A CO-OP's failure could break New York state's risk-adjustment system.

(Bloomberg) — UnitedHealth Group Inc. (NYSE:UNH), the largest U.S. health insurer, said its rates for public exchange plans in New York state may be too low because the failure of a competing insurer last year might lead to shortfalls in payments to the state’s risk-adjustment program.

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Drafters of the Patient Protection and Affordable Care Act (PPACA) created the risk-adjustment program in an effort to stabilize the exchange markets, by having insurers with enrollees with low health risk scores send payments to insurers with enrollees with high risk scores.

UnitedHealth set its rates for New York state based on the assumption that the risk-adjustment program would help stabilize the market, William Golden, the company’s Northeast region chief executive officer, said Wednesday at a state Senate round table in Albany.

If the loss of a participant reduces the funds available to UnitedHealth through the risk-adjustment program, the company’s rates in New York’s PPACA market may be insufficient, Golden said.

“I have rates that are substantially too low based on risk-adjustment payments not being paid,” he said in the meeting.

Others in the state’s health insurance industry also criticized the state Department of Financial Services (DFS) rate-review process.

PPACA requires either a state or federal agencies to review all requests for major medical rate increases of 10 percent or more. PPACA does not give regulators the authority to deny or change rate applications, but some states, including New York, do let regulators change the requested rates.

Paul Macielak, who runs the New York Health Plan Association, said DFS let Health Republic Insurance of New York, one of the young Consumer Operated and Oriented Plan (CO-OP) carriers, charge too little for its plans.

“Prior approval is a failed state policy,” Macielak said. “As it currently exists, it provides the superintendent with unfettered discretion to set rates.”

Generous benefits

Health Republic was charging far less than insurer HealthNow New York Inc., even though its benefits were more generous, HealthNow CEO David Anderson said, adding that regulators should have realized that the company’s collapse was likely.

“To have rates lower and costs that were higher is not sustainable,” he said at the event. “I don’t think you need to be a Harvard MBA to see that that.”

See also: Empire State CO-OP courts brokers

Troy Oechsner, who helps oversee health insurers at DFS, said the regulator makes sure rates are sound and supported by actuarial calculations. He said actuaries from DFS and Milliman Inc. had examined Health Republic’s rates.

“We feel strongly that we did the right thing at the time, given the uncertainty of the market,” he said at the event.

Risk-adjustment program

UnitedHealth’s Golden said DFS should have approved higher rates for his plans, given that uncertainty. State regulators required that UnitedHealth’s New York rates take into account payments from the law’s risk-adjustment program, Golden said. The program redistributes funds from health insurers who have low-risk, low-cost patients, to those with less healthy, more expensive customers.

The stabilization payments were thrown into doubt after regulators began shutting down Health Republic Insurance of New York in September because it was likely to become financially insolvent. With its failure, Health Republic won’t be able to pay into the risk-adjustment program, reducing the funds available to UnitedHealth and other plans in the state.

“I would have loved to have sat in a room and said, ‘What’s your confidence level that these risk-adjustment payments would have been paid?’” Golden said. “If we would have had that opportunity in July and August, based on the information that Troy just talked about, he would have said, ‘We’re not as confident as we should be.’”

See also: Health rate filings crack open PPACA window

The PPACA risk-adjustment program is one of the three PPACA “three R’s” programs. The other two are a temporary reinsurance program, which collected enough cash to pay eligible insurers all that it owed them for 2014, and a temporary risk corridors program. Managers of the risk corridors program, which is supposed to use cash from thriving exchange plan issuers to help ailing issuers, may collect only enough cash from thriving issuers to pay 13 percent of what it owes ailing issuers for 2014.

See also: Feds: PPACA risk program may pay just 13% of 2014 claims

UnitedHealth fell 1.2 percent to $115.30 at 3:45 p.m. in New York. The stock gained 16 percent last year.

Lowered rate increase

UnitedHealth requested a 22 percent rate increase for individual PPACA exchange plans. Instead, state regulators allowed the company to boost rates by 1.65 percent. The company also sells business under the Oxford brand, which requested a 5.32 percent rate increase, and was forced instead to cut rates by 12.25 percent.

The company has said it should have stayed out of PPACA’s individual markets until they stabilized. In November, UnitedHealth said it would record hundreds of millions of dollars in losses related to the business.

“It was for us a bad decision,” CEO Stephen Hemsley said at a December investor meeting in New York. It’s not clear if the potential problems in New York are accounted for in the company’s previously announced anticipated losses.

See also:

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