CMS risk-adjustment payment freeze to hit high-cost insurers hardest

The Trump administration's latest shock to the Obamacare system by freezing more than $10 billion in 2017 risk-adjustment transfers has even small companies that don't benefit from the program lambasting the CMS.

The risk-adjustment program has long divided insurers, as larger plans with more-sophisticated data teams and a longer history in the market have raked in more money to pay for their higher-cost patients. But even smaller carriers are framing the move as an eleventh-hour, arbitrary whiplash for the exchanges. Some analysts worry the move also signals a shift away from the Affordable Care Act's core tenet of guaranteed issue as it threatens a financial toll for insurers with older, sicker enrollees.

CMS Administrator Seema Verma hung the agency's controversial decision Saturday to suspend transfers on a federal court decision in New Mexico from February that sided with insurance co-op New Mexico Health Connections against HHS' risk-adjustment formula. Yet a separate, earlier decision in Massachusetts upheld the federal program.

Although small plans and co-ops—many of which failed and have shuttered—have complained that Obamacare risk adjustment skews in favor of more entrenched players, the feeling now is that the program freeze won't help anything.

"My belief here is that CMS is picking and choosing which court ruling to act on. It is very strange that administration would decide to freeze payment," said Sean Creighton, vice president of the Avalere consulting firm, "given that there are two opinions in different courts."

The agency had options, Creighton said. It could have asked the New Mexico court to stay the judgment pending clarification of the regulation, to apply the ruling only to New Mexico, or to take it to an appeals court.

"CMS' current course of action is hard to understand from either a legal or programmatic point of view," he said.

Michael Adelberg, a consultant with the Washington firm Faegre Baker Daniels, said that even if observers take the CMS justification of its decision at face value, the suddenness of the agency's announcement is problematic for everyone.

"This court decision came out in February," Adelberg said. "So HHS could have messaged this months ago, even as it filed motions in court to regain prerogative on the risk-adjustment transfers. It is confusing to announce this a week beyond HHS' own regulatory deadline, and the timing is unhelpful to all parties involved."

Ceci Connolly, president of the not-for-profit Alliance of Community Health Plans, which represents smaller carriers that largely lost rather than gained under the federal formula, said ultimately the timing hurts everyone as the calendar runs on toward 2019.

"If you are a smaller plan, you may not have squadrons of experts at your disposal to capture every bit of that risk," Connolly said. "So I understand why the New Mexico co-op filed the suit, and I would say that some of our small community health plans have probably been in similar circumstances over the past few years. But this is not the way to address those problems."

Greg Fann, a consulting actuary with Axene Health Partners and a fellow with the Society of Actuaries, urged a more tempered response to the freeze, comparing the action to President Donald Trump's cutoff last year of the cost-sharing reduction payments.

"I have been in the insurance industry for a long time, and I think that these catastrophic projections are overblown," Fann said. "I think it is very unlikely we go into 2019 with tremendous uncertainty in how risk adjustment gets applied. It won't get worked out this week. But I think and I hope that the final rates reflect the methodology, and I'll say this—this is an actuarial point—insurers can operate if they know what the rules are."

But Fann acknowledged that he has questions about the timing of the announcement and if there is a strategy behind it, noting that he does not know what the CMS was doing to react to the New Mexico case ahead of its missed June 30 deadline to release the 2017 risk-adjustment results.

Blue Cross and Blue Shield-branded plans—which are generally the last remaining major players in the individual market—are set to lose the most in the immediate future, analysts say. These plans have benefited the most from the transfers.

Some, like Connolly, attribute the Blues plans' risk-adjustment success to the data sets and reserves they have to devote to figuring out the formula. Others, like Creighton, say it's because these plans have higher-tiered plans and a broader risk pool—a fundamental of the methodology that Fann criticized as penalizing insurers with lower premiums and narrower networks.

"In general, it is fair to say that the transfers were leaning from bronze plans and low-cost silver plans to other plans—which makes sense," Creighton said. "I think honestly the program is working as intended, therefore plans that enroll more expensive enrollees will hurt the most from this."

The Blue Cross and Blue Shield Association was one of the first to come out swinging against the CMS announcement. The group's CEO, Scott Serota, in a statement praised the program's design to "keep costs down for consumers while meeting the medical needs of those requiring significant care."

"This action will significantly increase 2019 premiums for millions of individuals and small business owners and could result in far fewer health plan choices," Serota warned. "It will undermine Americans' access to affordable coverage, particularly those who need medical care the most."

While the CMS in its statement downplayed the freeze as pending a resolution between the Massachusetts and New Mexico court decisions, the timing of the announcement—several months after both rulings came down, and falling in the midst of plans' rate-setting season—has sparked dismay and undone good will that the agency has garnered with small plans through other tweaks to the program for next year.

"It's disheartening because the administration has had several options available to it along the way over the past several months," Connolly said. "In fact, its decision to make changes to the formula for 2019 demonstrates the administration understands some of the problems. But it could have challenged the rulings; it could have asked for the stay; it could have made administrative fixes over the past several months."

Connolly said that for insurance companies, the administration's actions since taking office undermine Verma's assurance over the weekend that the CMS wants to resolve the matter quickly and initiate the transfers.

"The behavior doesn't jibe with the statement this weekend, and we are wondering which statement to believe," Connolly said.

Now, insurers will watch what the CMS does next.

Creighton painted a dimmer picture for the key Obamacare idea of guaranteed issue as he placed the risk-adjustment move in the context of significant changes to the law made by the GOP-led Congress and the Trump administration.

"The bargain back in the day was that everybody gets to sign up, and for those who do you have guaranteed issue," Creighton said. "Now, already the administration has undermined the penalty and idea that everybody has to sign up."

The CMS announcement promised additional guidance on how the agency will manage appeals of 2017 risk-adjustment transfer amounts, rules for how carriers should treat risk-adjustment amounts when calculating medical loss ratios, as well as EDGE server data collection that is used to determine risk-adjustment transfers.

The big picture implication for Obamacare's individual market depends on whether the CMS reverts to the original formula, but it follows a series of significant changes and disappointments for ACA carriers that are reshaping the exchanges.

First, President Donald Trump halted cost-sharing reduction payments that insurers are mandated by law to pay out on behalf of their poor enrollees. In response, most states required carriers to load the cost of those payments into benchmark silver plans in order to increase subsidies and keep low-income people covered. As a result, the populations subsidized with advance premium tax credits have seen their premiums go down while the unsubsidized face higher prices than ever.

In June, a federal appeals court sided with the government against insurers who claimed they were owed billions in risk-corridor payments after Congress slapped a budget-neutrality requirement on the program through appropriations riders.

"None of the health plans want to go back to the bad old days, but the administration's action here is not helpful in that respect," Creighton said.