Presenter: Darrell D. Knapp, FSA, MAAA

Valuation Boot Camp for Health ActuariesSESSION 2C

Darrell Knapp

November 3, 2015

Valuation Issues from ACA

• Premium stabilization programs• Transitional Reinsurance

• Risk Adjustment

• Risk Corridor

• Minimum medical loss ratio requirements• Commercial

• By state

• By individual, small group, large group

• Medicare Advantage• By contract

Transitional Reinsurance

• Starting in 2014, issuers offering products in the individual market can no longer deny coverage based on preexisting conditions

• Individual risk pool expected to include larger proportion of people with chronic conditions, which will result in increased incidence and large claims

• Intended to reduce premiums in the individual market due to pent up demand of the uninsured and unknowns concerning the individual marketplace under ACA

• Transitional—2014 through 2016 or when funding expires

• Funded by contributions on a per member basis from commercial insurance and self funded plans

Transitional Reinsurance cont’d

• Reinsurance claims based on individual claims between $45,000 and $250,000 for 2014 and 2015 and between $90,000 and $250,000 for 2016. Targeted reimbursement percentage was 80% for 2014 and is 50% for 2015 and 2016

• Reinsurance program applies to ACA individual business • Reinsurance payment notifications are to be made in

July of year following. Payments in 2014 were be subject to 7.3% reduction for sequestration which were to be released at beginning of next government fiscal year (October 1, 2015).

• CMS has indicated they will make an early partial payment in 2016.

Transitional Reinsurance cont’d

• Accounting for transitional reinsurance• Contributions to be accounted for as taxes/assessments

for small group, large group, self-funded and non-ACA individual.

• For ACA individual, reinsurance accounting applies• Contributions treated as reinsurance premiums (offset to

premiums) but need to split out portion of assessment going to treasury and count as taxes/assessments

• Payments treated as reinsurance claims (offset to claims)• Payment receivables should be recorded as either reinsurance

receivable or as offset to unpaid claim liability

• Magnitude of receivable is significant

Transitional Reinsurance cont’d

• 2014 hindsight• CMS will collect $9.7 billion out of $12 billion target

• Target was $10 billion to reinsurance pool and $2 billion to treasury

• Reinsurance pool is funded out of collections prior to payment to treasury so reinsurance pool was $9.7 billion

• $9.7 billion based on approximate 154 million assessed lives

• Total claims submitted were $7.9 billion• CMS reimbursement rate was raised to 100%

• At December 31, 2014, many carriers had recorded transitional reinsurance receivable at 80% reimbursement so very favorable development (about $2 billion for industry)

• No significant reduction in review of submitted claims

Transitional Reinsurance cont’d

• 2015 Outlook• CMS target collection is $6 billion for reinsurance pool

and $2 billion for treasury

• At contribution rate, would require about 182 million assessed lives but only need 136 million assessed lives to fund $6 billion reinsurance pool

• Reinsurance pool also carries over $1.8 billion not used from 2014

• Carriers have difficult issue on selecting reimbursement rate

Transitional Reinsurance cont’d

• 2015 Outlook cont’d• Considerations in reimbursement rate

• Pool size—CMS may change rules• Volume of submitted claims

• $7.9 billion in 2014• More covered member months in 2015

• Late enrollees in 2014 covered for full year in 2015• Some 2014 transitional policies changed to ACA in 2015

• Change in severity of claims and trends

• Need to have supportable analysis for selected reimbursement rate• Expect to see rates from 50% to ???• Estimate has gone from essentially an either/or decision in 2014

with a 125% range to a continuum with a 100% range

Risk Adjustment

• Designed to allow a health insurer to price and offer individual and small-group products without consideration of the underlying relative health status of individuals purchasing the products.

• Closed system at the state, market, and risk-pool levels• States can operate their own risk-adjustment program• Magnitude and direction of the risk-adjustment

settlement is dependent on the relative measured risk of the issuer’s enrollees compared to all enrollees in the market

• Risk adjustment applies to all ACA individual and small group business

Risk Adjustment cont’d

• Similar to risk-adjustment mechanism that has been in place in Medicare Advantage (MA), however, differences exist including:• MA risk adjustment is based on a retrospective model, in

which demographic and diagnosis information from the prior calendar year is used to develop risk scores in the current calendar year

• MA risk adjustment is performed as a single national program, instead of multiple programs based on state/market/risk pool combinations

• With many MA plans, the issuer expects to have a high level of stability in membership from year to year

• For the MA program, the majority of enrollees are administered by the federal government

• Data is distributed model instead of centralized model

Risk Adjustment cont’d

• Carriers will be notified of risk adjustment settlements in July of following year. Amount will be due in 30 days with payments to carriers presumably rapidly following receipts.

