Tag Archives: essential health benefits

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!

Why Obamacare Is Unraveling

President Obama’s announcement during a Nov. 14 press conference that he would like to see insurance carriers extend non-complying health coverage after Jan. 1 may be the event that unravels the Affordable Care Act (ACA).  Carriers and health plans have worked hard for several years, have spent millions of dollars complying with ACA, have fought with insurance department regulators getting policies approved and, in many cases, have notified consumers of the need to terminate non-compliant policies. Now, carriers and health plans have a new wrinkle thrown their way.  What is going to happen next?

Some of the key principles of ACA are:

  • Clear definition of Essential Health Benefits (i.e., EHB)
  • Clear definition of metallic or metal level plans based upon the actuarial value of the benefit plan
  • Restrictions on premium format and methods to derive premium rates
  • Rigorous rate review and approval process coordinated by a combination of state insurance departments and federal oversight
  • Mandates for participation in some type of health coverage
  • Large number of taxes and fees to help fund ACA
  • Assumption that there would be a reasonable risk pool so carriers could appropriately price and predict future costs of care

Minimum loss ratio requirements to ensure that a reasonable portion of the premium rate goes toward the payment of claims

Carriers have worked hard to comply with the new regulations, which for many have involved significant shifts in the methods used to conduct business.  The rate development process for a typical carrier follows this process:

  • Review of prior claims experience and profitability
  • Determination of what rate increase will be required to maintain a profitable product offering
  • Development of proposed rate for various rate cohorts with competitive comparisons
  • Potential benefit redesign to meet regulatory changes or competitive pressures in the marketplace
  • Obtaining independent actuarial certification regarding proposed rates as a reasonableness test (e.g., Section 1163 required in California)
  • Filing of rates with regulators for approval and follow-up with regulators until rates are formally approved
  • Communication of rates to those insured, and implementation of the new rates

This process can require four to six months to complete.  It is actuarially complex and requires careful analysis of many factors and variables. 

As ACA emerged, carriers had to adjust benefits covered in prior products where they failed to meet the minimum EHB required.  In some cases, products were terminated because they did not meet either the EHB or the minimum actuarial value of 60%.  Carriers worked hard to develop replacement products, filed these with regulators and started to present these to their customers. 

It was obvious that some customers would be concerned about the impact of rate changes associated with ACA-approved benefit programs.  Rates would increase for a variety of reasons:

  • Health care inflation continues
  • Mandated benefits required broader coverage than previously purchased
  • Elimination of gender rating generally increased rates for insured males
  • Minimum Actuarial Values (i.e., > 60% AV) raised benefits for some insureds
  • Assumed average risk score for the individual market was higher than in the past because medical underwriting is no longer appropriate, and, in some cases, carriers raised the average assumed health status built into the rates to reflect the enrollment of additional Medicaid- or Medicaid-like lives.
  • Age rating was affected, requiring higher rates at younger ages to offset some of the reductions at the older ages (i.e., 3:1 limits on age rating curve).

The concerns expressed by the public on higher rates, the concerns expressed about policy cancellations, the delays caused by website challenges, the continued frustrations about ACA all combined into a situation where a large portion of public were frustrated with ACA.  The president’s announcement was a response to many of these concerns and frustrations.

However, there are several complications facing the carrier community as a result of this suggestion or proposal to the insurance departments and affected carriers.

  • Rates for terminated programs were not updated for 2014.  Rates can’t be extended without adjustment because rates were established for a previous time period, and there has been inflation.  Updating would require a minimum of 4 – 6 months.  The software implemented by the federal government and used at the local insurance department level is built around the new ACA requirements and would likely reject restored versions of terminated policies.
  • The risk pool for all of the ACA-approved rates will be changed significantly if individuals are able to continue their prior programs.  Selection bias issues would be significant.
  • The individual mandate for credible health coverage would be compromised if individuals continued their prior, non-compliant coverage.  The anticipated tax base would be jeopardized with the continued offering of non-compliant coverage if penalties were forgiven.
  • The disruption to the insurance industry involved in the exchanges would be significant and potentially would permanently damage the risk pool.
  • More importantly, the public’s perception of the benefit of ACA to them will be affected as changes were required, then they weren’t, then they will be, etc.

Although there are many features of ACA that potentially provide value to the public, the flawed rollout, the delays in implementation and now radical changes to the structure of the ACA program very likely start to unravel the viability of the program.  Only time will tell.