The closing of Utah’s Arches Health Plan was state insurance commissioner Todd Kiser’s decision of “last resort,” a feature in Utah Business Journal revealed.
The untimely closure of Utah’s nonprofit insurer affected over 60,000 policyholders.
During that period, Arches Health Plan was unable to pay for the medical fees of its policyholders due to a budget shortfall on the federal level. The state Insurance Department then announced on Oct. 27 that it would place Arches in receivership, giving the commission control of the insurer to liquidate its assets to pay for the deficit.
The Utah Business Journal feature outlined several factors that had a hand in influencing the financial troubles and subsequent closure of Arches.
One of the factors identified was the risk corridor that Arches contributed to, which lacked federal assistance. ACA-participating insurance companies—both major and nonprofits—were required to pay into a “risk corridor” fund that would help cover for medical bills that lower premiums would not. Thanks to the risk corridor, Arches offered low premiums and lenient requirements for coverage, attracting many new customers.
The risk corridor proved to be a double-edged sword for Arches, due to the adverse selection of the marketplace. Many of the patients covered by the risk corridor were Arches policyholders either with pre-existing medical conditions and/or severe medical diagnoses that “would have caused other insurance bills to skyrocket.” Kiser offered an example, citing that a diagnosis of cancer could cost an insurance company about $500,000 a year for a single patient.
To complicate matters, a conservative Congress in 2014 passed the Balanced Budget Act, which required the risk corridor to stay revenue neutral. This meant that the risk corridor could only rely on funds from companies without federal funding assistance, which further limited the amount companies such as Arches could tap into.
While $2.4 billion was submitted to the risk corridor in 2015, only $362 million was collected, noted Kiser. Arches submitted $10 million in claims to the risk corridor, but only received $1 million for its troubles.
“We were held by federal law to tell companies you’re tied in with this [risk corridor system], even though you’re not going to get that money,” Kiser remarked.
Kiser believes that aside from the failure of the risk corridor and the adverse selection of policyholders, it was Arches’ inability to raise more capital due to its nature as a nonprofit co-op that also led to its closure.
