Guest Post: Putting the S&P Report in Perspective, by Rebecca Stob, ASA MAAA

NOTE: A few days ago there were 2 ACA-related stories which caused me some concern: The initial 2016 rate request filings out of Oregon and a new report from Standard & Poors which seems to indicate troubled waters ahead for ACA-compliant policy premiums. Unfortunately, a lot of this stuff goes way over my head. Fortunately, actuary Rebecca Stob has offered to explain why there's more (or possibly less) than meets the eye in the S&P report:

Disclaimer: I am an actuary at Group Health Cooperative in Seattle WA - this represents my personal opinion and not that of Group Health.

The new S&P report makes 3 key assumptions:

  • The amounts reported in the financial statements by insurance companies are based on best estimates,
  • CMS has limited or no funding sources outside the payments coming into the corridor to fund this program, and
  • The risk corridor formula remains unchanged for 2014.

Putting news about the 3Rs in perspective. While this news about risk corridors isn't good - it is premature to come to any conclusions about the eventual outcomes based on what companies have reported in their financial statements up until now. And what ends up happening with 2014 risk corridor funding should not have any major impact on 2016 rate increases (although the transitional plans do have a major impact on 2016 rate increases)

2014 Risk corridor factors

2014 results are still uncertain for the other 2Rs. What is reported in insurer's financial statements are still estimates and insurers won't know the results from risk adjustment and reinsurance until they get the final report in June. In the first year of these programs there have been many challenges in accurately submitting the necessary data and estimating the final outcomes due to technical difficulties with the software and systems and the complicated nature of the risk adjustment formula itself which compares each insurer's risk scores and other rating factors to market averages. Generally when there is a lot of uncertainty about an estimate, insurer's will use conservative values in their financial reporting.

Reinsurance payouts may be significantly more than what companies are currently reporting. Reinsurance payouts come from fees charged on health care coverage in all commercial markets, including large group and self funded groups. HHS has said that if there is money left over after paying out according to the current parameters (80% of an individual market member's total paid claims between $45,000 and $250,000 in 2014) they will increase the payout proportionally up to paying 100% of total paid claims between $45,000 and $250,000, if there is still money left over they will roll it over to be used in 2015 reinsurance payouts.

Risk corridor depends on the results of reinsurance and risk adjustment. If an insurer is being conservative in estimating risk adjustment and reinsurance, when those values are used in the risk corridor formula it will tend to overstate the risk corridor receivable and understate the risk corridor payable.

Transitional adjustment percentages - the risk corridor formula for 2014 is modified by state specific percentages that are based on how much of the market enrollment was in the transitional plans. This is intended to compensate insurers is states where the risk pool was greatly affected by healthy individuals keeping their pre-ACA plans.

Bottom line is that there are still a lot of moving parts to risk corridors that won't be settled until the actual forms are submitted in July.

2016 Rate increases major factors

First year using actual ACA experience - 2016 rates are the first time actuaries have had a full year of ACA data to base rates on. Some of the rate increases/decreases will be a correction for what actually happened including the impact of transitional plans. I would expect to see higher rate increases in states with higher percentages of transitional plan enrollments (this may be part of what is going on in Oregon which in 2014 had 17.8% of the non-grandfathered individual membership in transitional plans).

Reinsurance amounts decreasing - the reinsurance program goes from 2014-2016 but the amount of money available decreases each year - the impact of this will vary but can contribute ~3-6% of the rate increase.

Risk adjustment - this is the first filing where there is preliminary information on a full year of ACA data about the relative risk scores to the market and how the risk adjustment transfer formula may play out. In future years with more data this could become an even bigger factor as companies experiment with different strategies based on the risk adjustment models.

Adjustment to market strategies -  a rate increase calculation is also less meaningful when there are big changes to the entire portfolio of plans an insurer offers. There may be a rate increase calculated that appears high but doesn't account for a whole new lower cost network or type of plan being offered or realignment of geographic factors.

Expectations of availability of 2016 risk corridor funds should not be a significant factor - it seems unlikely that an insurer would be setting their 2016 rates expecting that risk corridors would "bail them out". Generally insurers will try to set rates at a level where risk corridors aren't projected to be a factor and in a competitive, price sensitive market not an overly conservative level either.

Initial filed rate increases are not final - Regulators are always going to push for lower rates so the initial filed rates may be negotiated down over the rate review process, as more data about 2015 experience becomes available, or as there are other regulatory changes.

Rebecca Stob ASA MAAA