administrative cost when Medicare comes in at 2 to 3%? Is insane. I’ve come to the conclusion that as consumers we have had so much smoke blown up our rear end that the fog not only clouds our vision but our brains as well.
pluky
@Barbara: Current assessment of solvency is done after the dust has settled. Rather than wait for claims and expenses to outstrip inadequate premium receipts, some sort of mechanism to determine adequacy upfront seems to be in order. Say rates below x% of market average would trigger higher risk-based capital requirements, and more stringent examination of the annual statement of financial condition.
Barbara
@pluky: Yes, agreed.
JaySinWA
Just to make sure I understand:
The pay out from the risk pool for a company is not directly based on their balance sheet for revenue vrs cost, but on how sick the patients they cover code? And is it strictly based on code and expected cost or is it based on actual costs for all insurers? So even though these companies bankrupted themselves on costs, they were still on the hook for paying into the RA pool, and won’t get anything back because their costs were not above average?
Do I have that right?
Have you seen how much shortfall there is for various companies and any who might get swamped by the RA shortfall? How real is the risk that this will take down some more insurers?
Ohio Mom
@taumaturgo: It’s partially a result of accidents of history (a way to compensate employees during WWII wage freeze), partially the result of racism (see the 1619 Project, we don’t want Black people benefiting from anything) and partially the lack of any meaningful regulation. IMHO.
Barbara
@JaySinWA: It is based on coding of actual claims (not medical records — which is what MA does) but CMS is continually refining the methodology, and for the most part, coding and claims have correlated well when CMS has studied the actual performance of plans. I won’t bother to detail how it differs from Medicare Advantage, but it does in material ways that probably make it less vulnerable overall to gamesmanship.
The idea is that the insurer’s rates are supposed to reflect benefits not the expected health status of enrollees (except for a few demographic factors like age and gender).
Regarding your second question, I don’t know, but for the most part, it was the newcomers, not the established plans, that owe money, so the creditor plans presumably won’t become insolvent. For one thing, the individual ACA market is actually a pretty small part of the overall health insurance market, even the commercial market. I think the companies that owe money were disproportionately if not exclusively operating within the ACA’s individual market.
JaySinWA
@Barbara: Thanks.
I’m a bit confused about CMS and state roles in administering ACA in regard to Risk Adjustment (well in everything really). The risk pools are state based? Are the RA payouts administered by the state or by CMS? CMS monitors claims per state for ACA purposes even in state managed ACA plans and CMS data is used to determine RA pay outs?
I guess I am asking who needs to fix what. What role does the state insurance commissioner have in making sure a plan is solvent for RA and what role does CMS have?
Barbara
@JaySinWA: Rate review has basically been delegated to state insurance departments, but the process has to conform to federal requirements in how rates are developed. CMS handles the risk transfer process — it receives claims data and calculates who is owed what under a methodology that it controls. Same with rebates.
I think the view is that the changes have to be at the federal level because the weakness flows from federal methodology in how rates are developed and reviewed.
JaySinWA
Thanks again.
TF79
@Barbara: Thanks! So it sounds like they’re trying to profitable and just failing at it (as opposed to pursuing some other objective). Sort of like a house flipper buying up houses that discovers they aren’t very good at fixing houses and no one wants to buy them?
Snarki, child of Loki
Those VC people need first-hand experience that health insurance doesn’t cover crucifixion.
Because I’m pretty sure that their assumption is that they can walk away from their huge debts with no penalty, and a big bonus.
InterestedObserver
Then there’s the other end of the spectrum; carriers that have broad networks, attract higher utilizers, and price their products accordingly – and make large operating profits before receiving RA from the other, lower-priced, narrow-network competitors. Much more prevalent in the ESI group market than individual, but it’s driving competition out of the market. Perhaps if RA were claims=based instead of diagnosis-based, or if there were an offset to RA due to operating profit…