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How to Save Individual ACA Market

Since its passage, the Affordable Care Act (i.e., ACA) has been a controversial law. From the time of its passage in March 2010 until U.S. House and Senate Republicans began their efforts to repeal and replace the ACA in the spring of 2017, support for the law has never exceeded 50%. The ACA’s lack of popularity is a function of the disruption it has caused in the Individual insurance markets and the premium increases passed on to policyholders. However, some provisions of the ACA are very popular. One aspect of the law that has significant public support is the protections it provides for persons with pre-existing conditions (i.e., guaranteed issue and modified community rating), with polls showing public support for these provisions at 78% or greater.

Protections for persons with pre-existing conditions and the lack of a strong Individual mandate are the main reasons for the high premium increases observed to date in the Individual ACA market. Simply put, high premium rates have caused younger and healthier consumers to forgo ACA coverage. This problem is exacerbated by the current 3:1 age rating restrictions, which result in younger consumers paying higher premiums compared with their relative risk. As premium rates continue to rise, this trend will escalate, which could lead to one or more the states finding their Individual ACA markets in an adverse selection spiral.

It is the opinion of the authors that persons with pre-existing conditions are not insurable risks, and that attempts to accommodate them in insurance market risk pools are bound to fail. Furthermore, we think that providing healthcare insurance coverage to persons with pre-existing conditions amounts to a necessary form of charity, and is therefore a public good. We believe that forcing responsibility for the funding and management of public services onto participants in private markets is neither fair nor prudent. Instead, we believe the cost of such mandates should be the responsibility of those who enact them, i.e., the general public through its elected officials and government agencies.

The authors agree that persons with pre-existing conditions should not be denied affordable health insurance coverage. However, we think the appropriate vehicle for covering these people is a high-risk pool attached to the Individual ACA market and funded by general tax revenues. We believe that a properly structured high-risk pool would greatly lower premiums in the Individual ACA markets, significantly reduce the number of uninsured, provide for better returns on investment for care management programs, would be relatively inexpensive to operate, and would provide for a strong and sustainable lasting Individual health insurance market in the U.S.

Policy Proposal

This section provides the details for our proposal for the establishment of a permanent high-risk pool to pay for the cost of members with pre-existing conditions in the Individual ACA market. To make our proposal as easily understandable as possible, please note that all rules, subsidies, and structures that currently apply to the Individual ACA markets would continue to do so unless stated otherwise. Here is our proposal:

  1. The federal government, through the Centers for Medicare & Medicaid, would administer a high-risk pool to cover people with pre-existing conditions who are seeking health insurance coverage in the Individual ACA market.
  2. The cost of the program would be funded by a combination of the insurance premiums paid by the members identified with pre-existing conditions and general tax revenue generated through an additional payroll tax.
  3. All member premiums in the Individual ACA marketplace would be priced assuming that no one in the risk pool has a pre-existing condition.
  4. The allowable age rates for adults would increase from the current ratio of 3:1 to 5:1.
  5. Members identified as having one or more pre-existing conditions would have their premiums and claim costs ceded to CMS. Members would continue to use their “insurer’s” networks and benefit plans as long as those members continued to pay their premiums to the insurance company. Insurers would forward providers’ bills for members with pre-existing conditions to CMS as they are received, and CMS would directly pay the providers within a set period of time (e.g., three to six months).
  6. To be defined as having a pre-existing condition, an applicant would be required to have a current diagnosis at the time of enrollment for one or more conditions from a pre-defined list of conditions. This means that a member who develops a condition that is on the pre-existing conditions list during a coverage period would be the financial responsibility of his insurance company not CMS until the beginning the of the next coverage period. Please note that the policy would allow insurers to underwrite new members entering the Individual ACA for the purpose of determining whether or not they have a pre-existing condition at the time of enrollment.
  7. CMS would establish care management programs (administered internally or externally through vendors) for members identified as having pre-existing conditions, and would work directly with providers to efficiently and successfully manage the care of those members.

Please note that the above list is a general policy outline. We imagine that there could be ways to “game” this, and we reasonably expect that legislators and regulators will anticipate and react to attempts to circumvent the purpose and goals of the policy.

