Based on insurer estimates of payables and receivables, plus an uncertain funding limit, the risk corridor program can seem like it's actually making the new individual market more shaky.
Many insurers are expecting a small payout from the risk corridor program, but only a few think they'll have to pay in. According to Standard & Poor's, that seems to be the predicament mid-way through the life of the three-year risk corridor program, a part of the "3Rs" risk stabilization trifecta aimed at stabilizing losses from high claims.
Right now, the also-temporary reinsurance program "is perhaps the most predictable" of the 3Rs, said Deep Banerjee, an analyst at S&P's Ratings Services. The permanent risk adjustment system may be in-between, but the risk corridors is looking uncertain.
"If the 3Rs don't function in line with expectations, we believe premium costs for consumers will be more inconsistent and insurance companies will have more-volatile operating performance and potential capital strain," Banerjee wrote in a recent report.
There are a few reasons to be skeptical that the risk corridors will work as intended.
Banerjee and other S&P analysts expect the risk corridor pool to "be significantly underfunded if the government enforces budget neutrality," meaning that its available funding is solely from insurer contributions and not from other federal budget sources. (That possibility has led to the risk corridor's reputation as an "insurer bailout" among ACA critics.)
The Center for Medicare & Medicaid Services has yet to release data on the first year of the risk corridors, but Banerjee and colleagues estimate that the program does "not receive adequate monies from insurers with profitable exchange business to pay insurers that have unprofitable exchange business." CMS seems to acknowledge that potential as well, and has a contingency plan.
If there is a shortfall, CMS said in recent guidance, "all risk-corridor payments for the current year will be reduced pro rata to the extent of the shortfall." Then collections from 2015 would be used to cover unpaid amounts in 2014. The agency's idea is that the other two years of the program may bring excess collections, although Banerjee doesn't think the individual exchange business in 2015 will "be profitable enough" for that.
So far, the projections from insurers suggest that many are looking to collect a share of risk corridors. In an analysis of more than 300 insurer's financial statements, Banerjee and colleagues found that more than half of the companies selling public exchange plans didn't record any amount owed to the corridor program.
Expected receivables "insurers booked for the ACA corridor far outweigh the payables," Banerjee said. "In fact, our study indicates that the risk corridor payables are less than 10 percent of the receivables insurers reported in 2014."
What's more, there are insurers who may be eligible for payments, but chose conservative accounting and either didn't book receivables or only partially booked them. "This indicates that the actual aggregate payments due to insurers from the corridor are likely even higher than what has been currently recorded via receivables on their financial statements," Banerjee said.
The extent of the reliance on the risk corridors varies across insurers, and some may appear over-leveraged, as it were.
Health Care Services Corporation, the nation's fourth largest insurer with nonprofit Blues in Illinois, Texas and elsewhere, has the most exposure--expecting some $115 million to be owed, although that represents just 1 percent of its capital. Likewise, California-based for-profit Health Net is banking on $87 million, but that also is a small fraction (just five percent) of total capital.
Others, though, are expecting quite a bit. SelectHealth, the health plan of the nonprofit health system Intermountain Healthcare, is expecting $105 million, which is a not insignificant 24 percent of capital, according to S&P's review of financial data. Moda Health Plan, the nonprofit insurer serving Oregon, California and Alaska, is banking on $82 million--68 percent of its capital.
Then there are those whose receivables suggest a lot of high claims in 2014.
Kentucky Health Cooperative is projecting $76 million in risk corridor payments, representing 117 percent of its capital. PreferredOne, the provider-owned insurer that attracted the majority of Minnesota's exchange enrollment only to leave the public HIX market after one year, is banking on $72 million--or 149 percent of the health plan's capital.
Others with high receivables and little other non-exchange insurance business to help offset the uncertainty include another co-op, Common Ground Healthcare Cooperative of Wisconsin, and the for-profit New York City-based startup Oscar Health Insurance.
(Source: S&P analysis of NAIC and SEC data)