humana logoHumana has lowered its earnings outlook for the year, saying it will not be able to collect $591 million in Affordable Care Act-related funds it is owed by the federal government.

The Louisville-based insurer’s shares were down more than 2 percent in early Friday afternoon trading. Broader markets were up slightly. Shares of other big insurers — Anthem, United Health, Aetna — also were down.

To keep health insurance premiums stable and to protect insurers against uncertainty in claims’ costs during the first three years of the ACA, also known as Obamacare, the Centers for Medicare and Medicaid Services implemented mechanisms that aimed to spread the insurers’ risk from consumers with lots of health problems and high health care costs.

One of those mechanisms, called the temporary risk corridor, allowed the government to collect money from insurers if the health insurance premiums they collected exceeded claims’ costs by a certain amount and to redistribute those dollars to insurers whose premium collections fell short of claims’ costs by a certain amount.

The problem: The amount of excess profits is being dwarfed by the amount of excess costs. Many big insurers, including Humana and Aetna, have said that the cost of medical care for customers they have gained through the exchanges, which are a central part of the ACA, have exceeded, by far, the health insurance premiums those customers have paid.

Courtesy of pixabay.

Courtesy of pixabay.

CMS said last year that not enough insurers collected excessive profits from ACA customers — and that too many incurred significant losses. That meant the government collected too little risk corridor money from successful insurers to cover the dollars it owed the insurers who struggled with customers they gained through the exchanges.

For payments for the year 2014, CMS collected $362 million in risk corridor payments from successful insurers — but it owed $2.87 billion to the struggling insurers, including Humana.

The agency announced in October 2015 that it would pay the struggling insurers only 12.6 percent of the money they were supposed to get under the risk corridor mechanism.

Three months ago, CMS announced that preliminary risk corridor collections for 2015 indicated that the shortfall was continuing and that all new dollars collected would be used toward the prior year’s payments and that “no funds will be available” for any money owed for 2015.

Lawsuit unsuccessful

land-of-lincoln-healthChicago-based insurer Land of Lincoln Mutual Health Insurance Co. in June had sued the government to compel risk corridor payments of $72.9 million for what it asserted was a breach of contract. On Nov. 11, however, U.S Court of Federal Claims Judge Charles F. Lettow ruled against the insurer.

The judge acknowledged that U.S. Department of Health and Human Services, which oversees CMS, had said that in the “unlikely” event that it did “not not receive sufficient collection fees to make all necessary payments” it would “use other sources of funding for the risk corridors payments, subject to the availability of appropriations.”

However, the judge noted, Congress has explicitly prohibited HHS from using any of its lump-sum appropriation for payments under the risk corridor program, which meant that the obligation by HHS to make risk corridor adjustment payments is “subject to the availability of funds.”

While Lincoln Mutual indicated last month that it planned to appeal the decision, Humana’s filing Thursday evening suggested that it doubted the decision would be overturned or that Congress would make money available to cover the shortfall.

While CMS has not revealed the size of the shortfall for 2015, its statement revealed that the dollars it collected in 2014 and 2015 combined weren’t enough to pay what the government owed the insurers for 2014 alone.

CMS will still be paying off the shortfall from 2014, when it collects any excessive profits for this year, the final year of the three-year risk corridor mechanism.

“Collections from the 2016 benefit year will be used first for remaining 2014 benefit year risk corridors payments, then for 2015 benefit year risk corridors payments, then for 2016 benefit year risk corridors payments,” CMS said.

Humana said that given the court decision, “the company’s conclusion with respect to the ultimate collectability of the receivable has shifted, and accounting rules require that the receivable be written off.”

Therefore, Humana lowered its earnings projection for the year to $6.09, down $2.45, or 28.2 percent, from its projection on Nov. 4.

The insurer’s shares traded at about $201 early Friday afternoon, down $5.64, or 2.73 percent. The S.&P. 500 was up about 0.3 percent.