Risk adjustment woes fuel Molina's ACA exchange losses

Molina Healthcare, one of the insurers that has thrived in the individual marketplaces where others have struggled, is now unsure whether it will participate next year after facing unexpected losses.

The insurer said in its fourth-quarter earnings report that it estimated it lost $110 million on its Affordable Care Act exchange business last year, while it had been expecting to make $60 million.

One main cause was the fact that the insurer had to pay $325 million more into the risk adjustment program than it had anticipated, because its medical costs were $120 million lower than it had expected.  

“The program’s key weakness is that it redistributes dollars among health plans based on total premiums, and not purely health risk,” the company’s CEO, J. Mario Molina, said on a call with investors. “The methodology penalizes low-cost and low-premium health insurers like Molina.”

As a result, Molina has become one of the largest net payers into the risk transfer pools, he said. “To put this in perspective,” Molina added, “24% of our 2016 premiums were transferred to our competitors.”

The federal government has since made changes to the risk adjustment methodology, effective in 2018, he noted, but called it “too little, and maybe too late.” Had that change gone into effect in 2016, Molina’s pretax income would have been $70 million higher for the year.

Another pain point associated with operating in the marketplaces is the $90 million in risk corridor payments Molina said it has not received from the federal government. Like other insurers, Molina has sued to recoup these funds, its CEO noted on the call.

With the losses it has faced operating on the marketplaces and with the uncertainty about the future of the ACA, “there are simply too many unknowns with the marketplace program to commit to our participation beyond 2017,” Molina said.  

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The company will wait and see what changes the new administration and Congress will bring before deciding how to proceed, he added.

Other major insurers, including Anthem, Cigna and Aetna, are also taking a wait-and-see approach, though Aetna has already said it won’t re-enter any markets it left in 2017. Humana CEO Bruce Broussard said this week that the insurer has already decided not to participate in the exchanges in 2018.