ACA's impact on financial statements
What every insurer needs to know—and do—in 2014
New risk programs
New subsidies
New fees
As insurers begin to implement the Affordable Care Act (ACA), they are quickly encountering a range of questions regarding the proper way to report new and existing receivables, liabilities, and reserves on their 2014 financial statements. Because of new premium stabilization programs, subsidies, and fees, insurance company CFOs—and their accountants and actuaries—will soon be engaged in a complicated process of estimating unknown future calculations, updating these estimates when additional data are available, closing out these accruals when funds get transferred, and ensuring that the results are reflected in the proper time period. Furthermore, these financial entries will potentially be subject to review from a number of external stakeholders such as the U.S. Department of Health and Human Services (HHS), auditors, credit rating agencies, and state insurance departments.
There are approximately two dozen new issues that must be mastered. This overview focuses on those that are likely to have the greatest financial impact. Based on our expertise in insurance plan accounting, my colleagues and I have compiled an overview of the new risk programs, subsidies, and fees—with recommendations for both planning accruals and accounting for them on financial statements.
What it is: A program to even out the risk of the insured population in a market.
Duration: Permanent
Complexity: Very high
How it works: At the end of each year, insurers will calculate their actuarial risk and then HHS (or a state entity) will compile a score for the entire market. Insurers with below average risk will send a check to compensate those with above average risk.
Why it’s tricky: Health plans must estimate the risk scores of their members and the entire market prior to having complete experience. Risk adjustment transfer estimates should be accrued in the current plan year and reflected in current financial statements prior to being settled by June 30 of the subsequent year.
Timeline: Insurers will need estimates for the entire year by March 31—the end of the first quarter in order to have accurate premium rate filings for the following year. Insurers will need estimates throughout each year in order to monitor their financial results.
What’s at stake: Transfers could amount to +/- 15% of health plan premiums with some smaller insurers possibly seeing +/- 40%.
Remarks: Due to the high level of uncertainty inherent in this calculation, carriers may wish to conservatively accrue their risk adjustment estimates, and then adjust as new data is received and new assumptions are utilized.
What it is: This program will reimburse health plans in the individual commercial market that insure high-cost individuals.
Duration: Transitional, ending on December 31, 2016
Complexity: Medium
How it works: The U.S. government will reimburse insurers for 80% of claims for any single member in amounts between $45,000 and $250,000 in 2014. These parameters will change in future years.
Why it’s tricky: Health plans may estimate this reinsurance reimbursement amount based on claims received and paid throughout the year for members that hit, or are expected to hit, the $45,000 lower limit. However, no accounting rules exist for projecting unreported large claims, which typically have more variability from month to month and longer processing times. Also, recoveries can be altered depending on whether the program is over- or underfunded.
Timeline: Claims generally must be finalized and paid by April of the following year to be eligible for reimbursement.
What’s at stake: In 2014, it is estimated that roughly 12% to18% of an insurer’s claims in the individual market will be eligible for reimbursement under these parameters. Given that all markets pay into the pool and only the individual market receives recoveries, this program will result in a substantial subsidy to the individual market. However, since recoveries will not be received until the middle of the subsequent year, the result may involve substantial cashflow issues for some insurers in the interim.
Remarks: Reinsurance reimbursements are handled differently according to generally accepted accounting principles (GAAP) and statutory (STAT) standards. Under GAAP, the entire projected reimbursement amount is likely to be recorded as a new receivable. STAT, however, typically records receivables for paid claims as an asset and records receivables related to unpaid or unreported claims as an offset to unpaid claim liabilities.
What it is: A program designed to protect issuers of qualified health plans (QHPs) in the individual and small group markets against claims that are higher than targeted.
Duration: Transitional, ending on December 31, 2016
Complexity: High
How it works: Risk corridors kick in when claims vary by 3% or more from the target claims amount, where excess claims are initially shared 50% with the federal government. Beyond an 8% variation from target claims, excess claims are shared 80% with the federal government.
Why it’s tricky: Transfers are a two-way street. Insurers get reimbursed by the federal government for higher-than-targeted claims. But they owe money to the government if actual claims are below the target. In addition, risk sharing estimates are extremely difficult to calculate for accrual purposes as amounts from the other two programs—risk adjustment and reinsurance—must be factored in. Regulations regarding this mechanism have also grown considerably more complicated over time. The nuances of the mechanism can result in unexpected results. For example, in some cases even if all cash flows come in exactly as expected, a substantial risk corridor payment / receipt could be created.
Timeline: Risk corridors amounts are intended to be settled by July 31 of the year following the calendar year to which they apply.
What’s at stake: We estimate that the risk co rridors program can have an impact amounting to +/-25% of premiums.
Remarks: Insurers may be able to project throughout the year their anticipated risk corridors situation (i.e., either a payable or receivable) by comparing claims data to the claims assumptions utilized in 2014 pricing. In this case, accruals for the anticipated magnitude of the risk corridors transfer may be appropriate for filing 2014 financial statements in a reasonable timeframe. But given the mid-summer timeframe for this calculation to be complete, following settlements for several new items reported in June (e.g., risk adjustment and reinsurance), large true-up entries for 2014 financials may be required well into 2015.