See also: What Trump Wants to Do on ACA  

Modeling Methodology for Claims Projections

The relative costs of Individual ACA members in 2015, with and without pre-existing conditions, were modeled using the 2014 and 2015 Individual ACA membership and claims experience Axene Health Partner’s proprietary experience database. The 2015 Individual ACA experience in AHP’s experience database included more than 2.5 million member months. Chronic conditions for these members were assigned using the University of California, San Diego’s Chronic Illness and Disability Payment System (CDPS) risk adjustment model. The CDPS model assigns one or more of 58 possible conditions based on ICD9 and ICD10 diagnosis codes.

To simulate the underwriting of pre-existing conditions, we defined two classes of members with pre-existing conditions: members with known conditions, and members with undisclosed conditions. Members with known conditions were identified by comparing the CDPS results for Individual ACA members in 2015 with the CDPS results for members with any eligibility in 2014 with this health insurer. Conditions for these members that existed in both 2014 and 2015 were considered to be pre-existing in 2015. Members with undisclosed conditions were, by definition, more difficult to identify. For members that had Individual ACA eligibility in 2015, but no prior eligibility with a health insurer in AHP’s experience data, we assumed that the member had an undisclosed pre-existing condition if claims incurred within the first month of a member’s eligibility, as well as the claims over the remainder of 2015, were for one or more of the listed CDPS conditions.

Because the CDPS model is intended to calculate the total relative risk of a given member based on all of a member’s conditions, the model can flag a member for multiple conditions. For our modeling purposes, we wanted to assign at most one pre-existing condition per member, because it was not necessary for us to split a member’s total claims cost across multiple conditions. In cases where the CDPS model assigned more than one pre-existing condition to a given member, only the most severe condition was recorded. Condition severity was based on the CDPS model’s risk weights, and all costs were assigned to the condition with the highest risk weight.

We did not consider all of the 58 conditions used in the CDPS risk adjustment model to be appropriate for the pre-existing conditions high risk pool. Approximately two-thirds of the CDPS condition categories were excluded due to their relatively low CDPS model risk weights. We tended to keep conditions with qualifiers of “High” or “Very High”, more often than qualifiers of “Medium” or “Low”. We also used some judgement to include certain conditions when other categories within a certain condition class were already included. In the end, 21 conditions for adults and 19 conditions for children were chosen as appropriate for the pre-existing conditions high risk pool. Members who did not have a pre-existing condition on the list of chosen conditions, or members with no conditions at all, were assigned a condition of “none” for our modeling purposes. Table 1 below provides a summary of the pre-existing condition categories chosen.

Member months, member counts, allowed claims, and paid claims from AHP’s experience database for 2015 were aggregated for each condition into seven age bands. From these summary statistics, the probability of a member having a given condition by age band was calculated. Average allowed and paid claims PMPMs were also calculated for each condition and age band.

Using the summary statistics developed from AHP’s experience database for 2015 Individual ACA experience data, we modeled the expected cost of each state’s 2015 Individual ACA market. The total Individual ACA population that would be simulated for each state, as well as the distribution of ages within a given state, were collected from CMS public use data. The total Individual ACA population of each state was modeled based on the total State Billable Members Months listed in Appendix A to the Summary Report on Transitional Reinsurance Payments and Permanent Risk Adjustment Transfers for the 2015 Benefit Year. Billable member months were grossed up by approximately 0.40% to calculate total member months. This gross-up factor is based on the ratio of total member months to billable member months that we have seen in our clients’ recent data. Where possible, the distribution of ages within a state were based on the 2015 Marketplace Open Enrollment Public Use File. This report only contains information for the 37 states that used a federally facilitated exchange in 2015. For the states not captured in that report, the distribution of ages in the 2017 Marketplace Open Enrollment Public Use File were used instead.

A Monte Carlo simulation was performed in order to create a simulated Individual ACA market for each state. A set of random numbers was generated for each member in each state. These random numbers were used to assign the member’s age band by comparing the random number to the age distribution of members for a given state. A second set of random numbers was generated for each member and used to assign a condition by comparing the random number to the distribution of conditions for each age band. PMPM costs for each condition within each age band were scaled so that the expected total paid PMPM for each state tied to the state’s Average PMPM Claims reported in the 2015 Paid Claims Cost by State Report, produced based on data submitted to the EDGE server for purposes of the reinsurance program.

Please note, we believe the actual population of people with pre-existing conditions that would obtain coverage through the above defined high-risk pool would be essentially unchanged from the 2015 Individual ACA members who we have identified as having a pre-existing condition from our list. This is because the ACA premiums and subsidies are very attractive to those with pre-existing conditions, and we do not expect that our proposal would make the Individual ACA market more attractive to people with pre-existing conditions in any meaningful way.

