UPDATED: Connecticut Co-Op latest to bite the dust; the culprit this time: Risk Adjustment?

OK, this blows. Last year, you'll recall that about a dozen of two dozen ACA-created Co-Ops melted down, one after another, throughout August, September and October. There were a lot of reasons behind their failure, but one of the biggest ones had to do with the infamous Risk Corridor Massacre brouhaha.

As I noted last fall, "Risk Corridors" were one of three programs put into place by the federal government which are intended to smooth the way for the insurance carriers as they try to navigate the rocky, uncertain terrain of the new health insurance landscape under the ACA. Two of the programs--Risk Corridors and Reinsurance--were never intended to last more than the first 3 years of the exchanges anyway (that is, they've always been scheduled to be discontinued at the end of 2016). Unfortunately, due to the GOP yanking the rug out from under the Risk Corridor program, only 13% of the money which was supposed to be paid out to the eligible carriers ever was last year, causing several co-ops (and at least one private carrier) to go belly-up...and leaving many of the remaining co-ops on very shaky financial ground.

The third program, "Risk Adjustment", is permanent. Risk Corridors were set up to shift funds from carriers which lost more than a certain amount of money from carriers which earned more than a certain amount of money. Risk Adjustment, on the other hand, is designed to shift funds from carriers which happened to enroll lower-risk enrollees to those which enrolled higher-risk enrollees. This may sound similar on the surface, and I'm assuming there's quite a bit of overlap between the two in practice, but that's an important distinction.

As Richard Mayhew noted a few days ago over at Balloon Juice:

Experienced insurers know how to optimize their risk scores while inexperienced insurers are still groping forward with limited data. 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.

We’ll talk through an couple of examples of how the system is worked.

He goes on to provide a couple of nice case studies to demonstrate how a more experienced insurance carrier with lots of historic patient data to work with can effectively "work the system" in a perfectly legal manner, by making seemingly lower-risk patients seem to be much higher risk than they might otherwise appear to be (or, presumably, vice-versa). Since established carriers obviously have a lot more data, personnel, etc. to work with than the brand-new startups, they have a huge sitting advantage on this front. The whole point of the RA program was to try and make sure that the Little Guys didn't get stuck holding the bag...yet the irony is that it now appears that many of them are the ones who'll end up having to pay out to the big, established guys who outhustled them on the Risk Adjustment front. Ouch.

Anyway, these chickens now appear to be coming home to roost...with the first casualty apparently being HealthyCT, the Connecticut-based Co-Op:

Insurance Department Places HealthyCT Under Order of Supervision
Moves Immediately to Safeguard CO-OP’s 40,000 Policyholders

Insurance Commissioner Katharine L. Wade announced today that based on hazardous financial standing, the Department has placed HealthyCT, a Consumer Oriented and Operated Plan (CO-OP), under an immediate order of supervision, which prohibits the company from writing new business or renewing existing business in Connecticut effective immediately in order to protect its existing policyholders.

“This is not an action that we take lightly but did so in order to immediately protect the company’s 40,000 policyholders in Connecticut and make certain that their claims will be paid under the terms of their policies and for the duration of those policies,” Commissioner Wade said. “As regulators, consumer protection is our prime mission and an essential part of that is ensuring that carriers can honor their promises to their policyholders.

“Unfortunately HealthyCT’s financial health is unstable, having been seriously jeopardized by a federal requirement issued June 30, 2016 that it pay $13.4 million to the U.S. Department of Health and Human Services, Centers for Medicare & Medicaid Services as part of the Affordable Care Act’s Risk Adjustment Program,” the Commissioner said. “As a result, it became evident that this risk adjustment mandate would put the company under significant financial strain. This order of supervision provides for an orderly run-off of the company’s claim payment under close regulatory oversight.”

Since HealthyCT’s inception, the Department has met monthly with the company to monitor its financial solvency, its business plan and operations. Prior to the CMS Risk Adjustment Report on June 30, the company had adequate capital and sustainable liquidity.

What this means to policyholders:

  • Individual policyholders (13,000 members)

All Individual plan members will be fully covered through the end of the 2016 plan year which ends December 31, 2016 and all claims incurred during the 2016 calendar year will be paid under the terms of the policy.

During open enrollment for the 2017 plan year, which runs from November 1 through December 31, 2016, individual plan members must choose a different carrier because HealthyCT plans will no longer be offered.

One side-note: The official number of lives covered by currently-effectuated individual policies under HealthyCT was reported as exactly 16,274 at the beginning of June...yet today's press release lists the figure as only 13,000. In a sense this is good, because it means that 20% fewer people are impacted, but it also speaks to how difficult it is to keep track of just how many people are actively enrolled in a given type of policy at a given point in time.

  • Large and small employer plans (27,000 members)

HealthyCT cannot write new business or renew existing business effective August 1, 2016.

HealthyCT group plans that renewed on July 1, 2016 will still have coverage through June 30, 2017 with HealthyCT.

Group plans that come up for renewal on August 1, 2016 and beyond must move to a new carrier at renewal.

Again, the official report from the CT Dept. of Insurance last month was only 12,506...yet here it's more than double that number. I havent' a clue what accounts for this massive discrepancy.

UPDATE: Thanks to CNBC's Dan Mangan for pointing out that the 27K figure includes large group enrollees as well as small group. I didn't think the co-ops were even allowed to sell large group, but apparently they are; it specifically says "large and small employer plans", so there you go.

The Department will work closely with HealthyCT, the state exchange Access Health CT, the broker community and other carriers to help large and small employers find new coverage when it comes time for them to renew their plan annually.

HealthyCT was formed in 2011 as a non-profit entity in Connecticut with the intent to participate in the Connecticut health care market as a CO-OP under the federal Affordable Care Act (ACA). Under the ACA, the federal risk adjustment program is intended to spread the risk for carriers participating in ACA exchanges by redistributing funds from insurers with generally healthier policyholders to companies with sicker policyholders and higher claims costs.

When paired with a previous federal decision to withhold payments to companies under a related program known as the “risk corridor,” this created a level of financial stress which necessitated the Commissioner’s order. Commissioner Wade, Department staff and several other state insurance regulators have expressed concern to federal authorities over the risk adjustment formula and its potential damaging effects on the market, particularly its impact on small insurers like HealthyCT. The Commissioner personally met with HHS Secretary Sylvia Burwell earlier this year to urge for change to the risk adjustment formula.

“We have been exceptionally proud of our efforts here at HealthyCT and our staff has worked tremendously hard to serve our policyholders,” HealthyCT CEO Kenneth Lalime said. “We are grateful for the strong stewardship of the Connecticut Insurance Department whose professional staff have helped guide us through the entire process from our formation. I want to assure our policyholders that they are covered through the end of their policy periods.”

UPDATE 7/6/16: According to this press release from AccessHealthCT, there are exactly 11,299 HealthyCT members enrolled via the exchange itself. That suggests that there's only around 1,700 off-exchange individual enrollees (plus the 27K off-exchange small group enrollees).