COVID-19 and MLR Guidance on Risk Corridor Recoveries: State Options for Restoring Funds to Policyholders and the Public
Sabrina Corlette, Georgetown University Center on Health Insurance Reforms and Jason Levitis, Levitis Strategies
In April 2020, the Supreme Court ruled that the federal government must restore to health insurers approximately $12.3 billion in risk corridor payments under the Affordable Care Act (ACA). On September 30, the Center for Consumer Information and Insurance Oversight (CCIIO) proposed instructions on how to allocate these risk corridor payments under the ACA’s medical loss ratio (MLR) formula. This guidance means that policyholders will receive an estimated 2.4 percent ($298 million) of the risk corridor payout in the form of MLR rebates. At the same time, 2020 has been a highly profitable year for many health insurers, due to depressed utilization of health care services during the COVID-19 pandemic. This post considers ways states could potentially redirect insurers’ extra cash to benefit policyholders and the public.
Background: Risk Corridors and the MLR
The risk corridor program, authorized under the ACA, was available for the first three years of the marketplaces (2014-2016), a period during which insurers and policymakers anticipated the greatest uncertainty for the individual market. As designed, insurers whose premium revenue, minus non-benefit costs, was insufficient to cover their claims were partially reimbursed for their losses. Insurers whose premium revenue, minus non-benefit costs, exceed their claims costs were required to pay the government a portion of the excess premium revenue. However, in a 2014 appropriations bill, Congress began requiring payments to be “budget neutral.” This meant that the federal government could only use risk corridor receipts to finance payments to insurers. Because aggregate insurer losses greatly exceeded profits in the first years of the ACA’s marketplaces, insurers ultimately received only 12.6 percent of what they were owed under the program. Insurers sued, and the Supreme Court found in their favor on April 27, 2020. The federal government has since begun to disburse the $12.3 billion in the risk corridor funds that insurers were supposed to receive for plan years 2014, 2015, and 2016.
The ACA’ MLR provision requires insurers in the individual and employer group markets to issue rebates to policyholders if more than a threshold amount of premium revenue is devoted to overhead, marketing, and profit. In the individual market, insurers must spend at least 80 percent of premium revenue (minus government taxes and fees) on reimbursement of clinical services and activities to improve health care quality. CCIIO determines the amount that must be rebated to policyholders based on a 3-year rolling average. Thus, for example, rebates issued to a policyholder in 2020 are based on the insurer’s performance in 2017, 2018, and 2019. Because individual market insurers have been generally profitable since 2018, insurers are projected to send $1.97 billion in rebate checks to policyholders this year, the largest amount yet.
The Impact of CCIIO’s Risk Corridor/MLR Guidance: Rebates and Premium Tax Credits
Minimal, if any MLR Rebates for Policyholders
Given large insurer profits and widespread MLR rebates in recent years, the lion’s share of any additional insurer revenue in 2020 or 2021 would normally be returned to policyholders through MLR rebates. But CCIIO’s September 30 proposed guidance instead allows insurers to keep all but a tiny fraction of the risk corridor payments required by the Supreme Court. Specifically, the guidance instructs insurers to treat the risk corridor revenue they are receiving in 2020 (and potentially in 2021) as if they received it in the year it was supposed to have been received, for purposes of the MLR rebate calculation. In other words, insurers should revise their MLR financial reports for 2015-2018 to include full risk corridor payments. The actuarial firm Wakely estimates that, under this approach, policyholders will receive only 2.4 percent of the $12.3 billion in additional MLR rebates for those years. The reason for this low rate is that MLR rebates are generally triggered by excessive profits, while risk corridor payments to insurers were triggered by being unprofitable, and many insurers were unprofitable between 2014 and 2016.
Beyond backdating the risk corridor recovery for MLR purposes, the CCIIO guidance reduces the chance policyholders will receive rebates in two additional ways. First, insurers who revise their financial statements for 2015-2018 and conclude they do not owe any additional MLR rebates will not have to submit any data to CCIIO to verify this finding. CCIIO apparently trusts that insurers will universally make an accurate assessment of their rebate liability. Second, if insurers do conclude that they owe rebates, they need only make a “good faith” effort to locate past enrollees. Given the transitional nature of the individual market and the passage of several years, it is likely that many affected policyholders are no longer enrolled. Nothing in this guidance requires insurers to send notices to their last known address or undertake more than a minimal effort to deliver the rebates to which they are entitled.
In short, the proposed guidance greatly reduces the amount insurers owe in MLR rebates and also reduces the likelihood that amounts owed are actually paid. In doing so, it effectively deactivates the normal mechanism for returning windfall profits to consumers.
It is also important to note that insurers have largely recovered from their early-year financial losses – mostly through significant premium rate hikes. On average insurers raised premiums 22 percent in 2017 and 37 percent in 2018. These premium hikes directly affected unsubsidized enrollees, leading to a 45 percent decline in their enrollment and likely contributing to the recent rise in the rate of uninsured. Meanwhile, 2020 has been a banner year for health insurers, thanks to many enrollees delaying or forgoing elective care due to the COVID-19 pandemic.