Using the above methodology and data sources, we were only able to model the costs of the Individual ACA markets in 48 states. Excluded from our analysis were Massachusetts, Vermont, Washington D.C., and other U.S. territories such as Puerto Rico and Guam, due to a lack of publicly-available information necessary to model the costs of their Individual ACA market participants in 2015.

The results of our modeling provided us with average paid claims and “sustainable market premium” PMPMs for each of the 48 states. These metrics were calculated both including and excluding members with pre-existing conditions. We defined the average sustainable market premium as the premium that would result in an average loss ratio of 82% in each state’s Individual ACA market. Our last step was to develop aggregate results for each of the four metrics across all 48 states.

Modeling Results

Table 2 below provides a summary of the results of the 2015 Individual ACA markets in the 48 states we modeled.

Ceding members with pre-existing condition to CMS would have decreased the size of the 2015 Individual ACA markets in the 48 states in our analysis by approximately 3.1%, lowered total paid claims by approximately 23%, and decreased sustainable market premiums by almost 21%.

In total, health insurers in the 48 states in 2015 would have ceded $14.3 billion in claims and $1.84 billion in premium to CMS (leaving a net unfunded program cost of $12.5 billion) under our proposed high-risk pool program. Assuming that program expenses are 5% of total costs results in net program costs of $13.1 billion a year in 2015 dollars for the 48 states. Scaling this result to account for all 50 states, Washington D.C., and U.S. Territories would increase net program costs to $13.6 billion a year in 2015 dollars, which we rounded to $14 billion to provide some conservatism in our estimate.

By ceding members with pre-existing conditions to CMS’ Individual ACA high-risk pool, we have shown that insurers could lower sustainable market premium rates by more than 20%. A reduction in Individual ACA sustainable market premiums of 20% would make future premiums rates much more attractive to younger and healthier people who would otherwise forgo health insurance coverage.

Similar to the manner in which members with pre-existing conditions can cause premiums rate increases to compound due to adverse selection, removing those members from the Individual ACA pool could have a favorable compounding effect on rates as a healthier average risk pool causes premiums to drop, thereby attracting additional healthy members who have an additional favorable impact on premiums.

See also: 10 Ideas That Could Fix Healthcare  

Additionally, by resetting the age curve from 3:1 to 5:1 (i.e., the maximum ratio of premiums paid by members age 65 to premiums paid by members age 21), allows for a further decrease in required premiums for younger and healthier members.

Table 3 shows that removing members with pre-existing conditions from Individual ACA risk pool and resetting the premium age curve from 3:1 to 5:1 allows for decreases in required premium rates for all ages of at least 5%, while decreasing rates for the youngest members over 40%. These premium decreases are before the impact of the positive selection spiral. With the lower rates attracting more younger individuals into the risk pool, the premiums for older individuals will decrease accordingly.

Additional Considerations

Done correctly, we believe the creation of a high-risk pool of Individual ACA members with pre-existing conditions would result in a better return of investment for care management programs for these members. Given that members are allowed to change insurance carriers, persons with pre-existing conditions are as likely as any other market participants to shop for better plans and rates for the coverage they require. Care and disease management programs often require long time horizons to bear results. This means that insurers are less likely to implement cost-saving programs when members who benefited from the programs could change insurers before the full impact of the members’ claims cost savings are realized. By moving a large percentage of those with high-cost conditions to care management programs administered by a single entity (i.e., CMS), the return on investment of these programs is likely to be higher and results of the programs are likely to be more impactful for all insurers participating in the market.

Due to the large volume of claims for members with pre-existing conditions, CMS would have the ability to review clinical practices, related costs, and outcomes for the services provided to these members. This information could be used to develop approaches to improve the effectiveness and efficiency, while lowering the cost of the care provided to these high cost claimants. Using evidence-based targets, CMS could then enter into gain and/or risk-sharing arrangements to help improve the quality and lower the cost of care provided.


In this paper, we have introduced a straight-forward and workable policy proposal that would continue to provide health insurance coverage to people with pre-existing conditions, significantly lower premiums in the Individual ACA insurance markets, reduce the number of uninsured, and allow for the creation of care management and risk-sharing arrangements with providers that would could greatly improve the quality and lower the cost of care. The annual price of this proposal would be approximately $14 billion in 2015 dollars, and represent an approximately 0.38% increase in the federal budget. Considering the importance that voters place of health care cost, quality, and access, we believe that our policy proposal would provide a popular and effective change to this critical component of the U.S. health care system at relatively small price.

