These are three (3) of the more than 18 new taxes, fees, and deduction changes that have been created/implemented in order to fund the Affordable Care Act (ACA), aka Obamacare. The later two (2) have not yet been imposed/collected, but the bell rings this year (2014) for their collection and remittance to Uncle Sam. This week I thought I would delve into the ear marking of some of this revenue, and what many are calling the ACA’s “insurance company bailout”.
The ACA contains three (3) separate and distinct “bailout programs” embedded within it’s 2,700 pages. They are the Reinsurance Program (temporary), Risk Adjustment Mechanism, and Risk Corridor. In short, each program is designed to protect insurance companies that participate in the health care marketplaces/exchanges, from costs and losses. The Congressional Budget Office (CBO) has projected the ACA to direct some $1,071,000,000,000.00 (that’s trillion with a T) over the 10 year period from 2014 – 2023, to eligible insurers. Here’s a brief description of each of these programs.
[Temporary] Reinsurance Program
The temporary reinsurance program, which applies to individual plans only, places a partial cap on claims costs for participating insurers. As the description suggests, this particular program is temporary in nature, set to begin this year and last through 2016. In 2014 for example, 80 percent of individual costs between $45,000 and $250,000 are paid/funded by this program, which is in effect the American tax payer. So private insurers pay the claims costs below $45,000, and the reinsurance program covers 80% of the next $200,000 worth of costs. Think of this as a “donut hole” of sorts, where the ACA/tax payers cover the lion’s share of costs in said donut hole. Note: the transitional reinsurance fee referenced at the very beginning of this post, which applies this year, is equal to $63 per covered member. The fee is expected to generate $10 billion in 2014, $6 billion in 2015 (when the fee drops to $44 per member), and $4 billion in 2016.
This program, also temporary, and directed at the individual market, limits overall losses attributable to participating insurers in the public marketplaces/exchanges. This program is a little more complicated in terms of its application and use. The best way to explain it is to look at an example. So if an insurance company expects its losses to be “X” in a particular year, and actual costs end up being more than “X plus 2 percent”, the risk corridor program (again, aka tax payers) will assist the insurer. Once the insurer covers the 2 percent, the program is designed to cover 80 percent of costs exceeding the 2 percent. Readers interested in a much more detailed overview of this program and the calculations involved can access a Society of Actuaries report by clicking http://www.soa.org/library/newsletters/health-watch-newsletter/2013/october/hsn-2013-iss73-norris.aspx
Last, but certainly not least, and in fact, permanent by design, is the ACA’s risk adjustment mechanism. A previous blog post covered the ACA’s so called “modified community rating” provision, which standardizes health insurance premiums, and severely limits the criteria insurers can use to set premiums. Like the Risk Corridor program discussed above, the Risk Adjustment mechanism is very complex in nature. The department of health and human services (HHS) has developed an elaborate model that consists of 127 “Hierarchical Condition Categories” (HCC), which place a risk score upon each enrollee. For example, an anticipated loss of 8.8 percent on males age 60 and older, would become a gain of 7.3 percent after the application of the applicable adjustment. On the flip side, an anticipated gain for a younger male results in a loss, after the adjustment.
As I mentioned in last week’s post, the existence of these programs may have had an impact on health insurer’s 2014 and 2015 premium rate setting strategies. Knowing that there are safety nets in place for coverage bought and sold through the marketplaces/exchanges may just have given the industry a sense of confidence that translated into overall lower premium rates than would have otherwise been offered. Additionally, these programs/mechanisms have a profound effect on how insurance markets perform, how premium rates are derived, and how the ACA will ultimately impact insurers.
It is important to conclude with the fact that efforts are under way in Washington to repeal both the Reinsurance and Corridor programs, in both the House and Senate. Congressman Mike Coffman has introduced the “No Bailouts for Insurance Industry Act of 2014″ (H.R. 3812); and in the Senate, Senator Marco Rubio has introduced S. 1726. Coffman’s bill would repeal both programs, while Rubio’s bill seeks only to repeal the risk corridor.