In the book and movie, The Hunt for Red October, after his torpedoes failed to destroy a target that had gotten too close to him for the weapons to arm properly, the commander of the Soviet attack submarine ordered his crew to fire again and to “remove the safeties.” As a result, after some hair bending action, the torpedoes ended up destroying the very sub that had fired them. Oops!
Well, this may well have been what has just happened with Obamacare. Let me explain. Going in, the insurers knew that they had little loss experience with the new plans. In addition, they knew that people eligible for premium subsidies would likely become over-utilizers, but exactly how much could not be known with a high degree of certainty.
Furthermore, the insurers would not get important or sufficient claims experience for more than a year after launch, probably no earlier than about the 2016-2017 plan year. In order to get insurers to come on board, more or less, with Obamacare (PPACA), the legislation included a 3 year provision to protect the insurers from heavy losses due to medical claims.
It was expected, which turned out to be true, that people without health insurance who also exhibited high medical risk would be the first applicants. Many of these people obtained their coverage along with hefty premium subsidies. To exacerbate circumstances, healthy, low utilizing people, did not enroll in significant enough numbers to underpin a sound financial risk pool. PPACA stood in by establishing a risk/reinsurance pool.
This is how the reinsurance pool works. This reinsurance pool is funded through a tax levied on nearly every health policy, including self funded plans — currently it’s about $63/year. In order to keep insurers from suffering huge losses, the fund was to be used to cover a portion of large claims. The attachment point for reinsurance is $60,000, with a co-insurance rate of 80 percent, capped at $250,000. For example, if a patient has medical claims of $200,000, the insurer will be compensated $112,000 [($200,000-$60,000) X 80%] by the reinsurance fund (example extracted from NCPA blog, 11/11/13).
Another element of PPACA deals with risk corridors, which are funded by general fund tax dollars. This is an unlimited taxpayer liability (not covered by a special PPACA implemented tax) that compensates insurers in the exchanges for medical costs in excess of 103 percent of the target costs for each plan. For costs between 103 percent and 108 percent of target, taxpayers compensate the insurers half the excess loss. For costs above 108 percent of target, taxpayers will compensate plans 2.5 percent of the target medical cost plus 80 percent of the excess over 108 percent. (ref: NCAP blog 11/11/13).
During this past summer, the administration, in order to stave off much larger premium increases expected for 2015 (many analysts projected an average of 9-10%), took the caps off of coinsurance, letting the reimbursement rise up to 100%, thereby relieving the insurers from covering excesses losses with higher premium dollars. In addition, it has been reported, that many of the smaller companies that failed to attract a large number of enrollees, were advised by actuarial consultants to lower premiums to build their insured base. After all, the federal reinsurance and risk corridor and adjustment programs would protect them substantially for losses in excess of their targeted medical costs. These actions will de-stabilize the pool of insureds, particularly once the reinsurance program disappears, if not before.
The problem with this approach is (disregarding the argument made by some that this move may not have been a legal appropriation of tax payer funds), that the whole reinsurance program is supposed to terminate in 2017, and the current reinsurance tax revenue is insufficient to fully fund the reinsurance pool. “Removing the safeties” simply accelerates the need for more taxpayer funding. The lower premium increases beginning to be reported for 2015 are therefore heavily underwritten by additional taxpayer subsidy. The program is not going to be self-sufficient as planned or promoted, and premiums will eventually have to be adjusted significantly upward to properly fund the program.
R A Jensen