OK, OK — the title of this blog is rhetorical, purposely so. A number of states, Colorado not yet among them, are reporting increases being requested by health insurance plans for 2016. And they are they are going to be increasing significantly — solid double digits. Why?!
In the first chapter of this explanation, we have to go back to the past and explain an important part of the original legislation that gave rise to Obamacare. Back then, in order to somewhat mollify the health plans, the ACA legislation incorporated what are referred as the “3Rs”.
The first “R” stands for reinsurance. A special premium tax was levied on all health insurance policies to pay into a fund to provide excess loss relief to insurance companies. The rationale was that with the lifting of underwriting constraints (ie. no more preexisting conditions), most of the early enrollees in Obamacare plans would be people with medical history issues that would lead to increased claims. Reinsurance, which is not a new concept, would allow for repayment of a portion of those losses in compensation for this overweight enrollment. The first year would provide relief for roughly 80% of such losses, 70% in 2015, and 60% in 2016. After this the reinsurance program would cease. It was expected that by this time, the health insurance companies would have collected enough claims history on all enrollees to set their rates appropriate to this new “risk.” Keep this in mind, because there was a change in policy in the summer of 2014, which will be explained later.
The second “R” stands for risk corridors. Here is a useful explanation by the NCPA, 2013::
This is an unlimited taxpayer liability 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. This program was also set to last three years.
The third “R” stands for risk adjustment and is a permanent change to the way health plans under the new law are characterized. Essentially, lower risk income is shifted to cover high risk costs. This has the effect of inverting the typical health risk profile for most insurance companies. Think of it this way — in the past, men and the young had lower claims experiences than women and the older insureds, and therefore subsidized their rates. With risk adjustment, revenue is shifted about so that women and older members are more profitable (relatively speaking) for the insurance company. This is brought to bear by the mandate that rates from the youngest to the oldest insureds can not vary by more than a 3:1 ratio — in the past it was more than 6:1.To close out this chapter, let’s look back at July 2014, when the administration quietly directed that the reinsurance program reimburse to the level of 100% (rather than 80/70/60). Not only did this set the table for smaller companies to take the risk of lower rates for 2015 plans, since they knew they could qualify for a mid-2015 cash infusion, it also put the Treasury in the position of having to fork over more money from the general fund to make up any difference.
To put this is a real world context, consider this article from 6/10/2015 in Health News Colorado by Katie McCrimmon about the Colorado Health Coop. In the article (McCrimmon Article), the legislative oversight committee was briefed by the Colorado insurance commissioner about the financial status of the Colorado Health Coop. Even though the company has had a paper loss to date, note this passage::
The HealthOP is also due to receive millions in federal funds this fall. Across the country, insurance companies that took on the sickest patients and suffered extensive losses are slated to receive payments through the Affordable Care Act.
This specifically refers to the expected reimbursements for excess losses due from the reinsurance fund. [ed. note** The Colorado Health Coop was enabled by the ACA legislation and is operated as a non-profit organization. They need these sorts of cash infusions since they are generally unable to attract investments from private interests due to their status as an NPO]
In tomorrow’s chapter, we will delve into some early information from several states about their 2016 rate filings. Why would the 3Rs impact 2016 rates? Simply because insurance companies have to stabilize their accounts and reserves, both as required by law and for expected claims, in anticipation of the expiration of the first two Rs. Secondly, after two full years of claims experience, the plans are more fully aware of what their actual costs will be going forward into 2016, 2017 and beyond.
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