Anthem could take big hit from halt to risk-adjustment payments

The Trump administration’s decision to suspend some Obamacare payments could leave a few health insurers feeling flush—for now. But one of them isn't going to be Indianapolis-based Anthem Inc.

On Saturday, the U.S. Centers for Medicare & Medicaid Services said that it would pause what are known as risk-adjustment payments to insurers who sell health plans under the Affordable Care Act. The move is likely to further destabilize an already volatile market by depriving companies of compensation for extending coverage to riskier patients. The paused payments total roughly $10.4 billion.

For insurers such as Centene Corp. and Molina Healthcare Inc. that typically pay into the fund rather than receive money from it, however, the decision could provide a short-term boost. Those two firms each owe other insurers about $1 billion, according to regulatory filings. Now, they could end up with an unexpected hoard of cash on hand.

Molina’s shares rose as much as 5.4 percent on Monday, to $105.91 each, their highest-ever intraday price. Centene shares also reached an intraday record.

For example, for 2017, Molina is required to pay almost $800 million into risk-redistribution funds in California, Florida and Texas. Centene, which has rapidly increased its marketplace presence in the past years, is slated to pay nearly $300 million for risk adjustment in Florida, and roughly $117 million in Texas.

In the long run, Centene, which generates a significant amount of its revenue from the ACA marketplace, might find itself in jeopardy if the move ultimately destabilizes the markets. Ana Gupte, an analyst at Leerink Partners, estimates the company’s potential medium-term exposure at 15 percent to 20 percent of its earnings, the greatest downside risk out of all publicly traded Obamacare insurers.

Short-term losers

There could be short-term losers, too: Anthem Inc. received almost $500 million in risk-adjustment payments for the 2016 plan year, according to Evercore ISI analyst Michael Newshel. For 2017, the company will receive about $215 million in California alone. UnitedHealth Group Inc., too, will get $217 million in payments just in New York for last year.

Jefferies Group analyst David Windley and BMO Capital Markets analyst Matt Borsch both predict negative short-time impacts for Anthem, though Borsch said the company is unlikely to see any material impact on its earnings, given that less than 5 percent of its revenue comes from marketplace plans.

The payment freeze, which CMS said was carried out in response to a New Mexico court ruling from earlier this year, is the latest in a series of decisions by the administration to cut subsidies designed to stabilize the Obamacare insurance markets.

CMS Administrator Seema Verma said in a statement that her agency had asked the court to reconsider the ruling and that she hopes for a “prompt resolution that allows CMS to prevent more adverse impacts on Americans who receive their insurance in the individual and small group markets.”

The move won’t apply to risk-adjustment payments in 2019 because the administration already issued new rules for that year which take into consideration the issues raised by the New Mexico court decision.

New York Governor Andrew Cuomo said Monday that he directed the state’s Department of Financial Services to review the impact of the decision, and, if needed, prepare to implement and expand a risk-readjustment program for New York if the federal program isn’t reinstated.