What it is: Premium subsidies are available to individuals and families whose incomes are between 100% and 400% of the Federal Poverty Level (FPL). The insurer effectively acts as the administrator of this federal program.
Duration: Permanent
Complexity: Medium
How it works: Premium subsidy reconciliation with the Exchange and payment transfers will occur on a monthly basis in advance of the start of a coverage month (e.g., the premium subsidies for coverage starting January 2014 should be received by the insurer prior to the end of 2013).
Why it’s tricky: Premium subsidies may also need to be returned to the government for members whose coverage terminates prematurely, indicating the need to establish a refund liability account.
Timeline: Monthly, with annual retroactive reconciliations.
What’s at stake: The impact as a percentage of premiums will be variable. However, the increase in insurers’ administrative burden will be continuous. Also, members receiving premium subsidies are subject to generous grace period rules; this could result in insurers being liable for claims incurred during time periods for which premium will never be collected.
Remarks: Subsidies received by the insurer prior to the start of coverage should be recorded as an unearned premium, becoming “earned” when the coverage becomes effective.
What it is: Individuals and families whose incomes are between 100% and 250% of FPL are eligible for subsidies that reduce their deductibles, copayments, and coinsurance. These are collectively known as the costsharing elements of the policy. The members must choose a silver plan to qualify, and the cost-sharing subsidy may be in addition to the premium subsidy discussed above.
Duration: Permanent
Complexity: High
How it works: Insurers will enroll qualified members in costshare-reduced plan designs. The federal government will reimburse the insurer the difference between what the member paid in the enhanced plan design and what would have been paid in the “standard” silver plan. The federal government will provide insurers of these members with prospective payments throughout the year on a monthly basis (like premium subsidies), with a reconciliation occurring in the following year.
Why it’s tricky: In the similar Medicare Part D Low-Income Subsidy program, these payments are typically only reflected on the balance sheet with no impact to the income statement. It is believed that GAAP and statutory rules will treat this program similarly. However, a recent Interim Final Rule has indicated that insurers may use a simplified method for this calculation, but it is presently unknown how GAAP/STAT accounting will treat any income statement impact when using this method.
Timeline: Monthly, with annual retroactive reconciliations.
What’s at stake: As with the premium subsidy, the impact as a percentage of premiums will be variable. However, the increase in insurers’ administrative burden will be continuous.
Remarks: The simplified method instructs issuers to utilize claims data in the standard silver plan to generate effective cost-sharing parameters for the standard silver plan: an effective deductible, an effective pre-deductible coinsurance rate, an effective post-deductible coinsurance rate, and an effective claims ceiling. By adjudicating a member’s costshare reduced claims through this simplified plan design, the insurer can estimate what costs would have been paid under the standard silver plan design. However, experience data for this purpose is aggregated with such granularity that many insurers will not have sufficient credibility to perform the calculation. The regulations allow alternate approaches for this contingency.
What it is: An excise tax on insurers that is not deductible from taxable income.
Duration: Permanent
Complexity: Low
How it works: The 2014 fee is based on an insurer’s share of 2013 premiums collected nationwide.
Why it’s tricky: GAAP and statutory standards would typically accrue estimates of this fee in 2013. However, for this fee, GAAP says that a liability should be recognized on January 1st, 2014 (based on estimated 2013 premium share) with an offsetting intangible asset that gets amortized away throughout the year. Statutory standards are expected to be similar, with the exception that the intangible asset is non-admitted. Since the fee is based on prior-year premiums, insurers with variable growth rates (such as CO-OPs) will be affected differently.
Timeline: Monthly, with annual retroactive reconciliations.
What’s at stake: Approximately 2% of premiums in 2014. The fee amount is scheduled to increase in subsequent years.
Remarks: Unlike the risk programs, final 2014 financial statements should include the actual fee amount (since this fee is intended to be paid in the fall of 2014).
What it is: A fee that will fund the transitional reinsurance risk program.
Duration: Transitional, ending on December 31, 2016
Complexity: Low
How it works: A flat fee of $5.25 in 2014 per member per month (PMPM) is designed to collect a total of $12 billion to fund the reinsurance program’s first year operating cost.
Why it’s tricky: Because the funds for this program must be collected prior to distribution back to insurers covering high-cost members in the individual market, the fee will be calculated on nine months of data annualized to represent twelve months of enrollment. Also, the regulations specify a number of different permissible counting methods for determining the fee.
Timeline: Monthly, with annual retroactive reconciliations.
What’s at stake: Approximately 2% of premiums in 2014.
Remarks: For 2014, insurance carriers should receive bills in mid-December 2014 with 30 days to pay, meaning the actual payment may take place in 2014 or 2015. Carriers should accrue this fee based on actual enrollment throughout the year and should be able to “true-up” to the annual amount based on the bill received in December.
Conclusion
Despite the complexity of ACA , insurers have to continue serving their customers with compliant products. They also need to keep their businesses running. This means creating new models for managing cash flows, maintaining adequate reserves, and filing financial statements. Also, it’s important to recognize that each health plan will be impacted differently, based on state-by-state regulations, and demographic and market issues within each state. The health of each company’s balance sheet depends on its ability to get all of these moving parts right as quickly as possible.