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.