What Makes U.S. Healthcare Different?

We in the U.S. spend a lot on healthcare. Whether expressed as the cost per service, the cost per person or as a percentage of the gross domestic product, the high cost of healthcare is well documented. While solutions to this situation have been suggested for many years, the expensive reality continues.

Is it possible that unique characteristics of the American healthcare environment create special challenges? This article discusses several unique aspects.

Geographic Diversity

The U.S. is a diverse country with population centers scattered throughout the country. The mean center of population currently lies in Missouri.

As the inset map shows, this is east and south of the geographic center of the U.S. The major population centers in the eastern half of the country pull it east. The major population centers in the south pull it south. More than 10% of the population is in one major southwestern state, California. Major metropolitan areas can be found throughout the country: San Francisco and Los Angeles in the Southwest, Dallas and Houston in the south Midwest, Chicago in the upper Midwest, Boston and New York in the northeastern part of the country, Atlanta and Miami in the Southeast. Why is this important?

More than 90% of the Canadian population lives within 100 miles of the U.S. border. The oft-touted Canadian system serves a population that is concentrated in a thin band of land. In a concentrated environment, it is possible to have a more efficient allocation of resources. In the Canadian provinces with significant rural populations (e.g., Alberta and Saskatchewan) the provinces use regional health authorities to take responsibility.

See also: A Road Map for Health Insurance  

American Definition of Quality

Quality is difficult to universally define. Many times people say, “I know it when I see it” or, more importantly “I know it when I don’t see it.” Over the past 15 to 20 years, quality has been objectively defined, to the point that it is consistently measured across health systems. One of the best definitions of quality is “providing the right service, at the right time, to the right patient as efficiently as possible.” The American definition of quality usually includes a high degree of access and a significant sense of urgency.

Other countries do not see waiting as a deterioration in quality. In fact, queuing, or waiting lines, are accepted. The American ideal is getting healthcare now, not tomorrow, not next week or next year. Most Americans see waiting as a reduction in quality. Health systems that require pre-authorization or approval of referrals are frequently viewed as substandard because those systems create barriers that patients have to work through. In countries with socialized healthcare systems, patients regularly have to wait. Much of this wait is associated with fiscal limits within the system restricting the available resources. In the U.S., the excess capacity in the system almost always provides an adequate supply of healthcare resources, so the required waiting time is very limited.

The waiting line is caused by either quotas or specific budgets for specific procedures, producing a rigid form of rationing. In the U.S., waiting occurs when the physician was booked or the schedule was full. This queue is not a budget-driven constraint.

The U.S. healthcare system is recognized as one of the highest-quality in the world (e.g., high cancer screening rates). Although the quality of care is generally quite high, some of the measured outcomes suggest that the U.S. health system is not advancing as much as would be hoped. One example is the efforts to eliminate breast cancer. Screening for breast cancer is higher than it has ever been, but so is the rate of breast cancer. Perhaps improved detection has identified more cases.

Freedom of Choice

Americans value freedom of choice; they like to make decisions for themselves. Americans value going where they want to get care, choosing who they want to provide that care, oftentimes deciding what care they want and getting it when they want to get it. This has resulted in broader networks offering more choices than needed. This has resulted in higher-than-necessary utilization of specific services, including new technology. The need for freedom of choice has limited the effectiveness of care management programs. Freedom of choice combined with limited cost sharing results in expensive healthcare. One unfortunate consequence is the negative opinion that develops regarding any administrative process that limits freedom of choice. Programs that focus on limiting medically unnecessary care are accused of disrupting the physician/patient relationship.

Healthcare Resource Planning

In most states, there is very limited overall resource planning. At various times, some states have implemented certificate of need programs for specific types of providers. But, for the most part, there are no formal limits to the number of providers or types of providers. In most urban markets, there is an oversupply of providers. Rural markets are often plagued with a shortage. Some markets are so desperate for providers that significant compensation is offered to lure them.

Why is this important? Healthcare tends to be a market that fails to respond to traditional supply and demand economics. In the general economy, the greater the supply, the lesser the demand and the lower the prices. In healthcare, the higher the supply, the greater the induced demand and the continuation of higher prices. Informal studies suggest that utilization levels positively correlate with supply.

