On June 30, the Centers for Medicare and Medicaid Services (CMS) released its report on the Affordable Care Act’s (ACA) risk-adjustment and reinsurance programs for benefit year 2015. Less than a week later, the Connecticut Insurance Department announced that HealthyCT, a Consumer Oriented and Operated Plan (co-op), would be placed under an immediate order of supervision due to its hefty risk-adjustment obligation. The order prohibits the company from writing new business or renewing existing business.
Days later, Oregon's Health CO-OP announced it will fold at the end of this month, displacing 20,600 policyholders. The closure was also a result of the risk adjustment program.
Yesterday, Land of Lincoln's spokesperson Dennis O'Sullivan confirmed the co-op would liquidate and shut its doors.
The risk-assessment and reinsurance programs are both intended to transfer pooled funds from plans with lower-risk customers to those with higher risk. Although HealthyCT is set to receive $11.4 million under the reinsurance program, it’s also obligated to pay $13.4 million in risk-adjustment transfers, leaving the company $2 million in the hole. According to insurance Commissioner Katharine Wade, the risk-adjustment mandate has put HealthyCT “under significant financial strain.”
Money woes not new for co-ops
The ACA’s co-op program was established in 2013 to encourage competition in the ACA marketplace. The co-ops provide health plans almost exclusively to individuals and small groups; as a result, they have taken on more than their share of risk and were counting on low-interest government loans and risk-corridor payments (a fund meant to cushion insurers covering sicker, newly-insured patients) to keep them afloat.
It didn’t quite work out that way. The original 23 nonprofit co-ops were anticipating $6 billion in federal low-interest loans; they only received $2.4 billion. They also requested $362 million in risk corridor program payments, but only received a total of $2.87 billion.
Then there’s the federal risk-adjustment program. For the second year in a row, the law that was expected to protect insurers from high ACA losses has dealt the small co-ops a devastating blow. In addition to Healthy CT, some of the hardest hit were Freelancers Co-Op of NJ (owes $46 million), Land of Lincoln of IL (owes $31.8 million) and New Mexico Health Connections (owes $14.6 million). Unlike the reinsurance and risk-corridor programs -- both of which are three-year programs -- the risk-adjustment program is permanent.
Does the risk-adjustment program favor larger payers?
The risk-adjustment program has been widely criticized for being biased toward larger insurers. The smaller payers have argued they are being unfairly penalized for having healthier patient pools; they say in reality they just don’t have as much claims data.
“Experienced insurers know how to optimize their risk scores while inexperienced insurers are still groping forward with limited data,” Richard Mayhew said in an article for Balloon Juice.
“Insurers that have only ever operated in the small group and individual market are at a data disadvantage compared to insurers that operate in individual, small group, CHIP, Medicaid, Medicare and large employer group markets.”
Mayhew goes on to share a couple of examples that demonstrate how experienced insurers can use historical data to make a patient that at first glance appears to be lower risk, seem higher-risk. According to Mayhew, that type of data mining is both legal and common. “However it is a competency that requires a lot of experience, specific and expensive technical knowledge and deep data sets,” he says.
Will the risk-adjustment program cause co-ops to fold?
Of the original 23 co-ops, only seven are left. “The future does not bode well for most of them, and you may see almost all out of business soon barring some dramatic influx of capital and better management,” says Tim Hoff, Professor of Management, Healthcare Systems and Health Policy, D’Amore McKim School of Business.
Sally Pipes, president and CEO of the Pacific Research Institute says all of the remaining co-ops are bound to fail. “Over 740,000 Americans have already lost coverage by co-op closings, and the remaining co-ops are struggling with significant financial losses.”
Pipes says as of May, eight co-ops were near bankruptcy – Ohio, Connecticut, Massachusetts, Oregon, Montana, Wisconsin, Illinois and New Mexico – for a combined total loss of $400 million. Ohio, Oregon, and Illinois have since gone under.
CMS seeking a fix
In an effort to save the remaining co-ops, CMS lifted a restriction this past May that will now allow co-ops to seek private funding. CMS is also proposing some additional changes to the risk-adjustment program. First, the model would include an adjustment factor for partial-year enrollees beginning in 2017. Second, prescription drug utilization data would be incorporated into risk adjustment. That would begin in 2018. The co-ops and their advocates say these changes aren’t happening soon enough to keep the co-ops from going under.
“The risk adjustment has been one of the hurdles for start-ups and Commissioner Wade and her staff have expressed their concern to federal officials over the funding formula and it’s potentially damaging effects on the market, particularly its impact on small insurers,” says Donna Tommelleo, a spokeswoman for the Connecticut Insurance Department. “Unfortunately, CMS has declined to modify its approach for the 2017 plan year.”
Evergreen Health of Maryland is suing the federal government over the issue, claiming the company’s ris- adjustment payment would eat up 26% of its premium revenue for 2015 (its largest competitor will be receiving risk-adjustment money). Evergreen is seeking an injunction that would release it from its risk-adjustment obligations until the new guidelines go into effect.
Peter Beilenson, Evergreen’s chief executive, told The Washington Post he believes more co-ops could fold if CMS doesn’t revise its risk-adjustment method sooner.
“Risk adjustment was designed to stabilize the health insurance markets in the states but, in fact, CMS’s implementation of the program has done just the opposite,” Beilenson said. “If the system isn’t changed in the immediate future, many of the country’s most innovative and most affordable health insurance companies could very well go out of business.”
Possible impact on enrollees
Hoff says if the co-ops go under, people who are currently covered through co-op plans can go back into the insurance marketplace and pick from existing offerings, “although without a doubt they will pay higher premiums, deductibles and copays with their new coverage.” That said, Hoff believes they “may find plans with better provider networks and customer support.”
It may not be quite as easy to find new coverage as it was previously. Several major insurers (e.g., UnitedHealthcare) are only planning to participate in a handful of state exchanges next year; others are threatening to pull out completely. “The remaining insurers will have to bear more of the cost burden of participating in the marketplace, which will cause them to require higher premiums if they are to stay in business in the exchanges,” Pipes says.