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Will There Be An Obamacare Death Spiral in 2015? Probably Not.

By ROBERT LASZEWSKI

If the Obamacare health insurance exchanges are not able to get a good spread of risk––many more healthy people than sick––the long-term viability of the program will be placed in great jeopardy.

Given the early signs––far fewer people signing up than expected, enormous negative publicity about website problems, rate shock, big average deductibles, narrow provider networks, and a general growing dissatisfaction over the new health law––it is clear to me that this program is in very serious trouble.

But that trouble would not necessarily transfer to the health insurance plans participating on the state and federal health insurance exchanges.

Obamacare contains a $25 billion federal risk fund set up to benefit health insurance companies selling coverage on the state and federal health insurance exchanges as well as in the small group (less than 50 workers) market. The fund lasts only three years: 2014, 2015, and 2016.

The government’s risk management program for the insurers has three parts:

A revenue neutral Risk Adjustment System designed to level adverse claim costs between health plans.
A Reinsurance Program that caps big claim costs for insurers (individual plans only).
A Risk Corridor Program that limits overall losses for insurers.
Of the $25 billion, $20 billion is earmarked for the Reinsurance Program and $5 billion goes to the U.S. treasury.

First, the Reinsurance Program caps big individual claim costs for insurers––in 2014, 80% of individual costs between $45,000 and $250,000 are paid by the government, for example.

Then comes the Risk Corridor program. Participating health plans will receive payments from the federal government in any of the following circumstances:
The plan’s costs for any benefit year are more than 103% but not more than 108% of the health plan’s targeted amount. The feds will reimburse 50% of all costs in excess of 103% of the medical cost target.
If the plan’s costs are more than 108% of the annual target, the feds will first pay the health plan a flat 2.5% of the target and then reimburse the plan for 80% of their claim costs above the targeted amount––with no upside limit.
Target cost is simply defined in the new law as a health plan’s “total premiums (including any subsidies) reduced by the administrative costs of the plan.” It is whatever the health plan projected its premium needed to be to pay medical costs.

So, a plan is on the hook for all claim costs up to 102% (2% more) than the target cost.

But, if the health plan has costs at 110% of the medical cost target, it will be responsible for only 102.4% of the target (a 2.4% shortfall)––only about a quarter of its losses.

If the health plan’s medical costs come in at 120% of the expected claim cost target level, the health plan will only be responsible for 104.4% of the target (a 4.4% shortfall)––again only about a quarter of its losses.

While health plans won’t be losing anywhere near as much money as they would have if the medical loss ratio were a disaster, because of the claim Reinsurance Program and the Risk Corridor Program, they will be losing money.

If the health plans have claim costs below the expected target, they would have to pay the excess back to the feds using the same formula in reverse.

The statute very specifically limits funds collected to $25 billion over the three years––$12 billion in 2014. The source of these funds is the Obamacare $63 annual “Belly Button Tax” assessed on almost all people covered under a health insurance plan.

The reinsurance program has done and will continue to do what it was intended to do; help attract and keep more carriers in Obamacare than might have otherwise come. No matter who did health insurance reform, Democrats or Republicans, there was always going to be a transitionary period when those currently sick and unable to get coverage before would come flooding through the doors.

Does this mean that health plans would be happy to see their plans underpriced in the first year, as well as the second and third year? No, they will not have any incentive to see their products dramatically underpriced the first three years only to see their prices zoom in the fourth year and create havoc.

But, my sense is that health plans, because they are so insulated from big losses, will generally stand pat with their 2014 rate structures for 2015––no matter how bad the early claims experience looks. I expect that the health insurance industry will be content to give the Obama administration one more chance to reboot Obamacare in the fall of 2014, when the 2015 open enrollment takes place.

But that is all the patience I see the industry having. While they will continue to be protected from losses in 2016, two years will be enough patience for them and they will be eager to at least begin to transition their rates to the proper level in 2016 rather than face a huge adjustment in 2017 when the reinsurance program ends.

What consumers/voters will be thinking about Obamacare come November 2014 is still to be determined. But insurers won’t be losing a lot of sleep over it.

Robert Laszewski has been a fixture in Washington health policy circles for the better part of three decades. He currently serves as the president of Health Policy and Strategy Associates of Alexandria, Virginia. You can read more of his thoughtful analysis of healthcare industry trends at The Health Policy and Marketplace Blog, where this post first appeared.

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MD as HELL

To the title of the post:

No spiral.

It will just auger in like a meteorite……splat!!

Matt Morrison
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Matt Morrison

What if $25B isn’t enough? Early enrollment results show that enrollees aged 55 or more make up 33% of enrollees, but only 11% of the uninsured. Did the carriers with plans on the exchange account for this much of a skew when they were putting together their rates? I can’t imagine that the administration will be able to increase the $63 belly button tax when their own supporters (the unions) are already trying to weasel out of it.