One of the reasons for escalating costs is the continued oversupply of healthcare providers. One of the best examples of effective resource planning is the approach implemented by Kaiser Foundation Health Plan. Kaiser carefully plans the supply of professional services based on a long-established staffing model. As the associated membership grows, they move from a combination of “nearby owned facilities” and “rented facilities” to “owned facilities.” Kaiser carefully manages the strategic transition to a “wholly owned delivery system” and manages the resources based on membership growth. Kaiser avoids excess capacity and maintains a cost-effective delivery system.

Countries with socialized healthcare systems are much more involved with resource planning than the U.S. The competitive nature of healthcare in the U.S. is much more focused on capturing market share than defining appropriate resources for a region. Less effective resource planning drives up the cost of care.

Wide Variations in Efficiency

The efficiency of regional healthcare systems varies significantly from one geographic market to another. Delivery system care patterns have emerged based on local needs, regional care practices and the extent of provider involvement in the financing of care. Markets like Portland, OR, have developed extremely efficient in-patient care patterns with a larger portion of their healthcare dollar going to professional providers. Other markets have emerged at the same time with much less efficient patterns. In-patient utilization patterns vary by more than 35% to 45%. Analyses show no clinical rationale to support the observed variation. The U.S. is one of the few countries exhibiting this level of variation. Experts generally concur that much of this variation is caused by personal physician preference.

Tax-Sheltered Benefits

The current tax-sheltered employee benefit approach emerged during the post-WWII era where employers were seeking creative ways to attract, hire and keep employees. The tax law enabled employers to write off the cost of benefits and provide their employees a valuable tax-sheltered employee benefit. The tax law provides this favorable status only to employer-sponsored programs. Individual health insurance benefit programs do not enjoy this same tax advantage. Tax reform efforts have considered eliminating this difference. Self-funded employer-sponsored benefit programs, including those involving labor union negotiations (i.e., Taft -Hartley plans) are also tax-advantaged.

This is an important issue when discussing transitions to alternative systems. What role will employers play? What about programs negotiated by labor unions? How will we unravel the tax-advantaged funding of healthcare costs by the employer?

Diverse Insurance and Claims Administration

The employee health benefit marketplace has grown significantly with a large variety of organizations targeting the effective administration of such programs. Merger/acquisition activity has transformed the marketplace into a handful of major players and a large number of regional players. Third party administrators (TPAs) are active in the market supporting the self-funded and self-administered benefit programs. The federal government provides government-sponsored coverage for the elderly and disabled (Medicare) and for beneficiaries in lower socio-economic levels (Medicaid). Many of these programs outsource the administration and risk taking to the private sector. Healthcare administration in the U.S. includes a significant private sector involvement. There is little uniformity between different health plans. There are limited standards to streamline the process.

Public/Private Sector Cost Shift

The U.S. healthcare system incorporates a significant cost shift between the government-sponsored programs and the private sector programs. The private sector pays a much higher amount for identical services than the public sector. Within the private sector, each carrier/health plan is required to negotiate payment rates, which can vary substantially from one carrier to the next. The variability in reimbursement increases administrative costs for both the providers and the health plans or administrators.

See also: Healthcare Debate Misses Key Point  

Hesitancy to Declare Healthcare a Human Rights Issue

In the U.S., there has been a hesitancy to declare healthcare a human rights issue. In Canada, the Canada Health Care Act defines five principles:

    • Public Administration: All administration of provincial health insurance must be carried out by a public authority on a non-profit basis.
    • Comprehensiveness: All necessary health services, including hospitals, physicians and surgical dentists, must be insured.
    • Universality: All insured residents are entitled to the same level of healthcare.
    • Portability: A resident who moves to a different province or territory is still entitled to coverage from the home province during a minimum waiting period. This also applies to residents who leave the country.
    • Accessibility: All insured persons have reasonable access to healthcare facilities. In addition, all physicians, hospitals, etc., must be provided reasonable compensation for the services they provide.

A quick internet review will show considerable discussion defending both opinions: It is a right, or it isn’t a right. Dominant emerging thought focuses on what is called Triple Aim: a strong focus on quality and customer satisfaction, improving the population’s health status and reducing costs of care. They are admirable goals, but all require the definition or identification of a population. Who is the population? Is it everyone? Is it just the segment I am concerned about?

Recent healthcare reform efforts have focused on minimizing uninsured, which was a step toward universality. Ironically, the American’s demand for freedom of choice also includes freedom from being told that they must buy insurance and what kind of care they should pay for.


