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27 PD Transitional Reinsurance and Risk Corridors: Will you be ready to work without a net in
2017?
Presenters:
Travis Jay Gray, ASA, MAAA
Maria Lynn Leth, ASA, MAAA
RISK CORRIDORS
Past. Present. Future.
Presented by: T.J. Gray, ASA, MAAA
June 23, 2014
0
Caveats
The information presented represents my best understanding of the
provisions discussed as of the presentation date of this webinar based on
regulations currently available. All information is subject to change.
I intend to facilitate discussion surrounding the implementation of the risk
corridors provision. Each organization should consider the implications of
this provision internally and consult with legal counsel where necessary.
Milliman does not intend to create a legal duty to any user of this work.
This presentation represents the opinions of the presenter and not
necessarily Milliman as a whole.
1
2
Risk Corridors: Overview
3
Eligible Participants: QHPs
4
5
Risk Corridor Calculation Example
Premium
Allowable Claims
Non-Claims Costs
Taxes and Fees
Administrative Costs
After-Tax Premium
Allowable Profits
Allowable Admin Costs
Target Amount
Risk Corridor Ratio
Risk Corridor Receipt (Payment)
Profit Capped?
Admin Capped?
MLR
Profit Margin pre-RC
Profit Margin post-RC
6
$457.89
$385.00
$85.00
$25.00
$60.00
$432.89
?
?
?
?
?
?
?
84.1%
-2.6%
?
Polling Slide
1. No Risk Corridor parameters will
be invoked, resulting in a Risk
Corridor factor of 1.0 and a $0
Risk Corridor transfer.
2. Risk Corridor parameters will be
invoked, resulting in a Risk
Corridor factor less than 1.0 and
a Risk Corridor payment by the
insurer.
3. Risk Corridor parameters will be
invoked, resulting in a Risk
Corridor factor greater than 1.0
and a Risk Corridor receipt by
the insurer.
7
48%
34%
18%
1
2
3
Risk Corridor Calculation Solution
8
Side by Side Comparison
Priced Correctly Priced High
Pricing Error
0%
10%
Premium Charged
$457.89
$503.68
Allowable Costs
$350.00
$350.00
Non-Claims Cost
$85.00
$85.00
Fees/Taxes
$25.00
$25.00
Administrative Costs
$60.00
$60.00
Priced Profit Margin
5.0%
5.0%
After-Tax Premiums Earned
$432.89
$478.68
Profits
$22.89
$68.68
Allowable Admin Costs
$107.89
$120.74
Target Amount
$350.00
$382.95
Risk Corridors Ratio
100.0%
91.4%
RC Receipt (Payment)
$0.00
-$11.42
Profit Margin pre-RC
Profit Margin post-RC
9
5.0%
5.0%
13.6%
11.4%
Priced Low
-10%
$412.11
$350.00
$85.00
$25.00
$60.00
5.0%
$387.11
$11.61
$96.61
$315.49
110.9%
$15.30
-5.6%
-1.8%
High Admin Low Admin
0%
0%
$526.32
$421.05
$350.00
$350.00
$150.00
$50.00
$25.00
$25.00
$125.00
$25.00
5.0%
5.0%
$501.32
$396.05
$26.32
$21.05
$125.26
$71.05
$401.05
$350.00
87.3%
100.0%
-$25.20
$0.00
5.0%
0.2%
5.0%
5.0%
Transitional Policies
10
What is a model plan?
Model Plan:
– Allowable costs at 80% of premiums
– Federal income taxes at 35% of pre-tax profits
– Other taxes at 7.5% of premiums
– Other administrative costs at 8% of premiums
11
2015 Changes
12
2015 Changes
Premium
Allowable Claims
Non-Claims Costs
Taxes and Fees
Administrative Costs
After-Tax Premium
[A]
[B]
[C] (includes [D] & [E] below)
[D]
[E]
[F] = [A] - [D]
Allowable Profits
Allowable Admin Costs
Target Amount
Risk Corridor Ratio
Risk Corridor Receipt (Payment)
[G] = MAX(5% * [F] , [A] - [B] -[C])
[H] = MIN(22% * [F] , [D] + [G]) + [E]
[I] = [A] - [H]
[J] = [B] / [I]
[K]
Profit Floored?
Admin Capped?
