How the Authors of Obamacare Protected Insurance Companies

Three provisions in the law offset the crisis they might face if too few healthy people and too many sick ones enroll.

Protection: Insurance for insurance.
National Journal
Sam Baker
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Sam Baker
Nov. 10, 2013, 3 a.m.

The troubled launch of Health Care.gov has raised plenty of ques­tions about wheth­er young, healthy people will en­roll in cov­er­age — and, if they don’t, wheth­er in­sur­ance com­pan­ies will have to raise their premi­ums or give up on Obama- care’s new in­sur­ance mar­kets al­to­geth­er. But the law’s au­thors built in a safety net to help guard against that worst-case scen­ario. In es­sence, it’s an in­sur­ance policy for in­sur­ance com­pan­ies.

The back­stop is an ap­proach known as the “three R’s.” And health care ex­perts say that, taken to­geth­er, the three prongs will help in­surers not only grapple with the trans­ition to the new re­quire­ments to cov­er sick people but also ward off a fu­ture in which they raise premi­ums so much that healthy pa­tients stay away. “All three of those sig­ni­fic­antly shield the plans from ad­verse se­lec­tion,” says Timothy Jost, a law pro­fess­or at Wash­ing­ton & Lee Uni­versity and a fan of the Af­ford­able Care Act.

“Ad­verse se­lec­tion” is the tech­nic­al term for a bad risk pool — too many sick people, and not enough healthy people, sign­ing up. The Af­ford­able Care Act in­cludes tools, like the in­di­vidu­al man­date, to get young people in­to the sys­tem in the first place. If en­roll­ment is truly dis­astrous, the three R’s can’t res­cue in­sur­ance com­pan­ies, but if it is merely mid­dling and if the mix of sick and healthy pa­tients is merely worse than ex­pec­ted, they can help in­surers bounce back. Here’s how they work.

Re­in­sur­ance: The most straight­for­ward “R” is the tem­por­ary re­in­sur­ance pro­gram. It’s a big pot of money from which the Health and Hu­man Ser­vices De­part­ment will simply re­im­burse in­surers for the cost of cov­er­ing es­pe­cially sick con­sumers. Once pa­tients hit a cer­tain level of spend­ing, the gov­ern­ment pays for most of their costs. The law provides $10 bil­lion in re- in­sur­ance pay­ments next year, then smal­ler amounts for the next two years. “That’s go­ing to be huge if plans get a worse-than-ex­pec­ted risk pool, be­cause it’s go­ing to mean they’re shar­ing an aw­ful lot of the risk,” Jost says. Re­in­sur­ance was in­cluded be­cause every­one knows that some sick, ex­pens­ive pa­tients will en­roll; this pro­gram guar­an­tees that the gov­ern­ment will help pay for them.

Risk cor­ridors: This pro­gram is de­signed to pro­tect the over­all mar­ket­place if more high-cost pa­tients than ex­pec­ted sign up. If an in­surer’s real costs are high­er than it planned, the gov­ern­ment pays it part of the ex­cess. If its costs are lower than it planned, the in­surer pays the gov­ern­ment. The ACA is a big trans­ition for in­sur­ance com­pan­ies, and they have to make their best guess about how much it will cost to cov­er people in the health care law’s ex­changes. Risk cor­ridors are there to bal­ance out the over­all fin­an­cial bur­den in case they guessed wrong. If lit­er­ally every in­sur­ance com­pany un­der­es­tim­ated the cost of par­ti­cip­at­ing in the ex­changes, says Larry Levitt, seni­or ad­viser for spe­cial ini­ti­at­ives at the Kais­er Fam­ily Found­a­tion, they would all be com­pensated for that mis­take. “Risk cor­ridors ab­so­lutely would help to cush­ion the blow,” he says.

Risk ad­just­ment: The goal here isn’t to sta­bil­ize the over­all mar­ket the way risk cor­ridors do. It’s to make sure that one single com­pany doesn’t end up saddled with the most-ex­pens­ive pa­tients in a state. Un­der risk ad­just­ment, in­sur­ance com­pan­ies with­in a state pay each oth­er. Com­pan­ies with an es­pe­cially healthy risk pool make a cash pay­ment to com­pan­ies that ended up with an es­pe­cially un­healthy one. The fed­er­al gov­ern­ment sets the para­met­ers in most states, al­though, as with the ex­changes, some states do it on their own.

The three pro­grams are sim­il­ar but ad­dress slightly dif­fer­ent risks. The goal is to en­sure that as the health-in­sur­ance in­dustry trans­itions in­to the new mar­ket­places, in­di­vidu­al com­pan­ies aren’t forced out of the mar­ket and that the sys­tem gen­er­ally won’t have to raise premi­ums next year to off­set un­ex­pec­ted costs this year. That could be the be­gin­ning of the dreaded in­sur­ance “death spir­al,” in which sick cus­tom­ers be­get premi­um in­creases, which makes cov­er­age less at­tract­ive to health­i­er people. The au­thors of the health care law didn’t want that, and they re­cog­nized that the people who sign up for Obama­care first will prob­ably be the sick people who need it most.

Wheth­er the pro­grams are ro­bust enough to handle Obama­care de­pends on how the en­roll­ment pro­cess goes. The mix of sick and healthy en­rollees still has to be right — about 40 per­cent healthy, ac­cord­ing to HHS. Right now, it’s not look­ing great, at least in the 36 states that turned to the fed­er­al gov­ern­ment to run their mar­ket­places, but there’s no way to make a pre­dic­tion yet about the en­tire six-month en­roll­ment pro­cess. “It’s not like it provides 100 per­cent pro­tec­tion, but I think cush­ion­ing the blow is the right ana­logy,” Levitt says. The three R’s de­pend on en­roll­ment be­ing just bad enough, rather than the ab­so­lute cata­strophe its op­pon­ents have pre­dicted.

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