SN806 Financial Reporting Implications Under the ACA

Question 1

How does risk adjustment increase uncertainty in an issuer’s reported financial statements?

Answer 1

1. Uncertainty as to the issuers risk score
   
   1. 1 as of year-end, issuer does not possess all data that will be relevant to calculating its own risk score
   2. 2 issuer might estimate whether IBNP claims will impact risk scores
2. Uncertainty as to other issuers risk scores
3. Uncertainty as to member exposure
   
   3. 1 the ACA increases the grace period from 30 days to 90 days
4. Granularity of the calculation
   
   4. 1 a series of separate calculations for each risk adjustment cell
5. Implications of data reviews: could lead to payment adjustments

Question 2

How do reinsurance benefits and the risk corridor of ACA affect financial reporting?

Answer 2

1. Reinsurance benefits
   
   1. 1 the reinsurance mechanism protects issuers from increase in large claims, since issuers can no longer deny coverage based on preexisting conditions
   2. 2 increases uncertainty or impairs comparability in financial statements
      
      1. 2.1 The ACA reinsurance benefit motivates issuers to estimate potential reinsurance recovery on unpaid claims lacking specific information
      2. 2.2 potential valuation allowance on reinsurance recoverable, since reinsurance could be reduced due to availability of funds
      3. 2.3 issuer may have to estimate a probability of reinsurance claim denial
2. Risk corridor
   
   2. 1 payments will be made from HHS to the issuer experience is > 3 percent above a target, and vice versa
   3. 2 pertains only to qualified health plans
   4. 3 calculation is at plan-specific level, more granular than risk adjustment cells
   5. 4 calculation is after considering transfer from risk-adjustment or reinsurance

Question 3

HIP (health insurance providers) fee issues regarding financial statements and metrics

Answer 3

1. Risk of modest imaging the HIP fee amount in interim financial statements
2. Earnings emergence implications of revenue/expense mismatch
   
   2. 1 if issuers collect prem in 2013 to pre-fund the 2014 HIP fee, they can’t defer the recognition of revenue from 2013
   3. 2 issuers will report positive incremental net income in 2013 and negative incremental net income in 2014
3. Comparability across issuers subject to different tax code provisions
   
   3. 1 increase in premium to recoup HIP fee lowers (claims/prem). The decrease is more significant the higher the income tax rate
   4. 2 the ratio of income tax to operate income > tax rate, because the HIP fee is non-tax deductible and lowers operating income
4. Customer rebate implications of revenue/expense mismatch
   
   4. 1 HIP fees are adjustments to the ACA’s MLR denominator. If incremental premiums equal the incremental HIP fee then no impact on the MLR or rebates

Question 4

1. Differences between ACA risk-adjustment and the Medicare Advantage (MA) mechanism
2. Parallels between ACA risk-adjustment and Medicaid programs in some states

Answer 4

1. Differences between ACA risk-adjustment MA mechanism
   
   1. 1 MA is a retrospective model. Info from prior calendar year develop risk scores for current calendar year
   2. 2 MA adjustment is not multiple programs based on state/market/risk pool combinations
   3. 3 MA plans have a high level of stability in membership from year to year
   4. 4 for MA, majority of enrollees are administered by the federal govt
2. Parallels between ACA risk-adjustment and Medicaid programs in some states
   
   2. 1 Medicaid risk-adjustment is designed to be budget neutral to the state
   3. 2 Each issuers risk score needs normalized relative to those of other issuers
   4. 3 Difference: Medicaid uses concurrent data applied prospectively to adjust following years capitation rates

Question 5

ACA reinsurance contribution issues regarding issuers’ financial statements and metrics

Answer 5

1. Expense estimation risk is unlikely to be significant
   
   1. 1 Each year’s national reins. Contribution rate is fixed in advance
2. Earnings emergence implications of revenue/expense mismatch
   
   2. 1 The reinsurance contribution rate will vary by calendar year
   3. 2 assume level premiums across the policy year
   4. 3 Issuers will have negative earnings associated with the reins. Contribution some years offset by positive in other years
3. Comparability across issuers subject to different tax code provisions
   
   3. 1 Irrelevant to the reinsurance contribution, unlike the HIP fee
4. Customer rebate implications of revenue/expense mismatch
   
   4. 1 The same for the reinsurance contribution as it is for the HIP fee
5. Cash flow timing
   
   5. 1 An issuer’s cash flow and operating earnings for the calendar year is impacted by whether the issuer pays the bill in Dec or Jan

Question 6

Explain how payments from regulators that require subsequent true-ups affect insurer financial reporting

Answer 6

1. Premium Subsidies
   
   1. 1 Estimate the advanced payment tax credits received for members no longer in force, and establish a liability to be refunded to the government
   2. 2 A receivable for outstanding receipts may need to be set up
2. Cost-sharing reduction payments
3. 1 if the government paid too much in estimated payments to the issuer, the issuer will need to reimburse the government and vice versa
4. 2 this potential mismatch requires the issuer to set up an asset or liability

Question 7

How does ACA affect claim liabilities

Answer 7

1. There will be uncertainty around the morbidity level of issuers members
   
   1. 1 An issuer’s risk pool will change with the introduction of exchanges
   2. 2 A portion will come from previously uninsured and high-risk pools
   3. 3 need marketplace modeling to project the PMPM for recent months
2. Monitoring the mix of plans
   
   2. 1 avg benefits will increase due to min actuarial value and essential benefit requirements
   3. 2 evaluate whether to combine on-exchange and off-exchange plans
   4. 3 evaluate whether to combine plans across metal levels for reserving
   5. 4 impact that low-income cost sharing subsidies will have on seasonality
3. Increased provider risk sharing also will have an impact on claims reserves
   
   3. 1 decide whether to calculate reserves separately for ACOs or combine them with commercial business
   4. 2 determine liabilities for amounts owed to providers under gain sharing
   5. 3 if claims are higher than targets, may set up a receivable from providers
4. Consideration will need to be given to PAD amounts
5. Payment patterns also are likely to be impacted by claims operations

Question 8

How does ACA affect non-claim liabilities

Answer 8

1. Contract Reserves
   
   1. 1 Appropriate if a portion of past premiums was designed to pre fund future claims
   2. 2 a consequence of an issue age premium structure and medical u/w
   3. 3 this type of reserve less relevant since medical u/w no longer allowed
   4. 4 GAAP lock-in principle: may not be possible for issuers to update their reserve assumptions
   5. 5 For SAP, the lock-in principle generally is believed to not apply
   6. 6 MLR rebate: the release of contract reserves will impact customer rebates
2. Due and Unpaid Premium Asset
   
   2. 1 Under ACA some members have a 90-day prem grave period, rather than 30-day
3. premium deficiency reserves (PDR)
   
   3. 1 rate review under the ACA: consider likelihood of regulatory approval when evaluating rate increase assumptions for PDR calculation
   4. 2 changes in the insurance market could lead to changes in how issuers define their blocks of business for PDR testing purpose