MLR
Profit Margin pre-RC
Profit Margin post-RC
13
= [A] / [B]
= ([A]-[B]-[C]) / [A]
= ([A] - [B] - [C] + [K]) / [A]
$443.88
$350.00
$85.00
$25.00
$60.00
$418.88
$20.94
$105.94
$337.93
103.6%
$0.96
YES
NO
78.9%
2.0%
2.2%
14
Polling Slide
1. As it stands, more money will be
paid into the Risk Corridor
Program than is due to be paid
out to insurers
2. As it stands, the amount paid into
the Risk Corridor Program will be
about equal to what is due to be
paid out to insurers
3. As it stands, the amount paid into
the Risk Corridor Program will be
insufficient to cover what is due
to be paid out to insurers
74%
16%
1
15
10%
2
3
 If the amount of issuer payments exceeds the amount of issuer
requests, then any remaining monies would be first applied
towards prior year risk corridors obligations (if there are any),
and then held to apply towards the following year’s risk corridors
program.
 If the amount of issuer requests exceeds the amount of issuer
payments, then all requests would be funded on a pro rata
basis. For instance, if total issuer requests equaled $800
million, and total issuer payments equaled $400 million, then all
requests would be paid at 50% value.
16
Impact of Transitional Reinsurance
Original Reinsurance Parameters
Adjusted Reinsurance Parameters
Premium
Allowable Claims
Non-Claims Costs
Taxes and Fees
Administrative Costs
After-Tax Premium
$457.89
$385.00
$85.00
$25.00
$60.00
$432.89
$457.89
$373.77
$85.00
$25.00
$60.00
$432.89
Allowable Profits
Allowable Admin Costs
Target Amount
Risk Corridor Ratio
Risk Corridor Receipt (Payment)
$12.99
$97.99
$359.91
107.0%
$7.15
$12.99
$97.99
$359.91
103.9%
$1.53
YES
NO
84.1%
-2.6%
-1.1%
YES
NO
81.6%
-0.2%
0.1%
Illustrative Impact of Changing
Reinsurance Parameters (2014)
Profit Floored?
Admin Capped?
MLR
Profit Margin pre-RC
Profit Margin post-RC
17
“In the unlikely event of a shortfall for
the 2015 program year, HHS
recognizes that the Affordable Care
Act requires the Secretary to make full
payments to issuers. In that event,
HHS will use other sources of funding
for the risk corridors payments,
subject to the availability of
appropriations.”
18
19
2017
What happens when
net is removed?
20
Transitional Reinsurance
and Risk Corridors:
Will you be ready to work
without a net in 2017?
Who is your current employer?
A. Insurance
Company
B. Consulting
Company
C. Regulatory Agency
D. Other
65%
23%
3%
A.
2
B.
C.
8%
D.
How well do you know the 3Rs?
A. Expert
B. Proficient
C. Familiar
D. What are the 3Rs?
49%
33%
16%
2%
A.
3
B.
C.
D.
Transitional Reinsurance
Maria Leth, ASA, MAAA
Medica
Agenda
Transitional Reinsurance
1. Overview
2. Interaction with Risk Adjustment
3. Impact of Regulatory changes
4. What to expect in 2015-2016
5
1. Overview
• Transitional Reinsurance
• Temporary Program: 2014-2016
• Contributions come from all health insurance
issuers and self-insured group health plans.
• Payments go to issuers participating in the
individual market.
6
1. Overview - Contributions
Transitional Reinsurance Schedule
$14b
$12b
$10b
$2b
$8b
$2b
$6b
$4b
$10b
$1b
$6b
$2b
$4b
$0b
2014
2015
To Pool
To Treasury
• National Contribution Rate
• $5.25 pmpm in 2014
• $3.67 pmpm in 2015
• $2.50 pmpm in 2016 (estimated)
7
2016
1. Overview - Payments
• Reinsurance Payment Parameters
Benefit Year
Attachment Point
Reinsurance Coinsurance Cap
Rate
2014 [1]
$60,000
$250,000
80%
2015 [2]
$70,000
$250,000
50%
[1] Provided in the final 2014 Notice of Benefit and Payment Parameters,
released in March 2013
[2] Provided in the final 2015 Notice of Benefit and Payment Parameters,
released in March 2014
8
What is the impact on Premium?
A. <5%
B. 5-10%
C. 10-15%
D. 15%+
44%
34%
19%
3%
A.
9
B.
C.
D.
