Will health insurers ever see full claims benefits?
BOSTON — 31 December 2015 — The omnibus spending bill signed into law on Dec 18, provides US health insurers with a short-term reprieve by delaying the levy of three key Affordable Care Act (ACA) corporate taxes on the health industry and blocking appropriations to the law’s so-called temporary ‘risk corridors program,’ Fitch Ratings says.
Overall, however, the law, which earmarks $1.1 trillion in fiscal 2016 appropriations for multiple federal programs, casts uncertainty on whether health insurers that become beneficiaries of ACA’s key risk sharing programs will ever see full claims benefits. With ‘self-funding’ for the risk corridors running at 13% of need, and little assurance for future funding, health insurers’ incentives for participating in ACA programs could wane further.
Some health insurers have already booked material receivables due from the risk corridor program. The program’s collections through September had netted just $362 million on insurer reimbursement requests of $2.87 billion – meaning that there is only 13 cents available on each claim dollar submitted for the 2014 calendar year. As for each ACA risk-sharing program, there is some potential for becoming federally backstopped. However, with the Omnibus bill’s passage, such backstops appear unlikely, at least until the next US administration is in place.
Both the tax delays and the blockage of appropriations to the risk corridor program were driven by congressional wrangling over the future of the ACA. While less tax is well received by health insurers, smaller insurers could be most severely impacted if the risk corridors program is gutted further. It is unclear whether the tax delays also could hurt funding for ACA risk sharing programs.
Risk-sharing programs were intended to reduce various forms of adverse selection risk, stabilize premium rates and promote exchange-based competition. They serve as a safety net for those health insurers needing loss-absorbing capacity when new enrollees (many with limited health histories) result in higher than expected claim activity.
The taxes delayed under the Omnibus package include Health Insurance Industry Tax (HIIT, a delay in one year of taxes meant to be collected for 2017), the High Cost Employer-Sponsored Healthcare Coverage Excise Tax (the so-called ‘Cadillac tax’, delayed for two years), and a 2.3% excise tax on medical device manufacturers (two-year suspension, eligible for reinstatement in the Jan 2018 fiscal year).
The HIIT is the largest tax in the group, and the only one already in place. Apportioned on insurers by share of premiums written, it was a source of $8 billion in government revenue in 2014 and steps up annually to $14.3 billion by 2018. Most health insurers pass the HIIT tax on to their members, adding several percentage points of cost to the premium. The 2017 tax reprieve on HIIT and the 2017 and 2018 reprieve on the Cadillac tax help make insurance policies more affordable, but do not necessarily result in economic benefit for the insurers.
Two ACA risk-sharing programs, the ‘temporary risk corridor program’ and its sister program, the ‘transitional reinsurance program’ were intended to be budget neutral. The former program is funded predominantly through a profit sharing scheme whereby up to 80% of an insurer’s profits would be passed through to the Health and Human Services Department (HHS) when an insurer’s actual costs are less than 97% of expected costs. In return, the program could share up to 80% of insurer’s losses with HHS when actual costs are greater than 103% of expected costs.