On Wednesday the Centers for Medicare & Medicaid Services (CMS) announced an increase in the final coinsurance rate for the Transitional Reinsurance Program, from 80% to 100% for the 2014 benefit year. Jac Joubert, with Oliver Wyman’s actuarial practice, explains what this means for insurers:
The Transitional Reinsurance Program is a three-year program meant to offset some of the costs of insurers in the new Affordable Care Act-compliant individual market. The CMS announcement means that insurers providing ACA-compliant coverage in the individual market are now eligible to receive more of these reinsurance funds than had been originally outlined in the definition of the program. The change will likely lead to a windfall benefit for insurers in their 2015 income statements. The size of the impact will depend on several factors:
- Relative size. The comparative size of the ACA individual business as a share of all business written will make a difference. All else being equal, the ACA-created CO-OPs and some of the Blues plans may benefit disproportionately due to relatively larger exposure to this business.
- Actual observed plan experience. Clearly, issuers with more high-cost claimants would benefit more than those with proportionately fewer of these individuals. More generally, plans with very favorable or unfavorable 2014 experience may find that some of the windfall is offset by changes in risk corridor transfers or additional Medical Loss Ratio (MLR) payments due.
- Accounting decisions at year end 2014. Issuers that decided to be more conservative in their assumptions around reinsurance and/or risk corridor receivables at year end may see a larger income statement impact from the announced changes.
Potential impact. As an example of the potential impact, consider an issuer with 100,000 individual lives covered for an average of eight months at a $350 average monthly premium in 2014. Assume too that the issuer had booked a reinsurance receivables at 80% as at year end, booked no risk corridor at year end, and there were no potential for MLR or risk corridor payable amounts. Under a scenario where high cost claims represent 12.5% of premium then:
- At year end, using the 80% assumption the issuer would have expected to receive 80% x 12.5% = 10% of premium.
- With the CMS announcement, the reinsurance recoveries increase to 100% x 12.5%, or an increase of 2.5%. This effectively represents a reduction in MLR for this line of business for 2014 of 2.5%.
- In dollar terms, the issuer in this scenario would see an income statement impact of:
100,000 lives x $350 PMPM premium x 8 months x 2.5% = $7 million
Looking forward. While this is certainly positive news to issuers in this market segment, the impact beyond the immediate income statement benefit is likely to be limited. Leading issuers in the segment are increasingly looking beyond 2016 and focusing their attention on identifying and putting in place the solution set that can serve target population segments effectively, long after expiry of this program.