Obamacare Risk Adjustment: Moving the Goalposts



As noted in a previous blog entry, the Obama administration has ways to partially immunize health insurers from losing money in Obamacare’s exchanges. A later entry proposed that early results of open enrollment for Obamacare, which began on October 1, suggest that health insurers will require a bigger bailout than originally anticipated, and the administration is searching for ways to do this without congressional approval.

By the end of November, the U.S. Department of Health & Human Services (HHS) released its proposed rule for payment parameters for 2015. However, as well as proposing the parameters for reinsurance, risk adjustment, and risk corridors for the second year of the Obamacare exchanges, the proposed rule sketched out some of the adjustments it plans to make to the previously finalized rule for 2014.

The one that jumps out is the change to the attachment point for reinsurance. As described in the earlier post, the attachment point for 2014 was set at $60,000, with a maximum of $250,000.

For example, if a patient has medical claims of $200,000, the insurer would be compensated $112,000 [($200,000-$60,000) X 80%] by the reinsurance fund. If the patient has medical claims of $500,000, the insurer will claim the maximum of $152,000 [($250,000-$60,000) X 80%].

At the last minute, the new proposed rule has lowered the attachment point for 2014 to $35,000 from $60,000. Revisiting the two examples above, the patient with medical claims of $200,000 will now cause the insurer to be compensated $132,000 [($200,000-$35,000) X 80%] by the reinsurance fund. If the patient has medical claims of $500,000, the insurer will claim the maximum of $172,000 [($250,000-$35,000) X 80%].

However, there will not be enough money in the reinsurance fund to pay these claims. HHS asserts that it lowered the attachment point because there will be fewer extraordinary claims than originally anticipated: “...Updated information, including the actual premiums for reinsurance-eligible plans, as well as recent policy changes, suggest that our prior estimates of the payment parameters may overestimate the total covered claims costs of individuals enrolled in reinsurance-eligible plans in 2014” (italics mine).

This is a remarkable claim: I do not believe that any public expert who has been observing enrollment in the Obamacare exchanges since October 1 has come to this conclusion. Quite the contrary, we believe that the exchanges are attracting older and sicker applicants than originally anticipated.

Further, some (e.g., Robert Laszewski) suspect that there may be fewer people insured in 2014 than 2013, so bad has the launch been. This is an important point, because the reinsurance fund is financed by a tax of $63 per insured person. That figure was calculated by HHS assuming approximately 191 million insured people. Significantly fewer will reduce the funds available for reinsurance.

No matter how much or how little money is raised, reinsurance claims will be prorated, and the newly lowered attachment point makes it likely that there will be more claims on the payouts.

If the fund raises less revenue than expected, and 2014 medical claims in the exchanges do not drop as HHS (and nobody else) anticipates, the fund will not really be a reinsurance fund, but a small bowl out of which all the exchanges’ insurers will be scrambling to scrape out whatever crumbs they can.

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For the pivotal alternative to Obamacare, please see the Independent Institute’s widely acclaimed book: Priceless: Curing the Healthcare Crisis, by John C. Goodman.

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