The Patient Protection and Affordable Care Act (PPACA) risk corridors program is supposed to act like a Robin Hood for exchange plan issuers.
PPACA calls for the program, one of the three new PPACA “three R’s” risk-management programs, to take money from exchange plan issuers that do well in 2014, 2015 and 2016 and give it to exchange plan issuers that do poorly in those years.
One immediate problem is that officials at the U.S. Department of Health and Human Services (HHS) fear the program may take in only enough cash from successful health insurers for 2014 to pay less than 13 percent of the risk corridors receivables of health insurers that did poorly that year.
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Scott Katterman, an actuary at Milliman, argues in a new commentary that’s now going viral that the risk corridors program faces another, longer-term problem: that the mechanisms governing how much some insurers pay into the program and how much other insurers can take out of the program will “tend to result in higher insurer receivables, compared to payables, due to an asymmetry in calculating the ‘target amount’ (or expected cost) for each insurer.”
The asymmetry increases the likelihood that the program would be facing a funding gap, “even if aggregate claim costs across the entire market had developed in line with the average expectation of all insurers,” Katterman writes.
An insurer that does poorly can base receivables calculations on the full difference between its actual profit and a target profit amount. The target amount is equal to 3 percent of after-tax premiums.
An insurer that does well, and will owe a receivable, simply includes profits between the 3 percent profit target and an amount equal to 20 percent of after-tax premiums.
In the long run, if the risk corridors program survives and the rules stay the same, the asymmetry of the rules “will continue to skew market results, tending to increase receivables compared to payables,” Katterman warns.
Insurers will have to take that built-in risk corridors funding gap into account when managing health insurance operations this year and next year, Katterman concludes.