Fallen Arches: An FAQ on the Failure of Utah’s Co-Op Insurer

Why did Arches, Utah’s dynamic co-op insurer, collapse?  

When did Arches fail?

Arches Health Plan was placed into receivership by the Utah Insurance Department in October 2015 because the state’s insurance commissioner concluded Arches lacked sufficient cash reserves to cover future claims. As a result of this decision, Arches ceased offering individual market plans in 2016 but continued some small group plans until their renewal dates in 2016. Co-ops health plans also collapsed in Arizona, Colorado, Iowa, Kentucky, Louisiana, Michigan, Nevada, New York, Oregon, South Carolina, and Tennessee.

How many people had Arches coverage?

35,000 Utahns had purchased individual market insurance plans from Arches that were discontinued at the end of 2015. Another 31,000 Utahns were covered by the co-op’s small group plans. Many of the small group customers were able to keep their coverage into 2016 and until their plans reached their renewal date.  Arches sold both individual market insurance and small group insurance in all 29 counties in Utah and their plans were especially popular in Grand and Washington counties.

Why did Arches fail?

In October 2015 Arches was expecting almost $9 million in “risk corridor” payments to compensate the insurer for spending more than they anticipated on insurance claims in 2014, the first year of ACA coverage. Instead, Arches received approximately 12.6% of their expected risk corridor payments, leaving the insurer with an overall $27 million shortfall heading into the third open enrollment period in 2016. This debt caused the Utah Insurance Department to place Arches in receivership.

What are risk corridors?

Risk corridors were set up by the ACA to protect insurers from the unpredictable costs associated with enrolling previously uninsured and less healthy populations. Risk corridors were designed to operate for the first three years of the ACA, from 2014 to 2016. If an insurer set premiums too low and or incurred unexpectedly high claims from new customers, the risk corridor program would cover a sliding scale percentage of the insurer’s loses. Risk corridors were noncontroversial when the ACA was debated and passed. They had previously been included in the Medicare Modernization Act of 2003, which established coverage of prescription drugs through Medicare Part D. The risk corridors in Medicare Part D plan are still operating.

How do risk corridors work?

Each premium for an insurance plan has a target amount that is equal to the premi­um price minus administrative costs such as taxes regulatory fees, adminis­trative costs, and profit. If an insurer had claims that were between 103% and 108% of their premium’s target amount (thereby incurring a loss), the insurer would be reimbursed for 50% of their losses within that range. And if insurers had claims that were more than 108% of their target amount, they would be reimbursed 80% percent of those losses. For example, if a plan’s target amount was $500, but an insurer actually spent $550 on claims, its ratio would be 110%. As a result, the insurer would receive 50% reimbursement for its losses between 103% and 108% ($12.50) and 80% for expenses above 108% ($8.00), for a total reimbursement of $20.50 on an overall $50 loss. Likewise, if insurers spent less than expected on claims, they would contribute a corresponding percentage of their gains to the risk corridor pool.

How much was the risk corridor program expected to pay out?

Risk corridor payments for the first year of the ACA enrollment (2014) were scheduled to be paid to insurers in the fall of 2015. By mid-July 2015 struggling insurers were requesting $2.9 billion in reimbursements from the risk corridor program, while profitable insurers contributed only $362 million to the payment pool.

Why was the risk corridor program so short of funds?

Future payouts from the risk corridor program were hamstrung by a little-noticed provision inserted into the December 2014 “Cromnibus” spending bill that required the program to be “budget neutral.” This provision restricted HHS to use only the incoming funds collected by profitable insurance plans and no other funding sources or trust funds. This restriction limited the eventual risk corridor payouts to $362 million or 12.6% of the total amount requested.

Does the failure of Arches mean that the federal government can’t be trusted to fully fund Medicaid expansion?

Some people have argued that the lack of funding for risk corridors—which led to Arches’ collapse—is a reason to doubt the enhanced federal funding for Medicaid expansion (90% federal funds and 10% state funds, compared to the current 70/30% match rate for Utah). However, the funding mechanisms and history between risk corridor payments to insurers and Medicaid payments to states are completely different and not comparable.

Arches failed because the risk corridor program could not access the necessary funds to pay the reimbursement requests made by insurance companies. Other HHS funds were available to pay the risk corridor program, but Congress passed a law that prohibited the agency from using those additional funds in a move calculated to hurt the program. Since Congress hamstrung the risk corridor program before it had collected any funding from insurers, there was no evidence available how this change would affect future payments.

In contrast, the federal government has never missed a Medicaid payment to states since the creation of the program in the mid-1960s. In fact, Medicaid payments to Utah recently increased during the 2009-2010 recession. Utah’s current Medicaid match rate is 70% federal, 30% state funding. Other states have different match rates based on the state’s Gross Domestic Product (GDP) and other income factors. For instance, Colorado’s federal match rate was 50% federal, 50% state funds, and Mississippi’s federal match rate is 75% federal, 25% state funds. The federal government has made all of its enhanced match rate payments to the more than two dozen states that have expanded Medicaid since 2014.