Is Obamacare dying?

The United States Senate fails to replace — or even repeal — the ACA forcing the Government to adopt a wait and watch approach with the ACA marketplace. At this time, measuring the health of the ACA marketplace becomes increasingly critical. To that end, today we take a look at three relatively obscure, maligned, and misunderstood parts of the law, and see what they tell us about the health of the ACA marketplace: Risk adjustment, Reinsurance, and Risk corridors.

  1. Risk adjustment:

This is the program that helps ensure that all plans have a manageable risk population. If one plan has a disproportionately high share of unhealthy individuals (compared to other plans that offer similar benefits), they are likely to incur heavy losses and disturb the balance in the marketplace. To avoid this, the Centers for Medicare & Medicaid Services (CMS) calculates a risk score for each plan, by averaging an estimated risk score for each individual in that plan. Plans with lower than expected risk pay into a fund that pays out to plans with higher than expected risk. This system helps prevent plans from cherry picking healthy customers to avoid high costs.

Scope: Permanent

2. Reinsurance:

This program aims to prevent unusual premium increases by compensating plans which have high cost beneficiaries. It uses actual costs of each patient (calculated retrospectively at the end of the year), as opposed to expected costs used in the risk adjustment program. All plans contribute funds at the start of the year. At the end of the year, CMS identifies beneficiaries who cost more than a certain sum (called attachment point) and then reimburses plans a certain percentage of claims above the attachment point. For example, in 2014, the attachment point was set at $45,000 per beneficiary and at the end of the year CMS paid out 100% of claims above the attachment point to plans that had these high cost patients (in 2015, they only paid out 55.1%, instead of 100%).

Scope: Temporary (2014–16)

3. Risk corridors:

in 2014, CMS set a target that insurers on the individual marketplace should spend about 80% of their premium dollars on healthcare. Plans who spend 3% less than the target or 3% more than the target were then enrolled into a program to help stabilize premium rates. Plans that spent less money paid a portion of the excess into a fund, and plans that spent more than their target got paid from the fund to compensate for their high costs.

Scope: Temporary (2014–16)

These programs all have unique roles in stabilizing the insurance marketplace, but they do allow for some exemptions. Only newer plans and plans in the individual marketplace have to participate in these programs. Grandfathered plans, and group plans are exempt from some of these programs. Interestingly, ACA did not invent any of these approaches. All three of these approaches were used, rather effectively, when Medicare part D started in 2006. However, they have been a lot more controversial in the ACA. Many critics see these programs as socialist, because they quite literally tinker with the natural selection forces in the marketplace. Despite the criticism, these programs might be helping the insurance market in the country.

In its latest report, released on June 30th 2017, CMS remains optimistic about the health of the ACA. They estimate that the reinsurance and risk corridor programs have helped reduce the rate of premium hikes. Even the risk scores for each plan have become more stable and predictable since 2015, indicating that insurance plans are settling down, allowing for greater stability and smaller premium hikes. However, a few days later, CMS announced that nearly 44% of counties in the country have 1 or no plans available on the marketplace. These two reports are seemingly at odds with each other, because the health of the ACA marketplace has a lot more indicators than just these three programs. We will explore, in another post, other indicators of the ACA’s health to gain further insight into the issue.

Further reading:

Sujith Ramachandran

Written by

Sujith Ramachandran is an Assistant Professor of Pharmacy Administration, a passionate student of health policy, and loves talking about himself in 3rd person!

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