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.
Systemic risk in the ACA risk adjustment marketPost + Comments (21)