Bob Hertz
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Bob Hertz

note to John Balland – you would enjoy an article by Joseph White called ‘The Politics of Belief and US Health Care Reform.’ Anything by Prof White is worth reading, of course, starting with his book Competing Solutions that is still my bible on health policy. America has a large group of voters who really believe in the freedom of the individual. (some of these voters eagerly accept Medicare and Social Security, but I digress.) Anyways, this contingent of voters will vigorously oppose any new social insurance. Most European nations have no such contingent, or a very tiny one. Their… Read more »

John Ballard
Guest

Thanks, Bob. I’m sure it’s good. I may get to it sometime but I have a feeling I’m already in the choir. I also already watched the Blyth talk linked by Peter above and gave it a push at my Facebook page a few weeks back. Sometimes I wonder if I’m an echo chamber of my own making like the atavistic masses drinking the Fox koolade, but I really don’t think that is the case when I discover I’m in the company of others whose universe is diverse enough that links like these are not remarkable. For reflecting people these… Read more »

Bob Hertz
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Bob Hertz

Note to Archon 41:

In order for the retired engineer to get such a large subsidy, he and his wife must be living on a taxable income of about $30K a year.

Maybe withdrawals from savings or dividends are not counted as income for purposes of ACA subsidies?

I am not sure we know the whole story here.

Barry Carol
Guest
Barry Carol

Bob — I’m pretty sure that dividends and other investment income would count as part of the income amount used to calculate the health insurance subsidy. Withdrawals from savings would not. Even if he has an IRA or 401-K, he can’t withdraw the money before age 59 1/2 without incurring a 10% tax penalty on top of regular income taxes. I agree that he is probably looking at total modified adjusted gross income in the $30K range which is less than 200% of the FPL for a couple. He is too young to be eligible for social security unless he… Read more »

Bob Hertz
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Bob Hertz

Note to Peter1:

I am not sure that the federal government cut very many employees due to austerity. Even if they did, the political impact of a job loss in Alexandria VA is much, much less than the impact of closing an un-needed hospital in Billings MT.

Peter1
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Peter1

I guess my point Bob was that government knowingly uses job lose all the time in economic policy so why should the hospital sector be exempt. Ontario Canada did a purge of some underused hospitals years back then built some new ones later. People naturally want walk to convenience but always want the other guy to take the tax savings hit. There would have to be controls on political hospital building for purely election gains. People in remote and sparsely populated areas just live with longer drives to everything. I think government run/controlled health systems more efficient because they operate… Read more »

John Ballard
Guest

If I may jump in, part of the dynamic is how we in America regard how social benefits relate to economic and living cycles. Countries with strong social safety nets have crafted them to be counter-cyclical, but ours tend to be pro-cyclical. We tend to be generous when the economy is flourishing and tight-fisted when times are tough — the very times that a large number of people are struggling to make ends meet. But countries with generous unemployment support systems, reliable universal health systems, old-age pensions, maternity benefits that make ours look Dickensian — they take a longer view… Read more »

Peter1
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Peter1

John, & others,

I just watched an earlier link of Bobby Gladd’s – “Austerity – The History of a Dangerous Idea”, very timely to your comment John on economic cycles.

A must see. “Austerity in times of plenty and spending in times of need.”

http://www.youtube.com/watch?v=JQuHSQXxsjM&feature=youtu.be

Barry Carol
Guest
Barry Carol

John – Unemployment benefits, food stamps, and Medicaid are all counter-cyclical. As more people meet the income criteria to receive benefits in a weak economy, enrollment increases. On the other hand, programs that need to be funded by state and local government like K-12 education and subsidies for higher education are indeed cut back during economic downturns as state and local tax revenue shrinks. Many countries in Western Europe are having increasing trouble financing their generous social safety nets especially as their population ages. You might also want to check the unemployment rate in most of these countries. It’s significantly… Read more »

John Ballard
Guest

Right you are.
And the Scandinavian countries have the advantage, in addition to smaller populations, of fairly homogeneous social profiles, not to mention Norway’s deep, deep pockets from North Sea oil. I read somewhere that Norway is the only country with an ongoing budget surplus. As the saying goes, rich or poor it’s nice to have money.

I suppose we will always have a segment of the electorate willing to put poison pills into social programs lest a growing population of ingrates learn to abuse them.

Barry Carol
Guest
Barry Carol

“I think government run/controlled health systems more efficient because they operate on scare(r) dollars, here it seems there are no scarce dollars just higher billings. Imagine if the price of food went up 6% -10% compounded yearly, would people complain.” Peter1 — Imagine if we had single payer supermarkets or single payer gas stations with no money exchanged at the point of service. Numerous countries, in effect, make a political decision as to what percentage of GDP they want to spend on healthcare and they get there by restricting supply. The thing is that the politically determined GDP percentage to… Read more »

Peter1
Guest
Peter1

“Imagine if we had single payer supermarkets or single payer gas stations with no money exchanged at the point of service.” Barry, we don’t have or need those, and I don’t advocate that. “In New York City, newly elected liberal mayor, Bill DiBlasio, ran, in part, on working to oppose the closing of any more hospitals even if they aren’t needed.” A bad economic decision is just, that no matter who advocates. Barry, I don’t know how much price transparency government health care has in other countries, not much I think. When you’re not paying directly the prices are just… Read more »

Barry Carol
Guest
Barry Carol

Pter1 – The employer doesn’t know what anything costs either until the bills arrive after the insurer paid them on its behalf. The employee doesn’t care if he or she is insulated from the cost and has access to a broad network of providers. The doctor, who makes the referral to a hospital or imaging center or whatever doesn’t consider it part of his job to know or to care about costs unless the patient brings it up as an issue of concern due, usually, to a high deductible. The Certificate of Need program was intended to help government control… Read more »