These nine issues provide an initial list of unique characteristics of the U.S. healthcare system. When working toward solutions to resolving the high cost of care, these issues must be considered. This is not an exhaustive list but does begin to highlight what makes American healthcare different.

Progress Report on ACA After 9 Months

Nine months into it and getting ready for the next go-round, I thought it might be beneficial to take a look back and see what progress has been made on the Affordable Care Act.  There are many perspectives from which to evaluate the situation, and many will vary in their assessment. This article attempts to take an unbiased view and make an accurate assessment.

First of all, the implementation was a near disaster. Frustrated customers, frustrated carriers, frustrated providers. . . Obamacare couldn’t have generated more frustration if that had been the primary objective. Now that most of the dust has settled, the exchanges are enrolling individuals, and customers are paying their premiums and obtaining coverage with their selected health plan and carrier. I am not aware of any major glitch in this process. It appears that this part of the marketplace is functioning well, even if with implementation bruises.

The rate update process for 2015 also appears to be working well. Most health plans are now more comfortable with the system. The oversight of the various insurance commissioners seems to be working better this year. Rates are being approved. And most things seem to be ready for the coming implementation in the fall.

For all practical purposes, the ability to offer a benefit program, publicize the rate in the marketplace, purchase it, enroll and make use of the benefits as needed seems to be working well. This is not a major improvement, just a catching up to what had been done before, outside this new marketplace. Yes, the plans are standardized (the metallic levels), and the rates are consistently made (through a combination of oversight and standard ACA age factors), which improve the marketplace and minimize some adverse selection. But for the most part this is just doing business a new way.

So, have there be any improvements? Are more people covered? Have inflationary trends gone down? Has coverage become more affordable?

The results so far are preliminary, hard to measure and somewhat variable from one market to another. However, based on my experience with carriers and health plans across the country, I have the following observations:

  • 2015 rate increases will likely be less than in prior years is many markets;  this is less the result of reductions in underlying healthcare trends and more the result of the lack of any major change in the underlying marketplace.  Moving from a situation of being able to underwrite new members to one where no medical information can be used resulted in many carriers being conservative in their pricing for 2014. Because 2015 is merely an update from the prior year, the actual changes were less. One of the exceptions will be carriers who are phasing in the impact of ending the ACA catastrophic reinsurance program in 2017. I expect that most rate increases in most markets will be less than 10%.
  • Pharmacy costs are increasing much more rapidly than previously anticipated. The introduction of Sovaldi for Hep-C patients has significantly affected those programs covering Hep-C patients. Although Sovaldi essentially provides a cure for Hep-C, the treatment cost for patients is about $90,000 over three months and is expected to increase to at least $120,000 as the updated combo drug is introduced later this year. This highly effective, yet costly, drug is one of many hitting the market that are driving up costs. This drug has nothing to do with ACA implementation but will be included in the assessment of ACA effectiveness because it was introduced post-ACA.
  • The rolling of some Medicaid beneficiaries into the exchanges and the expansion of Medicaid in many states is having a significant impact for carriers operating in those markets. In one particular market, these changes are leading to severe financial challenges for carriers assuming the financial risk of these members in the exchange and in the managed care Medicaid program offered side by side to the ACA exchange.  Apparent underfunding by the state and much higher-than-expected utilization and costs are leading to serious financial issues. These issues appear to be replicated in many markets nationally.
  • The 3Rs (i.e., risk adjustor, risk corridor and reinsurance mechanisms) have yet to be included in financial results of health plans and carriers. Health plans are having to incorporate adjustments into this year’s financial results yet do not really know what the final adjustments will be. Some will have to establish premium deficiency reserves, others accruals for subsidies from ACA or payouts to ACA, adding much uncertainty to their operations. Boards are going to be less aware of financial results than in the past. Audits are going to be harder to complete and audit adjustments more common.
  • Underlying inflationary trends do not appear to be lowering as a result of ACA. Unit cost increases appear to be as fast as before, and in some markets more rapid. There is increasing pressure from providers as health plans attempt to negotiate controlled or reduced rates. Health plans are pursuing narrower networks to get the deals they desire, with public pressure to continue to keep maximum choice. The conflict of health plan objectives of controlling costs and consumer pressure to maintain no restrictions is leading to increased costs. Logically, one would assume that there is a point where the consumer might be willing to utilize a more restrictive network at a lower price, but the general reaction is that we aren’t yet at that point. Even though we are experiencing the highest costs on the planet, the average consumer still desires unlimited choice.  These same consumers complain about cost but are not willing to make personal changes to help reduce those costs.
  • The numbers of individuals without health plan coverage has reduced slightly but has not yet approached targeted levels. We have not yet achieved coverage for all. In fact, we are not yet on a path to accomplish this.