• 2014 payments were subject to 7.3% sequestration which will then be paid following end of government fiscal year (October)

• Concurrent claim based risk adjustment can have some incongruent behavioral incentives:• “Curing” people reduces income• Need to get people treated every year

Risk Adjustment cont’d

• Accounting for risk adjustment• Need to determine if estimable—may be different

accounting hurdles for receivable and payable

• Receivable is retrospective rating receivable

• Payable is experience rating liability

• Actuarial opinion scope?• Payable definitely with scope of actuarial opinion (on a specified

line)

• By extension, seems like receivable would be included as an actuarially determined receivable

Risk Adjustment cont’d

• 2014 hindsight• Risk adjustment was very difficult to estimate for 2014

• No knowledge of market risk score or average premium• Uncertainties around own risk score• Concern about how other pieces of formula may effect estimate

• Carriers used a variety of methods to estimate receivable payable• Consultant analysis (Wakely)• Other analysis—internal and external• Market control approach

• Challenge for auditors to get comfortable with ability to estimate

• Overall industry recorded about $400 million more receivables than payables

Risk Adjustment cont’d

• 2015 outlook• Similar uncertainties to 2014

• Know 2014 market average risk score and average premium but significant changes• Rate change activity and competitor changes

• Effect of short year enrollments in 2014—late enrollees and transition members

• Effect of short year enrollments in 2015

• Carriers indicating plans to use similar mechanisms as prior year and same challenges will exist

• May need to consider effect of insolvencies

Risk Corridor

• The risk-corridor program was designed to provide some aggregate protection against variability for issuers in the individual and small-group markets from 2014 through 2016

• The program pertains only to qualified health plans both on and off the exchange

• Risk-corridor calculation is to be performed at the plan level but allowable claim costs are to allocated from the state/market level

• Risk-corridor calculation is to be performed after considering any amounts transferred to or from the issuer as a result of the risk-adjustment and reinsurance programs

Risk Corridor cont’d

• Calculations may require some additional allocations to the state/market level that issuers are not currently performing

• Any accrual calculation is relatively complex needing to integrate with other items

• Calculation is not symmetrical—positive experience in one cell does not necessarily offset negative experience in another cell

• Risk corridors apply to qualified health plans (QHPs) in individual and small group market. QHPs would include plans on the exchanges and plans substantially similar to those on the exchanges

Risk Corridor cont’d

• Accounting for risk corridors• If calculated payable, recorded as experience rating refund

liability• If calculated receivable, need to first consider amount to be

ultimately collected and then record net amount.• Need to have good basis for estimation of original amount and

amount collectible.• If not estimable, record $0• Accountants may have different hurdles for estimability for

receivables and payables• Actuarial opinion scope?

• Payable definitely with scope of actuarial opinion (on a specified line)

• By extension, seems like receivable would be included as an actuarially determined receivable

Risk Corridor cont’d

• 2014 hindsight• Most carriers recorded less than calculated amount or $0 for

risk corridor receivable at December 31, 2014• Industry recorded receivables exceeded payables by nearly

$900 million• CMS recently stated total payables were $362 million and

calculated receivables were $2.9 billion• Since no outside funds available, CMS will pay 12.6% of receivables• Remaining funds from 2014 have first priority on 2015 and 2016

payables

• Actual experience somewhat less favorable than original calculation due to favorable transitional reinsurance development

Risk Corridor cont’d

• Pricing assumptions for small group block• Premium 100• Claims 78• Taxes/fees 6 w/ FIT rate of 25%• Administrative expenses 12• Profit 4

• If claims at expected, risk corridor target is 78

• If claims at 70, risk corridor target is 72 (100-8-20)

• If claims at 62, risk corridor target is 70 (100-10-20); pay 3.67

• If claims at 86, risk corridor target is 81 (100-4-15); collect 1.29

• If claims at 94, risk corridor target is 83 (100-2-15); collect 5.56

Risk Corridor cont’d

• 2015 outlook• If payable, need to record

• If receivable, carriers have two significant decisions for 2015 financial statements:• Amount of uncollected 2014 receivable to be collected from

2015 and 2016 payables

• Amount of 2015 receivable to be collected from 2015 and 2016 payables

• 2014 payable not necessarily a good proxy for future payables• Favorable development on reinsurance

• Pricing and experience changes

Minimum Medical Loss Ratio

• ACA created minimum medical loss ratio requirements• Individual, small group and large group by state• Medicare Advantage by contract

• Numerator includes:• Claims and capitations (adjusted)• Health care quality improvement expenses• Health information technology expenses• Fraud expenses (limited to amounts recovered)• Adjustment for experience rating refunds• Reduction for pharmacy rebates• Adjustment for premium stabilization programs

Minimum Medical Loss Ratio cont’d

• Denominator includes:• Premiums

• Adjustment for taxes/fees or charitable activities in lieu of taxes

• Adjustment for experience rating refunds

• Required loss ratio is 80% for individual and small group and 85% for large group and Medicare Advantage

Minimum Medical Loss Ratio cont’d

• Accounting for MLR• Treated as experience rating refund liability and within

scope of actuarial opinion

• Estimation difficulties due to granularity of calculation

• Since claims are based on runout, need to consider effect of any margins in claims

• Interim amounts recorded can be either year-to-date calculation or proration of expected annual payment

Conclusions

• Premium stabilization programs were very challenging for health actuaries in 2014 with significant restatements

• 2015 not expected to be much easier

• Significant unknown as retrospective audits of these programs are performed• Potential RADV type adjustments on risk adjustment

• MLR has had limited regulatory reviews without significant findings