1. Overview – Premium Impact
• Example (2014)
Reinsurance
$21.20
Net Claim Cost
$265.00
Premium
$331.25
Percent
8.0%
6.4%
Based on the original parameters, the individual market
could lower premiums by approximately 6.4% (with the
above assumptions)
10
2. Interaction with Risk Adjustment
• The risk adjustment transfer formula does
not account for any reinsurance payments;
therefore, for benefit years 2014-2016
issuers who attract less healthy members
get “double” credit:
• Higher risk score in the risk adjustment
transfer calculation, and
• Higher reinsurance payments
11
2. Interaction with Risk Adjustment
Examples
12
Example #1
•
•
•
•
•
•
13
Member: Matt
Metal Level: Gold (80% plan coverage)
50 year old Male
Condition: Diabetes without complication
Treatment: insulin, diet and exercise
2014 net claim cost = $2,000
Example #1
• Reinsurance Payment =
• ($2,000 - $60,000) x 0.8 = $0
• Risk Adjustment Score =
•
•
•
•
14
Demographic Factor: 0.626
HCC 21 (Diabetes w/o Complication): 0.000
G01 HCC Group: 1.199
Risk Score = 0.626 + 1.199 = 1.825
Example #2
•
•
•
•
•
•
15
Member: John
Metal Level: Gold (80% plan coverage)
50 year old Male
Condition: Hepatitis C
Treatment: new drug Sovaldi (3 months)
2014 net claim cost = $100,000
Example #2
• Reinsurance Payment =
• ($100,000 - $60,000) x 0.8 = $32,000
• Risk Adjustment Score =
• Demographic Factor: 0.626
• HCC 37 (Chronic Hepatitis): 1.228
• Risk Score = 0.626 + 1.228 = 1.854
• Note: the data used to calibrate the risk adjustment
model is the 2010 MarketScan database (2009 and
2010 data from employers and health plans), prior to
this treatment option being available.
16
3. Impact of Regulatory Changes
17
3. Impact of Regulatory Changes
• Reinsurance Payment Parameters
Benefit Year
Attachment Point
Reinsurance Coinsurance Cap
Rate
2014 [1]
$45,000
$250,000
80%+
2015 [2]
$70,000
$250,000
50%
[1] Provided in the final 2015 Notice of Benefit and Payment Parameters,
released in March 2014
[2] Provided in the final 2015 Notice of Benefit and Payment Parameters,
released in March 2014
18
3. Impact on 2014 Premium
• Example (2014)
Reinsurance
$28.62
Net Claim Cost
$265.00
Premium
$331.25
Percent
10.8%
8.6%
Based on the revised parameters, the individual market could
have lowered premiums by approximately 8.6% (with the above
assumptions)
• The impact on premium could be as high as 11% if the
coinsurance rate is increased to 100%.
19
4. What to expect in 2015-2016
• The intent of the transitional reinsurance
program is to help stabilize premium in the
“new world” individual market. How much
is it helping?
• In our 2014 example, reinsurance dampened
rates by 6.4% (original payment parameters)
• In 2015, the impact could drop by 3-5% with
the new payment parameters ($70k & 50%)
• Premiums will therefore need to increase by 3-5%
20
4. What to expect in 2015-2016
• Reinsurance Payment Parameters
Benefit Year
Attachment Point
Reinsurance Coinsurance Cap
Rate
2014 [1]
$45,000
$250,000
80%+
2015 [2]
$45,000
$250,000
50%+
[1] Provided in the final 2015 Notice of Benefit and Payment Parameters,
released in March 2014
[2] Provided in the final Exchange and Insurance Market Standards for 2015
and Beyond, released in May 2014 (intend to change in the 2016 Payment
Notice)
21
4. What to expect in 2015-2016
• What is known?
• 2014 payment parameters*
• Coinsurance Rate to be finalized in 2015
• Reinsurance contributions are due in Jan 2015
• Issuers will be able to calculate their own reinsurance
payments by early 2015
• 2016 Rate Filings due in Jun 2015
• HHS will notify issuers of their pending reinsurance
payments in Jun 2015
• Excluding the amount withheld for sequestration
• Amount held for sequestration paid in Oct 2015
• US Treasury contributions are due in Q4 2015
22
4. What to expect in 2015-2016
• What is unknown?
• Will the payments be funded at 100%?
• A bigger concern prior to transitional policies
• When will the 2015 parameters be finalized?
• What will the 2016 parameters be?
• Will the final parameters be in the 2016 Payment Notice?
• Will the end date for transitional policies change?
• Currently through renewals effective October 1, 2016
(hinted at extending another year)
23
Conclusion
24

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