Tuesday, January 28, 2014

How the Obamacare Bailouts Work

... What are risk corridors? Are they as boring as they sound?

Risk corridors limit both the amount of money that a health insurance plan can make -- and how much it can lose -- during the first three years it sells on the health insurance exchanges. Risk corridors tend to exist in the bowels of actuarial science rather than in New York Post op-eds but, since they're having a moment in the sun, we'll stop here to explain this very technical program in two paragraphs.

Some background is helpful here: Typically, insurance companies rely on their past experience to set prices; how many people got sick in 2013 can be a good proxy for estimating how many people will get sick in 2014. But when insurance companies went onto the exchanges, none of them had ever sold in the Obamacare marketplaces. They didn't have a 2013 to rely on, which made setting premiums a vexing task.

One way insurance companies could mitigate their risk was by setting premiums pretty high -- if you charge each person $800 per month, for example, to sign-up for your plan, you will probably cover the cost of claims. But the Obama administration was worried that such high prices would scare away consumers and enter the risk corridors, a program that reimburses insurance plans for claims that cost significantly more than premiums that new subscribers paid in.

What counts as "significantly" more? 

The risk corridor program kicks in when health insurers show that the claims their subscribers submit outpace premiums they paid in by more than 3 percent. So, if we take the World's Tiniest Insurance Company and say it received $100 in premiums (it is, after all, very tiny) but paid out $110 in claims, it would get help from other insurance plans paying for that $10 above and beyond the $100 paid in premiums -- but the government will not foot the whole bill.

For claim costs that are 3 to 8 percent higher than the amount paid in premiums, the federal government will reimburse half that amount. For costs that exceed 8 percent, insurers will be reimbursed 80 percent. So, if we stick with World's Tiniest Insurance Company example, this means the government would reimburse it $4.10: $2.50 for 50 percent of the 3 to 8 percent cost above the premium, which in this case was $5, and another $1.60 for 80 percent of remaining 2 percent, $2 in this example, in additional costs.

Could you put this in a chart?

We can't--but the American Academy of Actuaries can! This chart shows how the risk corridor program kicks in at different levels of claims paid out.

Where does the money to pay insurance companies come from?

Other insurance companies. [It is far more accurate to say policy holders and tax payers since these funds ultimately come from increased premiums] All non-grandfathered plans are required to pay into a pot of money that's used to fund the risk corridor program. This means there's potential for insurers to lose money through the risk corridor program, which is what you see represented on the left side of the above chart. If an insurance company finds that their premiums way more than cover claims paid out - the technical definition of "way more" here is defined as claims cost at least 3 percent less  than premiums - then that health plan has to fork over some of that money into the risk corridor pool.

And this just goes on forever, each year?

No -- the health-care law's risk corridors are a temporary program that expires in 2016. By then, insurance plans should have enough experience with who is in their plans and the level of claims they submit in order to accurately price their insurance products. ...

You mentioned earlier there were three programs. What are the other two?

Are you ready to get wonky? Hope so! The two other programs are called risk adjustment and reinsurance.  In the risk adjustment program, Health and Human Services collects funds from plans who have healthier enrollees and redistributes them to plans that have sicker enrollees.

Unlike risk corridors, this is a permanent part of the health-care law. In the temporary reinsurance program (which, like risk corridors, runs through 2016), Health and Human Services has $10 billion in federal funding to help insurers pay the cost of especially expensive enrollees.

More specifically, the reinsurance program helps health plans pay for subscribers who run up at least $60,000 in claims. There is a cap on reinsurance payments, too: Above $250,000, the health plan would once again be responsible for covering its subscribers' costs.

More charts please!

Okay! Here's a great one from Kaiser Family Foundation that puts all three of these programs onto one page, comparing their main features.