The Risk Corridor “Windfall” and Options for States
States may have a number of options to ensure that insurers’ extra revenue is deployed to help policyholders or achieve broader public objectives, such as efforts to combat the COVID-19 pandemic.
Use a state rebate program. A state could require insurers to return a portion of their risk corridor receipts back to policyholders, either current or former, via a state-defined rebate. However, rebate programs can require state investments in administration and can be imperfect mechanisms for ensuring that rebates go to those most harmed by past excessive premiums. For states that have their own existing MLR rebate programs, it may be necessary to amend regulations or guidance to ensure that insurers count the risk corridor recovery for the MLR calculation in the year it is received.
One–time assessment to fund COVID-19 relief or other public priorities. In the absence of Congressional action on COVID-19 relief, states could tap insurers to support public health efforts. For example, insurers could be a revenue source to help finance widespread, frequent testing of vulnerable populations and workers. States could focus such an assessment narrowly on the risk corridor recovery or could look more broadly at excess profits related to COVID-19. The design of such assessment may need to take into account that some insurers previously sold off their right to risk corridor payments to third parties, so they benefited earlier but may not receive additional revenue now. Depending on specific state conditions and insurer practices, key design issues include:
- How to account for sale of recovery rights in measuring risk corridor awards. These options could be used in combination with those further below to protect insurers that may have sold their risk corridor recovery rights.
- Assess the entire award regardless of recovery-right sales. This has the potential to raise the largest amount of revenue but would provide the least protection to insurers that sold recovery rights.
- Assess each insurer’s actual new recovery of risk corridor payments, not including amounts sold to third parties. This would raise less revenue but provide the greatest protection to insurers that sold recovery rights. It could be seen as unfair since these insurers benefited earlier from selling their rights, though these insurers may have raised their premiums less as a result.
- Assess each insurer’s actual revenue due to unpaid risk corridor payments – including any new recovery and any proceeds from selling recovery rights. A middle ground between the prior two options, this would avoid exempting insurers that sold recovery rights but still offer them some measure of protection.
Especially under the first option above, states may wish to include additional measures to protect carriers, especially those that may have sold their recovery rights, such as:
- Assessment rate. To create greater parity among insurers while also softening the blow on those that sold recovery rights, states could collect only a portion (e.g., 50 percent) of the risk corridor award.
- Tying assessment to MLR. To ensure that an assessment accounts for insurers’ overall financial health, states could peg it to overall excess revenue in 2020. Excess revenue would be measured using an MLR concept, but including the risk corridor recovery in 2020 revenue. Insurers who receive the full risk corridor payment would likely have a lower MLR than those who sold their rights to a third party. This approach also accounts for differences among insurers with respect to service utilization during the COVID-19 pandemic. This approach could be combined with those above – for example, basing the assessment on the full recovery award but capping it based on the MLR – or it could be the sole basis for the assessment.
- Insurance regulator discretion. States could assuage concerns about assessments being unaffordable for insurers by giving insurance regulators discretion to reduce an assessment that would endanger solvency.
Any assessment would likely require legislative authorization, and the state DOI would need to ensure that insurers do not pass on the assessment to policyholders through higher premiums.
Some states may find an assessment infeasible, but can pursue additional ways to return insurers’ windfall to policyholders. These could include:
Require profitability adjustments. In 2017, Covered California notified participating insurers that the marketplace will, in future years, take back via lower premiums any excess profits insurers received due to “shifts in federal policy and other uncertainties.” Other states without California’s active purchasing approach could similarly use their rate review authority to require insurers to parlay risk corridor repayments and COVID-19 savings into reduced rates or benefit enhancements for consumers in future years. (Ambien) At a minimum, any insurer’s request for a profit margin or contribution to surplus for 2022 should be examined with a critical eye.
Encourage voluntary premium holidays. States could encourage insurers to voluntarily provide premium holidays for enrollees. Even before the risk corridor award, many issuers were providing such rebates given unusually low utilization due to COVID-19. Under CMS guidance released August 4, 2020, the window has closed for insurers to provide such rebates in 2020, but CMS may again permit them in 2021.
State-level oversight of federal rebates. In addition to the measures noted above, states may want to help ensure that their residents actually receive the federal MLR rebates that are owed under the CCIIO policy. While CCIIO is not requiring insurers to submit revised financial reports for 2015-18 if they determine they do not owe rebates, state insurance regulators could impose such a requirement. This would enable an independent assessment of what insurers owe to past policyholders in MLR rebates. Additionally, states could set specific standards for what constitutes a “good faith” effort to locate past policyholders and ensure they receive the rebates to which they may be entitled.
MLR Rebates and Premium Tax Credits
The prospect of MLR rebates resulting from risk corridor recoveries has renewed questions about how MLR rebates are taken into account for the premium tax credit (PTC). Fortunately it appears the answer continues to be straightforward and taxpayer-friendly. As explained in an IRS FAQ (#15), taxpayers who claim PTC for a year and then receive an MLR rebate for that year are not required to account for the rebate in any way. The FAQ indicates that the IRS is considering whether to start requiring PTC recipients to account for MLR rebates in some way, but it notes that any such requirement would apply only to future years. As a result, MLR rebates paid out in 2020, as required under the proposed guidance, should not have any PTC impact.