Presenter: Darrell D. Knapp, FSA, MAAA

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Presenter:

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Valuation Boot Camp for

Health Actuaries

SESSION 2C

Darrell Knapp

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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

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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

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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.

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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References

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