S&P charts insurers' PPACA lifeboat problems

Some health insurers seemed to have more problems estimating what they would get from two big new federal risk-management programs than others, but it's not clear what that means.

Analysts at Standard & Poor's Ratings Services (S&P) have digested the data in a big, unwieldy federal report on the Patient Protection and Affordable Care Act (PPACA) reinsurance and PPACA risk-adjustment programs into a collection of short, easier-to-interpret tables.

The programs are two of the three programs that PPACA watchers have dubbed the "three R's" programs.

PPACA drafters hoped the programs would act as lifeboats for health insurers, to keep confusion about PPACA changes from killing companies off. But officials at the Centers for Medicare & Medicaid Services (CMS) warned early on, while they were designing the program, that, in some cases, glitches in the complicated new programs could lead to unintended consequences, or even push some insurers into insolvency.

At publicly trade health insurers, for example, the reinsurance and risk-adjustment programs could lead to cash flows ranging from an outflow for 2014 of about $31 million at Centene Corp. (NYSE:CNC) to an inflow of about $586 million at Anthem Inc. (NYSE:ANTM), the S&P analysts say. The ratio of total estimated flows for the two programs to reported capital ranges from a cut equal to 1.6 percent of capital at Centene to a gain equal to 7.9 percent of capital at Health Net Inc. (NYSE:HNT).

"On average," the S&P analysts say, "the two R's account for less than 1 percent of reported year-end capital of the publics."

But most health insurers have quarterly net income figures that are much smaller than their reported capital levels, and the risk program flows could look different when expressed as a share of second-quarter or first-half net income.

S&P analysts estimate that the risk-adjustment program could lead to about $2.3 billion in cash transfers.

The temporary reinsurance program is supposed to use flat per-enrollee fees from all insurers to help individual policy issuers with enrollees with catastrophic costs. The risk-adjustment program is supposed to shift money from exchange plan issuers with relatively low-risk enrollees to issuers with relatively high-risk enrollees.

CMS gave figures for hundreds of issuers, organized by state, in a PDF posted June 30. The agency did not make any effort to indicate which issuers belong to which corporate groups, or to use information about issuers' premium revenue, enrollment or capital levels to put the risk program figures in context.

The numbers CMS published are estimates, and issuers unhappy with the estimates can go through a formal appeals process that could last for months.

S&P used its analytical resources to come up with totals for the groups of health insurance issuers controlled by the big, publicly traded health insurance companies, such as Anthem Inc. (NYSE:ANTM) and UnitedHealth Group Inc. (NYSE:UNH).

The analysts also came up with totals for many of the independent Blue Cross and Blue Shield carriers and groups it rates, and totals for new nonprofit, member-owned CO-OP plans spawned by PPACA.

The analysts focused more on comparing the accuracy of insurers' reinsurance and risk-adjustment program cash flow forecasts than on the size of the amounts that CMS says will be coming from or going to the programs.

The S&P analysts found that the two public companies that have had the biggest problems with overly optimistic "two R's" program forecasts are companies now being acquired: Humana Inc. (NYSE:HUM) and Health Net.

The gap, or "negative net variance," between what Humana said it hoped to get from the two R's and what CMS says Humana will actually get for 2014 amounts to 2.1 percent of the company's reported capital, the analysts say.

At Health Net, the negative gap amounts to 1.5 percent of reported capital.

Three of the non-public Blues S&P included in the tables had negative gaps. Highmark has a negative net variance of 1.6 percent of reported capital.

Four of the CO-OPs in the tables have negative net variance figures greater than 20 percent of reported capital.