How one letter in the alphabet raised health care costs for all

If schoolkids have to suffer through the “three Rs,” you, too, should start paying attention. But I’m not talking about reading, writing, and arithmetic. I’m talking about the “three Rs” of health care: reinsurance, risk adjustment, and risk corridors. Why are these “Rs” so important? Because each of them have an impact on the cost you pay for health care. So pay attention! Class is in session.

In 2010, the Affordable Care Act (ACA) was launched with a goal of guaranteeing health care coverage for all Americans. The law prohibited insurers from denying coverage to those with pre-existing conditions or basing health insurance premiums on an individual’s health status.

It’s important to point out that many insurers, including CDPHP, never denied coverage or on pre-existing conditions.

That said, the law posed obvious financial risks for insurers, who would be required to provide coverage to millions of individuals who had never had insurance before and had significant pent-up demand. One concern of guaranteed coverage is that consumers – who are most in need of services – would be first in line to sign up and use a higher proportion of services. This concept, which is known as adverse selection, can cause insurance premiums to rise. There were similar concerns that some insurers might try to avoid enrolling sick individuals, a practice that known as risk selection – or cherry-picking.

In order to prevent these things from happening, the ACA included three risk-sharing programs, commonly known as the “three Rs.” The goal of reinsurance, risk adjustment, and risk corridors was to stabilize the market, promote competition, and ensure health insurers would participate in the new marketplaces. At the end of today’s lesson, you can decide if these programs have been successful.

Risk Adjustment

The permanent risk-adjustment program was put in place to “spread the wealth” when it came to ACA-related risk. That is, health insurers with lower risk (i.e. younger, healthier members) would make payments to insurers with greater risk. These payments – which are passed back and forth between insurers in the same state – are based on a combination of factors, including enrollees’ demographics, medical history, and utilization.

Reinsurance

Similar to risk adjustment, the ACA’s reinsurance program was created to protect the marketplace from adverse selection. However, this program is temporary (2014-2016) and is reserved for insurers who assume unusually high risk. Oftentimes, this involves a very small number of members with very high medical costs. This program, which is funded to the tune of $25 billion, is propped up by yours truly – health insurers and group health plans – through a tax levied each year.

Risk Corridors

The final, and possibly most critical “R” in the bunch, is the risk corridors program. Risk corridors were designed to mitigate the risk that insurers assume when pricing products with little to no background information. Historically speaking, health insurers have to analyze prior years’ data to determine how much it will cost to insure a given group people. However, when the ACA was implemented, insurance companies had no way of knowing how much these new members would cost. The risk corridors program was intended to protect consumers from dramatic year-to-year cost increases, if actual costs varied from projections.

Promises, promises…

The law’s creators promised the program would redistribute funds from insurers with high profits to those with losses. But with legislative changes to the program and so many insurers in the red during the first two years of the ACA, the risk corridor program wound up woefully underfunded. According to recent reports, the program collected $362 million from health plans in 2014, while the federal government promised plans nearly $3 billion in payments.

We are now seeing the fallout from these unmet promises, as more than half of the nation’s health insurance co-ops – which were created by Obamacare to the tune of $2.4 billion – have announced plans to close. Health Republic of New York is one of the 12 co-ops shuttered in recent weeks, leaving 215,000 individuals scrambling to enroll in new plans. Even health insurance supergiant, UnitedHealthcare, recently announced it, too, may pull out of the marketplace.

These developments represent a major blow to the ACA as it enters a critical third year. If the law is going to provide stable coverage for all consumers, lawmakers and regulators will need to make good on promises necessary to stabilize the market.

No one said health insurance was an easy class to pass. Now that the government is involved to such a large extent, I hope you’re taking notes!