The bottom line:

  • We have made some progress to bring healthcare to the table for discussion.
  • We have re-arranged many of the insurance and health plan chairs on the Titanic-like health care system. We have avoided some icebergs this year, but it is not yet clear that we have clear sailing.
  • The system is still subject to significant cost factors that are hard to control (such as Sovaldi), anticipate and plan for. These “icebergs” will continue in the future.
  • The environment that our health plans are operating in is financially risky for them and will require high levels of cooperation with government oversight bodies (i.e., Medicaid departments, CMS and insurance departments).
  • Although rate increases may be tempered somewhat this coming year, there is little evidence of any long-term tempering or reduction in underlying health carecosts or bending of the trend. Many attempts by the carriers (e.g., narrow networks) are not receiving adequate acceptance by the public and regulators.

ACA is a work in progress. It has introduced some hope but has yet to produce the results hoped for.

New Confusion on ACA and Healthcare Reform

Recent events have added a layer of confusion for healthcare reform that needs to be resolved now.

The already confusing Affordable Care Act, with its massive regulations, reached a new tipping point as two separate federal appeals courts made contradictory rulings regarding federal subsidies for lower-income enrollees.  One ruled that a strict interpretation of the law limited subsidies to those states running their own exchanges, while the other indicated that the law would also apply in those states using only the federal exchange.

The conflicting rulings raise a very important issue for the many hundreds of thousands of people who have made insurance decisions in the affected states, relying on what they have been told. Individuals in one of the specified lower- income categories were told they would receive subsidies from the federal government. They reviewed their options and made specific choices based on the information they received and, without some clarification by the courts or Congress, are having the proverbial rug ripped from under their feet. Will there be a subsidy or not?

Insurance companies and health plans are in the middle of getting rates approved under the assumption that certain people will be there to sign up for the rates. If the underlying population group radically changes, rates will not reflect who is signing up. The lack of a subsidy will drive up the cost to each individual, making insurance unaffordable. This is unacceptable no matter what side of the aisle you’re on.

Someone has to step in quickly and resolve this issue. If there was ever a time to act in Washington, DC, this is the time. Either there are subsidies for all Americans, no matter what state they live in, or there should be no subsidies for any. This is a broad entitlement issue, not a political issue. 

Many of the states that didn’t establish state-run exchanges (and, thus, may lose access to subsidies) are “red” states, so any financial blow will fall disproportionately on conservatives. Democrats, meanwhile, want the president’s signature legislation to succeed. So, both sides have a significant reason for prompt resolution. 

Let’s get to it.

The Supposed Health Insurer Bailout!

As a professional who spends his entire career on healthcare issues, I get very annoyed when I read articles that put an extremely biased and misleading spin on the emerging healthcare reform activities known as ACA or Obamacare.  Whether one is for or against ACA, it is good to have accurate reporting regarding it to help refine one’s thinking and personal preferences.  Sensational articles add little value and create unnecessary confusion in the marketplace. 

An excellent article written by former associate Bob Laszewski in his Jan. 6, 2014, blog titled “Will There Be an Obamacare Death Spiral in 2015? No” was recently taken completely out of context by the Weekly Standard in a second article released in their blog Jan. 13, 2014, (i.e., “Bailing Out Health Insurers and Helping Obamacare”).  It’s a big disappointment to see this type of questionable journalism.

As part of the transitional plan to implement ACA, carefully crafted, but not perfect, risk-mitigation programs designed to both protect and fairly allocate revenue among the participating health plans were embedded in ACA.  These alliterative risk-mitigation provisions have been called “the 3 R’s.”  They are:

  • Risk Adjustor – sharing of revenue between plans to be sure revenue reasonably matches the spread of risk among the plans.
  • Reinsurance – special protection for plans hit with a higher-than-expected number of catastrophic claims.
  • Risk Corridors – risk-sharing program that reduces excessive profits on some plans and uses that to fund higher-than-expected losses on other plans.

The first one is a program that will continue long into the future.  The latter two are transitional. They will end after three years, when the program is designed to be stabilized.

