At the end of September, CMS issued draft guidance on the treatment of risk corridors recovery payments in the medical loss ratio (MLR) and rebate calculations. The guidance follows a ruling by the US Supreme Court in April that the federal government owes health insurers more than $12 billion of risk corridors payments from 2014 through 2016. Comments on the proposed guidance are due Oct. 21.
The draft guidance from CMS asks health insurers that are due the 2014-16 payments to revise affected MLR reports to include these additional payments and to determine if they owe additional premium rebates to individuals or small group customers.
Health insurers that owe new premium rebates to members or small group customers would be required to submit revised MLR reports to CMS by Dec. 31 or within 60 days of receiving additional risk corridors payments from HHS, whichever is later. Health insurers also would be required to disburse additional rebates to individuals or small groups within 60 days of submitting their revised MLR reports to CMS.
The Affordable Care Act (ACA) established a federal risk corridors program intended to stabilize premiums in the individual and small group markets by limiting losses and gains for health insurers through transferring funds from lower-risk plans to higher-risk plans during the first three years—2014-16—of those markets.
In 2014, the payments due to health insurers exceeded the payments due from health insurers by roughly $2.5 billion, according to CMS. Risk corridors payments collected for 2015 and 2016 were applied toward the balances due to health insurers for 2014. The collections in 2015 and 2016 were insufficient to cover the balances owed to insurers for 2014, let alone 2015 or 2016. Appropriations bills passed by Congress in the exchanges’ early years prevented CMS from using other funds to make up the difference. The Supreme Court ruling from April requires the federal government to make up the difference of $12 billion owed to health insurers.
The ACA’s MLR standards require health insurers to spend a minimum percentage of premiums on healthcare or quality improvement: 80% for individual and small group plans and 85% for large group plans. Health insurers are required to report their MLR data to HHS annually. If plans do not meet these thresholds, insurers must issue rebates to customers. MLR rebates for a given year are calculated based on three years of financial data. For example, 2016 MLR rebates were calculated based on 2016, 2015 and 2014 data.
Risk corridors payments received by health insurers decrease the medical loss ratio and may trigger or increase rebates due to members. In the 2014 MLR reporting, CMS required health insurers to include the full risk corridors payment due to them, rather than the reduced, prorated amount they received. In the 2015 and 2016 MLR reporting, CMS instructed health insurers to include only the risk corridors payments received for 2014 and report $0 for 2015 and 2016.
Under the proposed guidance from CMS, all health insurers receiving additional risk corridors payments for any of the three years the program was active (2014-16) will have to revise at least two years of MLR forms to determine if they owe any additional rebates to customers. Health insurers receiving risk corridors payments for 2015 and 2016 will have to revise four years of MLR forms (2015-18).
Insurers that owe additional rebates to customers will have to manage the administrative burden of issuing these rebates. This includes making a good faith effort to locate members from as far back as 2015 who may no longer be a member of the plan and may have moved from the last known address.
Health insurers will also need to evaluate the impact of the additional risk corridors payments on risk-based and premium-based contracts. This could include third-party commercial reinsurance contracts and risk-bearing arrangements with providers.
While the proposed guidance creates some additional administrative burden for health insurers, the additional $12 billion will be welcomed by those insurers still in business. This money will add to insurers’ capital surplus.
Earnings and capital surplus have been on the rise during the pandemic as utilization and claims costs plummeted in the second quarter and have yet to return to expected levels. This has raised some concerns for MLR rebates in 2021 and the potential for increased regulatory scrutiny if risk-based capital ratios—the level of capital held compared to a minimum required capital measure—get too high.
Some payers are using capital to aid struggling providers, and others are taking advantage of relaxed guidance from CMS that allows them to reduce 2020 premiums for individual and small group plans. Some payers may also consider investing in strategic initiatives, such as partnering with providers to ensure that members get the care they need this year, rather than deferring it.