Why Obamacare isn’t at risk for a death spiral anytime soon

If the Obamacare health insurance exchanges are not able to get a good spread of risk — many more healthy people than sick — the long-term viability of the program will be placed in great jeopardy.

Given the early signs — far fewer people signing up than expected, enormous negative publicity about website problems, rate shock, big average deductibles, narrow provider networks, and a general growing dissatisfaction over the new health law — it is clear to me that this program is in very serious trouble.

But that trouble would not necessarily transfer to the health insurance plans participating on the state and federal health insurance exchanges.

Obamacare contains a $25 billion federal risk fund set up to benefit health insurance companies selling coverage on the state and federal health insurance exchanges as well as in the small group (less than 50 workers) market. The fund lasts only three years: 2014, 2015, and 2016.

The government’s risk management program for the insurers has three parts:

  • A revenue neutral risk adjustment system designed to level adverse claim costs between health plans.
  • A reinsurance program that caps big claim costs for insurers (individual plans only).
  • A risk corridor program that limits overall losses for insurers.

Of the $25 billion, $20 billion is earmarked for the reinsurance program and $5 billion goes to the U.S. treasury.

First, the reinsurance program caps big individual claim costs for insurers — in 2014, 80% of individual costs between $45,000 and $250,000 are paid by the government, for example.

Then comes the risk corridor program. Participating health plans will receive payments from the federal government in any of the following circumstances:

  • The plan’s costs for any benefit year are more than 103% but not more than 108% of the health plan’s targeted amount. The feds will reimburse 50% of all costs in excess of 103% of the medical cost target.
  • If the plan’s costs are more than 108% of the annual target, the feds will first pay the health plan a flat 2.5% of the target and then reimburse the plan for 80% of their claim costs above the targeted amount — with no upside limit.

Target cost is simply defined in the new law as a health plan’s “total premiums (including any subsidies) reduced by the administrative costs of the plan.” It is whatever the health plan projected its premium needed to be to pay medical costs.

So, a plan is on the hook for all claim costs up to 102% (2% more) than the target cost.

But, if the health plan has costs at 110% of the medical cost target, it will be responsible for only 102.4% of the target (a 2.4% shortfall) — only about a quarter of its losses.

If the health plan’s medical costs come in at 120% of the expected claim cost target level, the health plan will only be responsible for 104.4% of the target (a 4.4% shortfall) — again only about a quarter of its losses.

While health plans won’t be losing anywhere near as much money as they would have if the medical loss ratio were a disaster, because of the claim reinsurance program and the risk corridor program, they will be losing money.

If the health plans have claim costs below the expected target, they would have to pay the excess back to the feds using the same formula in reverse.

The statute very specifically limits funds collected to $25 billion over the three years — $12 billion in 2014. The source of these funds is the Obamacare $63 annual “belly button tax” assessed on almost all people covered under a health insurance plan.

The reinsurance program has done and will continue to do what it was intended to do; help attract and keep more carriers in Obamacare than might have otherwise come. No matter who did health insurance reform, Democrats or Republicans, there was always going to be a transitionary period when those currently sick and unable to get coverage before would come flooding through the doors.

Does this mean that health plans would be happy to see their plans underpriced in the first year, as well as the second and third year? No, they will not have any incentive to see their products dramatically underpriced the first three years only to see their prices zoom in the fourth year and create havoc.

But, my sense is that health plans, because they are so insulated from big losses, will generally stand pat with their 2014 rate structures for 2015 — no matter how bad the early claims experience looks. I expect that the health insurance industry will be content to give the Obama administration one more chance to reboot Obamacare in the fall of 2014, when the 2015 open enrollment takes place.

But that is all the patience I see the industry having. While they will continue to be protected from losses in 2016, two years will be enough patience for them and they will be eager to at least begin to transition their rates to the proper level in 2016 rather than face a huge adjustment in 2017 when the reinsurance program ends.

What consumers/voters will be thinking about Obamacare come November 2014 is still to be determined. But insurers won’t be losing a lot of sleep over it.

Robert Laszewski is president, Health Policy and Strategy Associates and blogs at Health Care Policy and Marketplace Review.

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  • Thomas D Guastavino

    And what happens in two years when insurance are stuck with high claims patients and are forced to radically raise rates?
    Im sorry. The more Obamacare goes on the more it looks like all of this is an insidious and well thought out plan to purposely collapse the private health insurance market so that the only one left to clean up the mess is the government. Emperor Palpatine would be proud.

    • http://onhealthtech.blogspot.com Margalit Gur-Arie

      How does funneling billions of taxpayer dollars into private corporations to support inefficiency and obscene executive salaries and unprecedented profits, collapse the private health insurance market?
      In two years, the too big to fail insurers will be crying out in feigned outrage, terrorizing people into thinking that they won’t get medical care when they need it most, and emergency funding will be extended for a few more years, and then again and again, in larger and larger amounts, in parallel with shrinking “benefits” for most people. It’s just too perfect a rent seeking scheme to be true….

