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ACA risk adjustment eats 25 percent of Molina exchange revenue

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Executives at Molina Healthcare, a government plan issuer that still likes the Affordable Care Act, say the current ACA risk-adjustment program formula is terrible for issuers that sell coverage at a low price and do a good job of managing risk.

Because of the way the ACA risk-adjustment formula now works, the system took about 25 percent of the Long Beach, California-based carrier’s ACA exchange plan premium revenue and shifted the money to competitors, the company said when it announced its third-quarter earnings.

The ACA risk-adjustment program is supposed to help protect an individual or small-group major medical coverage issuer from absorbing more than its fair share of the risk in a market. The program uses health risk scores for the enrollees to move cash from plans with relatively low-risk enrollees to competitors with higher-risk enrollees.

Related: How sick is everyone? A vast PPACA tracking system takes shape

Molina Healthcare paid $254 million into the program for 2015 and estimates it may pay $372 million into the program this year.

The company as a whole, which focuses mainly on the Medicaid and Children’s Health Insurance Program markets, is reporting $42 million in net income for the third quarter on $4.5 billion in revenue, compared with $46 million in net income on $3.6 billion in revenue for the third quarter of 2015.

The company ended the quarter providing or administering medical coverage for 4.2 million people, up from 3.5 million people a year earlier.

Bad math

Dr. Joseph Mario Molina, the company’s chief executive officer, said he believes participating in the ACA exchange system, or “marketplace” system, is important to his company’s mission to help people receiving government assistance get health care.

“The marketplaces are generally performing well,” Molina said during a conference call with securities analysts.

Molina Healthcare now has about 550,000 exchange plan enrollees, up from 170,000 at the end of the third quarter of 2015, and the exchange system has helped the company diversify, Molina said.

Because the ACA risk-adjustment system is just starting up, “we should not be surprised that it needs fine-tuning,” Molina said.

But the current formula redistributes dollars more on the basis of total premiums than on the basis of health risk.

“Since premiums include medical and administrative costs, any transfer payment is based partly on non-medical costs captured in the statewide average premium,” Molina said.

Molina Healthcare has been on track to sell exchange coverage in more states in 2017, but, because of the risk-adjustment problems, “we may be forced to curtail our marketing in certain marketplace states,” Molina said.

Molina said he does not intend to terminate exchange operations in the problem states and still hopes to work with risk-adjustment program managers to resolve the problems.

The company is the second big exchange plan issuer of the week to report having serious problems with the ACA risk-adjustment program.

Mark Bertolini, the chairman of Hartford-based Aetna, said Thursday that he believes the ACA risk-adjustment program has the wrong centerpoint and is pushing good risks out of the market. He said the problems are causing a premium spiral, or self-perpetuating cycle of premium increases and market shrinkage. 


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