Medical loss ratios after reinsurance, risk corridors and risk adjustment

Donna Novak describes her understanding of new HHS standards.

By Donna Novak, President & CEO, NovaRest Inc.

DonnaNovak After reviewing the new HHS Standards Related to Reinsurance, Risk Corridors and Risk Adjustment, I am noticing the interaction of these issues with the medical loss ratio (MLR) refund regulations. Each one impacts the MLR formula and therefore the possibility of whether or not having to pay a refund or not. I participated in an SOA webcast last April that addressed the actuarial estimate of the MLR refund liability. I am now identifying that issues associated with determination of liabilities associated with MLR (and potential rebates) are going to be complicated by the presence of the need to estimate additional assets and/or liabilities attributable to the various risk mitigation programs incorporated into ACA after January 2014. I will briefly describe my understanding of the new standards. First, I should note that there are more issues yet to be resolved and that many of the parameters that will be part of our estimates are yet to be determined.


The Transitional Reinsurance Program will be administered by the states or by HHS on behalf of the states. It provides funding to plans that enroll the highest cost individuals for the years 2014 – 2016. The program will receive its funding from contributions charged to all insurers and TPAs. This includes funding from self-insured plans that act as their own TPAs (pay their own claims). Payments are made to non-grandfathered “individual market” plans inside and outside of the exchange and the Federal Treasury. The state may coordinate the state high risk pool with the reinsurance program. The amount of the funds to be transferred differs by year. For the three years 2014, 2015 and 2016 the total U.S. target transfer amount is $10 billion to the individual market plans, $2 billion to the U.S. Treasury, is $6 billion to the individual market plans, $2 billion to the U.S. Treasury, and is $4 billion to the individual market plans, $1 billion to the U.S. Treasury respectively. It is currently recommended that the contributions be a percent of premium. Yet to be determined are:

1) Method of allocating contributions to states and further to contributing entities;

2) Attachment point for reinsurance, which is the threshold dollar amount of costs incurred by a health insurance issuer for payment of essential health benefits before reinsurance coverage;

3) Coinsurance rate, which is the rate at which the applicable reinsurance entity will reimburse the health insurance issuer for costs incurred to cover essential health benefits;

4) Reinsurance cap, which the threshold dollar amount for costs incurred by a health insurance issuer for payment of essential health benefits; and

5) Essential benefits.

Even once these are defined, a state can vary them, within some parameters. The variations that states make include collecting more in contributions. Also, please note the essential health benefits language – it is interesting.

The risk corridors will be administered by HHS and not by the states. They are intended to limit issuer loss (and gains) and protect against inaccurate rate-setting. All qualified health plans (QHPs) will participate after the impact of reinsurance and risk adjustment for 2014 – 2016. QHP issuers with costs that are less than 97% of the QHP’s costs projections will remit charges for a percentage of those savings to HHS, while QHP issuers of QHP’s with costs greater than 103% of cost projections will receive payments from HHS to offset a percentage of those losses. For amounts between 103% and 108%, HHS will make a payment of 50% of the amount over 103% and for amounts over 108% there will be an additional payment of 2.5% of the target amount plus 80%of the amount in excess of the 108% of the target amount. For amounts between 92% and 97% the QHP will remit a charge to HHS of 50% of the amount under 97% of the target amount and for amounts under 92% of the target amount the QHP will remit charges equal to 2.5% of the target amount plus 80% of the difference between 92% of the target amount and actual amount.

The risk adjustment mechanism will be administered by the states or by HHS on behalf of the states. This is a permanent program starting in 2014, which transfers funds from the plans with lower cost members to plans with the higher cost members. It applies to non-grandfathered individual and small group market plans, inside and outside the exchange. The purpose of this mechanism is to protect issuers against adverse selection. Funds are collected from the plans with lower cost individuals and paid to the plans with higher cost individuals based on a risk score assigned to each member based on their medical treatments (diagnosis and drug usage). The qualified risk adjustment mechanism(s) have not been defined yet and states can design their own mechanisms, which HHS has to certify.

Getting back to MLR, the MLR liability estimate has to be modified to take into consideration the reinsurance, risk corridors and risk adjustment asset or liability estimates. The order of calculations becomes very important. It would seem that the first order of operation would be the individual reinsurance program. The second order should be the risk adjustment. The third order would be the risk corridors (reflecting both reinsurance and risk adjustment results). Then finally, the MLR calculation can be completed. Therefore the MLR rebate calculations will not be able to be performed until all the other three risk mitigation programs have been completed. Estimating the impact of these other three programs for financial statement purposes will be problematic, since they are interrelated and depend upon not only the specific carrier’s experience, but its experience relative to all other carriers within the market. The HHS standard outlines the adjustments as (note it does not indicate an adjustment for risk corridors):

Premium amounts must be adjusted in the following manner:

(1) Increased by the amount of any payments received for –
(i) Risk adjustment, and
(ii) Reinsurance as described in §153.230; and

(2) Reduced for any –
(i) Risk adjustment charges assessed,
(ii) Reinsurance contributions made as described in §153.220, and
(iii) User fees paid.

I am sure that this has raised more questions than it has answered. We do live in interesting times.

For further information use the following links:

Implementation of Health Exchanges:


Implementation of standards for reinsurance and risk adjustment:


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