      • Thomas D Guastavino

        The idea is to lull the private insurers into a false sense of security then drop the hammer. If in the future the private carriers do as you say then that is exactly the crisis that the government is hoping for as a provocation so they can step in and “save” the health care system.
        I will make a prediction. Sometime within the next few months someone will suggest that the health insurance market has become so unstable that the only answer will be “emergency socialized medicine” They, of course, wont use that term but thats what it will be, for all intents and purposes. Diabolical

        • http://onhealthtech.blogspot.com Margalit Gur-Arie

          I’m afraid history is not on your side here. When banks became unstable, nobody stepped in and suggested that we nationalize the banks. When auto makers became “unstable”, they were given oodles of cash to sustain their existence and eventually sell out to obscure European auto makers. When farmers complained about their sustainability, subsidies and generous handouts were built into every budget to maintain stability of food prices, and the government didn’t take over farming.
          Increasingly poorer taxpayers are now engaged in the largest ever welfare program for huge corporations, and the whole thing keeps growing unabated. We are being fleeced by these private entities, not by government. Government is just the tool they use for this purpose.

          • Thomas D Guastavino

            Ah, but remember, this administrations ultimate goal has always been socialized medicine. How many on the left felt that the the ACA did not go far enough. The administration was smart enough to realize that a more gradual approach was needed. I still say, Diabloical

          • ErnieG

            I agree with you. Obamacare will create such a mess with patients/citizens (dissatisfaction), rates will rise to obscene levels, and the purported benefits will fail to materialize, that a single payer system will be touted as the solution. I am sure some will come out for a “socialized medicine model”, and the devil is in the details, but I have no faith the single payer system will be better– the big players who will duke it out will be pharma, hospitals, gov’t, and existing insurance. Docs won’t have a role (surprise).

          • Thomas D Guastavino

            The fact that docs wont have a role is not surprising but will in fact be the downfall of the current models of health reform. The ACA, or socialized medicine, is doomed to fail for a number of reasons. At the top of the list is the assumption that physicians will continue to act like lemmings and accept whatever rules and crumbs are thrown at them. Given our past behaviour this is not surprising.

          • Thomas D Guastavino

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          • Thomas D Guastavino

            Ah, but remember. The ACA was always considered by its supporters as just a stepping stone to socialized medicine. I still say, diabolical

      • Eric Thompson

        The insurers will just raise their rates to cover their patient demographics. No need for the governemnt to bail them out. Plus, the insurers profits are capped under the ACA. The big issue will be the lack of participation by healthy people with the corresponding increase in premiums. That is the death spiral.

  • NewMexicoRam

    Oh, yes, the old “the feds will bail us out” routine.
    And who are the feds paid by? The taxpayers, ultimately.
    What a sad, sad joke this whole thing is on the American taxpayer.

  • doc99

    How do you spell Reinsurance? B-A-I-L-O-U-T. Now our taxes are about to subsidize United Healthcare – nothing to see here… move along.

    • whoknows

      Zing. Good comment doc

  • johnfembup

    I think this article has it about right, and not only because the reinsurance arrangement limits potential losses (and gains), but also because the national politics involved will continue to influence how the insurers manage their businesses.

    I’m also skeptical whether the $25 billion in reinsurance funds will last three years. Or even one year.

    Early exhaustion of these funds would change the picture. Recall the high risk individual pool and the early retirement reimbursement program, both of which rapidly exhausted their appropriations and stopped accepting new applicants.

    When chafing at “bailouts” keep in mind that the reinsurance arrangement is financed in two parts – one is tax revenue, and the other is reverse-reinsurance payments by insurance companies whose claims experience was favorable to expectation. Both the tax and the insurance premiums (including the premium subsidies for people who get subsidies) are paid for by the people; the government has no money of its own. Just as with every other “government” program, Obamacare is not ultimately funded by the government, but by the people. This is not new – nor will it ever change.

  • Bob

    If indeed the problems with ObamaCare is money; then Bob you would be right as any President can print more of it.
    But unfortunately that is not the problem, and while the Administration and Congress can for instance pump all the money set aside back to insurers, money can’t buy you love or care!
    If you haven’t noticed, hundreds of thousands of free or tax payer subsidized insurance is flooding the market, with little or no cost to those covered by taxpayer funded entitlement plans; however there is no increase in the number of physicians, nurses and other caregivers, or hospitals clinics, etc.
    Further since fraud has been and is known to be $1 of every $3 spent, a third of the increased costs will not provide anyone any care, just as $1 trillion a year doesn’t now. So a few thousand DoJ and state MFCU’s enforcement agents are “rounding up and prosecuting” providers and throwing them off the provider lists. I’m just guessing but think that providers aren’t too willing to take any more entitlement plan participants, which also require major changes in their practices for all their patients, like limiting visits to 15 minutes, so they will just write more papers: prescriptions, tests, referrals [often to specialists that are “full up” and they will wait in long “Canadian like lines”.
    So with the current 4 million new Medicaid recipients added in the past few months, and evidently more in the next two months; and with 4 million Medicare “Boomer” patients added every year and for the next 10 years, who in Medicaid or Medicare will receive this great new affordable care?