Obamacare's 'risk' program may shake up insurance prices

When this Obamacare bill comes due, will there be nearly enough money to pay it?

An important tool meant to limit the financial risk of Obamacare insurers is expected to be grossly underfunded and "may make the U.S. insurance market less stable, not more," a new analysis warns.

The amount of money that profitable insurers expect to pay into the program was less than an estimated 10 percent what is expected to be paid out to unprofitable insurers, the Standard & Poor's Ratings Services report found.

The analysis assumes Congress will continue mandating that the program must be self-sustaining from insurers' payments, and not tap government funds.

As a result, some insurers may have a tougher time covering their costs—and Obamacare customers in some areas of the country may face higher premium prices in 2016.

Health care senior
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"There's a lot of uncertainty, and unless there is clear guidance that comes out, pricing itself for the next year will be a little uncertain from both consumers' perspective and insurers' perspective," said credit analyst Deep Banerjee, one of the authors of the Standard & Poor's report.

That uncertainty relates to the Affordable Care Act's "risk corridor program," which was designed to have insurers share the financial risk of providing health benefits to customers of government-run Obamacare exchanges during the first three years of operation, from 2014 through 2016.

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Under the program, insurers that pay out significantly less in benefits to exchange customers than they collect in premiums will pay some money into the risk corridor. In turn, that money is supposed to be paid out in varying degrees to insurers who collected significantly less in premiums than the cost of providing benefits. Insurers whose losses and profits are not substantial neither pay into the risk corridor, nor get money from it.

Not enough money now, or possibly later

The Standard & Poor's report looked at insurers' financial statements and compared the total risk corridor receivables and payables they had booked.

"We estimate that the ACA risk corridor will not receive adequate monies from insurers with profitable exchange business to pay insurers that have unprofitable exchange business," it said.

The report did not identify the total amounts of receivables and payables disclosed, but Banerjee said the deficit would be in the range of several billion dollars.

The Centers for Medicare and Medicaid Services, which administers Obamacare, did not comment when asked about the report. Last year, CMS said that if there is a shortfall in the program, all payments for the current year would be reduced on a pro rata basis "to the extent of the shortfall."

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Standard & Poor's said that even if CMS then used risk corridor collections from 2015 to first cover the unpaid amounts in 2014, "we do not expect the individual exchange business in 2015 to be profitable enough to offset the deficit from the previous year."

The report notes that it may be possible for CMS to use excess funding from another Obamacare program, if any, to offset some of the deficit, but notes it is "more likely" that CMS will have to adjust the risk corridor scheme "to ensure budget neutrality."

Problem worse than estimated?

No money has yet been paid out under the program.

Banerjee said insurers with businesses that are well-diversified beyond the Obamacare exchanges will be able to easily handle not getting risk corridor payments to which they are entitled.

But for insurers that are heavily concentrated on the exchanges, "not getting the money they think they are supposed to get will have a much bigger impact," Banerjee said.

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A large number of insurers—more than half of the Obamacare exchange issuers—"were conservative" and did not record any risk corridor payments that they might be owed, the report found. "This indicates that the actual aggregate payments due to insurers from the corridor are likely even higher than what has been currently recorded."

If in fact there is a significant amount of receivables that are not being publicly disclosed, that means that the risk corridor program is even more underfunded than S&P estimated in its report, Banerjee said. That's because it's unlikely that insurers are understating the amount of money they have to pay into the risk corridor to nearly the same degree that the receivables are being understated, Banerjee said.

The report went on to argue that "insurers likely didn't record the receivables because they doubt they'll actually receive their eligible corridor payments."

Big exposure for some

In another potentially worrisome sign, a number of insurers had risk corridor receivables that exceeded 50 percent of their reported capital.

PreferredOne, based in Minnesota, booked risk corridor receivables that were 149 percent of the insurer's reported capital. A spokesman for the insurer said, "PreferredOne expects the federal government to meet its risk corridor obligation for all insurers who provided individual health coverage as required by the Affordable Care Act."

Kentucky Health Cooperative had the second-highest level of receivables as a percentage of capital—117 percent. A spokeswoman did not return a call seeking comment.

Oscar Health Insurance, which is based in New York and does business as well in New Jersey, had $15 million worth of receivables, which accounted for 57 percent of reported capital, according to the S&P report.

In a statement, an Oscar spokeswoman said, "Utilizing the latest available information that has been released on the statewide risk pool, Oscar expects its risk corridor receivable to be $9 million."

"The difference from the $15 million cited in Oscar's financial statements is driven by refined expectations of Oscar's relativity to the market risk pool, and not by expected funding issues of the risk corridor program. This number should be held against Oscar's total capital of over $250 million, as opposed to only its capital in New York."

The spokeswoman also said: "CMS has indicated that payments into the risk corridor program in 2015 and 2016 will be used to pay 2014 obligations if the program is underfunded. Reports and industry-internal discussions we follow indicate that insurers will be made whole for 2014 risk corridor receivables, although the precise timing of these payments is uncertain."

Other insurers with relatively high ratios of receivables to capital—Moda Health Plan of Oregon, Common Ground Healthcare and Health Republic Insurance of New York—either had no comment or did not respond to requests for comment.

Earlier this year, an Iowa-based insurer, CoOportunity Health, was taken over by government regulators after claims by customers outweighed its capital. CoOportunity Health had been reporting tens of millions of dollars of risk corridor payments as part of its capital.