In early summer, a small, nonprofit HMO in Birmingham, Ala., got a surprise from the federal government: a bill for $1.7 million.
The goal is to help keep insurance markets stable by sharing the “risk” of sicker people and removing any incentive for plans to avoid individuals who need more medical care. Such stability is likely to encourage competition and keep overall prices lower for consumers, while its absence can undermine both and limit coverage choices — the basic principles of the law.
Yet the way the Obama administration has carried out this strategy shows another unexpected consequence of the 2010 health-care law. The administration defends its approach, but critics say the “risk adjustment” program is having a reverse Robin Hood effect — taking money from some plans that are small, innovative or fast-growing, while handing windfalls to some of the industry’s most entrenched players.
Indeed, Blue Cross and Blue Shield of Alabama, which dominates the market in which Viva sells, is getting more than $2.5 million.
“It’s completely backwards,” said New Mexico Insurance Superintendent John Franchini, one of several state insurance regulators concerned about the way this aspect of the ACA has been handled and the impact it is having on competition.
Some insurers hit with big bills have already raised rates; others intend to limit what or where they sell. New health plans have been particularly vulnerable: For 2014, 27 of 35 such plans were told to write checks to the program, according to an analysis by a fledgling coalition of small insurers in the ACA insurance exchanges.
Unless the government changes the way it figures out risk, more plans “of all kinds” are certain to depart, Richard Foster, the retired chief actuary for the Centers for Medicare and Medicaid Services, warned in a critique commissioned by the coalition and sent to Health and Human Services Secretary Sylvia Mathews Burwell.
Foster emphasized in an interview that now is a particularly bad time to do anything that might hurt competition. Large insurers “are merging right and left, so you want to have new plans coming in and have a fighting chance of succeeding,” he said.
The concerns were compounded last fall by another wrinkle in the law. The government was able to pay just 12.6 percent of the $2.9 billion it owes under a separate “risk corridor” program to plans facing unexpectedly large expenses.
Together, these challenges have buffeted insurers at a time when the long-term future of the exchanges, and insurance markets in general, are unclear. Though consumer interest in 2016 coverage has been robust, the administration’s expectations for ACA enrollment growth remain modest, and premiums are increasing.
HHS officials say the risk-adjustment program, though new and complex, is working well.
“Is this the be-all and end-all? Absolutely not, but it’s a good formula,” said Kevin Counihan, director of HHS’s Center for Consumer Information and Insurance Oversight. He said insurers had plenty of opportunities to make suggestions before the formula was put into use. “The tires of this thing were kicked . . . for a couple of years.”
HHS is planning a conference in March to discuss possible changes, but Counihan maintains that “there is no evidence that this formula is biased against small issuers.” Some unexpected results, he said, may reflect “a bunch of new issuers . . . getting their sea legs on for managing their business.”
‘A knife to a gunfight’
Viva Health was created two decades ago as an offshoot of Alabama’s largest academic medical center. It is not part of the federal marketplace, but the ACA requires that the plans it sells to small businesses match the benefits and coverage levels of small-group plans on the exchange. Viva did that in 2014 with lower premiums than policies sold by Blue Cross and Blue Shield of Alabama, which accounts for more than 95 percent of that market.
The HMO saw a business opportunity. “We were really poised for great growth,” said Anna Velasco, an executive vice president.
Then, on June 30, HHS published its first risk-adjustment list, and Viva learned that it owed the $1.7 million payment based on its 1,100 small-group customers during the previous year. Blue Cross and Blue Shield of Alabama, by contrast, would get a $1.55 million check for its small-group insurance and nearly $1 million more for individual health plans.
“It’s hard to swallow,” Velasco said. Alabama’s insurance commissioner wrote to Burwell, questioning the “integrity” of the data and calling for program improvements.
To determine an insurer’s degree of risk, the government relies on records of medical diagnoses by doctors. But when a plan is new or has many new members, for example, not everyone sees a doctor right away, potentially making its customers appear healthier than they are. Wellness programs that help cut down on treatment also can skew a risk level. The formula does not include prescription-drug records, which might give clues to customers’ health problems.
Viva and other plans encountered other issues, including in submitting data to HHS because of problems with the federal server. Officials “would give us reports back that basically looked like hieroglyphics,” Velasco said. With no advance warning about low risk, the HMO did not scramble to fill in diagnostic records more thoroughly — as some large insurers did with help from consultants.
“Risk adjustment is dark art,” said Michael Adelberg, a former HHS official who worked with nonprofit health plans created under the ACA, many of which have been hit hard. Adelberg believes few insurers understood how much things would shift. “Some carriers brought only a knife to a gunfight,” he said.
Viva lodged an appeal in August to protest its bill; the government has not yet made a decision. Under the rules, a health plan can win such an appeal only if federal officials did the math wrong — not if the program is unfair.
‘You have to scratch your head’
Counihan declined to say how many plans have filed appeals. But Viva is not the only one.
A provider-owned health plan in the Midwest has appealed, according to an administrator who asked that the plan not be identified so as not to antagonize federal officials. Its staff sent in diagnoses data with the understanding that it’d be told if the submission had any mistakes. It did not hear of any. Instead, it got a big bill.
Belatedly, the administrator said, the plan hired an outside consultant who discovered what HHS had not pointed out: When a patient had more than one diagnosis, the plan had listed them vertically, in a way the federal computer server could not read. The glitch made the plan’s customers appear healthier than they actually were. Given the costs, the plan now expects to stop selling coverage in one area.
Departures have already begun. A decades-old South Florida HMO, Preferred Medical Plan, had the lowest premiums in Dade County for 2014 and received a risk-adjustment bill of $97 million. "You have to scratch your head," said its president, Albert Arca.
Last spring, Preferred Medical stopped selling health plans on the federal exchange after administrators realized its finances were in worse shape than they had understood. Florida’s insurance commissioner approved its premiums for 2016 ACA plans on one condition: that federal officials promise to pay everything owed Preferred Medical under the other ACA risk program. They did not promise, and the HMO is not allowed on the exchange this year. It is preparing to close down, unless it can negotiate a rescue plan with HHS.
As for Viva Health, Velasco said, “We are trying our best to stay in the game.” It raised rates 7 percent, though that won’t make up for the check it has written to the government.
And reversing its intentions, it has stopped trying to get more small-business customers.
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