Because of the high level of uncertainty and risk associated with ACA, the federal government wisely incorporated risk-mitigation programs.  All are designed to minimize material financial obstacles for volunteer participant carriers to be part of ACA.  Without the 3 R’s, it is very likely the number of participating plans/carriers would have been much smaller.  One of the keys to long-term ACA success is high participation by the public and the maintenance of a reasonable competitive market for the public to choose from.  We have yet to see the results of these programs, but they are there to be sure we have a viable marketplace.  This is definitely not a bailout for health plans. Rather this is a carefully crafted plan to mitigate unfortunate implementation risks in an uncertain environment.

Now for a discussion of the controversial blog:

The initial blog did not suggest, despite the accusation in the second article, that Obamacare is almost certain to cause insurance costs to skyrocket.  The blog accurately discussed the risk corridor program and how this mitigates risk in the initial years.

The second article expressed shock “that it will also subsidize those same insurers’ losses.”  ACA, by design, utilizes private insurance companies and health plans to underwrite insurance coverage offered through ACA and the exchanges.  The uncertainty about who will sign up, their health status, the propensity to use healthcare services, etc. makes it nearly impossible for a carrier to predict what it should charge.  ACA has created a logical marketplace with standardized benefits (i.e., Essential Health Benefits) and consistent plan designs (i.e., the metallic plans–Bronze, Silver, Gold and Platinum).  Even with these features, ACA creates uncertainty, and stable premium pricing is required to have a viable and competitive marketplace.  The likelihood of premium rate stability is enhanced if over a transitional period the “big worries” are mitigated.  These include:

  • Selection bias among various carriers.
  • Some assurance that people will sign up.
  • Significant shock losses centralized in a single carrier.
  • Surprising cost of health care for this population.

The long-term risk adjustment process solves the first issue.  The individual and employer mandates help resolve the second.  The transitional reinsurance program and transitional risk corridor protection resolve the third.  The last concern is subject to a two-way risk sharing.  Those carriers that “guessed” too high and overcharged will give up some of their revenue.  Those carriers that “guessed” too low are protected.  This is not a bailout; this is an equitable risk protection to ensure an orderly implementation of ACA.

The second article goes on to say that taxpayers subsidize big companies’ business expenses.  This, again, does not specifically address the real issue.  The transitional reinsurance program provides catastrophic reinsurance protection for all health plans in the exchange marketplace (i.e., initially claims in excess of $60,000 up to $250,000) primarily funded by a $5.25 per month per person charge for all health plans whether or not they are in the exchange marketplace.  Because those in the exchange are receiving a reinsurance benefit, I am not sure this is subsidizing anything.  For those out of the exchange, they are paying a fee and not receiving any benefit.  This could be considered a tax to those carriers.  Most, if not all, carriers are building this fee into their cost structure, so it is being passed on to the public.  However, the government has already proposed an increased reinsurance benefit and is already talking about reducing the premium.

The second article continues: “Insurers don’t have to pay out all of their costs,” suggesting that the risk corridor program is a bailout.  No, this isn’t a bailout. It is a temporary protection to help smooth out the premium rates.  Those carriers overcharging will get less money and those undercharging will receive some subsidy until the cost structures stabilize.  This is a short-term program providing assistance to the carriers as they calibrate costs under ACA.  This is not a bailout.  This is a two-way risk protection mechanism.  It does rely on a balanced marketplace.  To the extent the ACA rollout is flawed and carriers are all on the unfavorable side of the risk curve, the government will have to provide assistance, but the intent of the program is to be balanced.

In summary, we need more accurate reporting of the actual situation.  There are some concerns about the implementation of ACA, and they are real; they aren’t fabricated.  Fortunately, the 3 R’s are going to help mitigate some of these issues.  Without the 3 R’s there would be more serious issues than there will be with them.  If the program failed, if no carriers participated, if no one signed up, there would likely be a major government takeover.  That would be a serious issue with a federalization of the health insurance marketplace.  That did not happen and will likely not happen. 

Perhaps reflection as to why ACA emerged might be helpful.  Health costs and healthcare premiums were escalating far faster than we can afford.  They continue to increase much faster than the rest of the economy, which cannot continue without some type of intervention.  One hopes that ACA will be able to help resolve some of the concerns and issues.  Without some long-term improvement in the economics of healthcare we, as individuals and a nation, are faced with exceptional long-term economic challenges. 

Maybe we should be talking about this!