• Delaying the individual mandate would be a headache for insurers, but it wouldn’t induce a “death spiral”

    Can we all calm down about death spirals? Yes, recent HealthCare.gov news has been dismal at best. Yes, the administration is statutorily locked in to the open enrollment period. And yes, if glitches persist, they may opt to delay the individual mandate through the hardship exemption. This is less disastrous than it sounds. 

    I’ve argued in the past that delaying the individual mandate for a year wouldn’t provoke a full death spiral; it would be an uncomfortable hiccup, but it’s not enough time for the whole market to unravel. More importantly, there are deep-in-the-weeds protections baked into the Affordable Care Act: risk adjustment, reinsurance, and risk corridors.

    These programs—collectively called the “three Rs”—aid insurers if they wind up enrolling a population that is sicker and more expensive than projected. They do a crucial bit of policy work: we want plans competing on efficiency and quality, not their ability to attract the healthiest patients.

    The programs have related functions, but risk corridors will play the biggest role if the individual mandate does get delayed. Their entire purpose is to stabilize premiums during the first three years of Obamacare, when it’s especially difficult for insurers to price plans.

    Here’s how it works: exchange plans (QHPs) projected how much their risk pool would cost overall in 2014, their “target” cost. If they’ve significantly miscalculated—or, say, if a mandate delay causes adverse selection that they couldn’t have predicted—HHS will take action:

    The risk corridor mechanism compares the total allowable medical costs for each QHP (excluding non-medical or administrative costs) to those projected or targeted by the QHP. If the actual allowable costs are less than 97 percent of the QHP’s target amount, a percentage of these savings will be remitted to HHS (limiting gain). Similarly if the actual allowable cost is more than 103 percent of the QHP’s target amount, a percentage of the difference will be paid back to the QHP (limiting loss).

    Total transfer depends on how badly the insurer miscalculated:

    qhpriskcorridor_rwjf75568

    Basically, today’s worst-case scenario is that HealthCare.gov takes months to fix and the mandate is delayed until 2015, resulting in widespread adverse selection. Insurers wouldn’t recoup all losses, but the risk corridor program provides their bottom line with a substantial buffer. Importantly, it doesn’t need to be budget neutral; if the math demands it, the government can pay out more than it collects through the program. This could be expensive—the CBO scored the health law as though risk corridors were budget neutral—but it could also be offset by foregone subsidies.

    Insurers have a stake in Obamacare’s success; that doesn’t magically disappear if 2014 enrollment is rockier than anticipated. The the risk corridor program continues through 2016, which would allow plans to weather 2014′s uncertainty and probably keep the following year’s premiums relatively unchanged as the risk pool normalizes.

    The real risk of delaying the individual mandate is long-term political fallout from Obamacare being labeled a “fiasco”, not the dreaded insurance death spiral.

    Adrianna (@onceuponA)

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    • And many insurers have engaged in their own risk management by offering numerous QHPs within each category, which has resulted in complexity that not even the very best web site mavens may be able to fix. In today’s NYT, Ezekiel Emanuel has his prescription for fixing the federal exchange, including this one: “Fourth, delay what can be delayed to focus on the absolute top priority: the customer shopping experience, especially the ability to compare coverage, deductibles, co-pays, subsidized premiums and other information side by side”. I admire Dr. Emanuel, not least because of his very funny account of his and his brother’s childhood, but does he really believe that the “customer shopping experience” can be fixed with the insurers offering so many different QHPs within each category, with only marginal differences among them. Indeed, the exchange does not now provide any information about the QHPS other than prices, instead providing links to the insurers’ web sites for the “coverage, deductibles, co-pays, subsidized premiums and other information”. Is the intent for the exchange ultimately to provide this information as suggested by Dr. Emanuel? Highly unlikely. Why? Because the insurers would cry foul, as their marketing has always included minor differences in policies that make apples to apples and oranges to oranges comparisons next to impossible. And so it is with the many QHPs being offered on the exchange. There is a solution to this dilemma, but the administration chose not to adopt it, so here we are.

    • Adrianna
      Narrow analysis, dont you think?

      Community rating and market failure goes beyond RA. The inertia of failure itself: MCOs pulling out of markets, enrollee loss of confidence, purchasing outside of exchange, and political opportunism key factors.

      You highlight an important support mechanism. But it is not the only factor. I still think caution necessary.
      Brad

    • Adriana: Just curious, does the ability of the government to pay out more then it takes in as part of the risk corridor depend on a Congressional appropriation, or is that funding already in place and available? Because if they have to go to Congress for an extra $10 billion or so to fund the risk corridors, I think I see a problem with that.

      The adverse selection protections were built with the idea that some insurers might wind up with sicker populations than other insurers. I’m not sure they’re ready for the possibility that everybody has a sicker population than planned for.

      • My understanding is that it’s not dependent on a Congressional appropriation, that the law appropriates for it without a ceiling—but it must conform to the formula prescribed in the regulations, broadly outlined in that table. It’s like if we magically had 100% enrollment in the exchanges in 2014: the government would shell out way more than expected in subsidies, but wouldn’t need to ask Congress’s permission first, because the law provides for the subsidies.

        The protections weren’t designed for it—evidenced by the CBO scoring the risk corridor program as budget neutral—but I still think they would serve the purpose anyway. The risk-adjustment program is a permanent fixture to balance that problem of plans attracting populations of differential health profiles. Reinsurance and risk corridors were designed for the uncertainty of the first few years, but reinsurance is financially limited to the fees it collects. The risk corridor program is not similarly constrained.

    • This is a somewhat off-topic response:

      The website is just a symptom of a larger problem. Let’s say the mandate gets delayed by a year to give the developers more time. During that time what happens? See, there’s nothing coming out of the White House or HHS that describes the pathway to stabilization. The only thing recently has been “we’ve been blindsided and the President is as mad as you are.” That’s not reassuring. But we’re grown-ups, we’re not saying we want reassurance. We’re saying that the excuse given is indefensible. This was an arbitrary deadline, not an attack. So, now what? Some of the questions are:

      A) How will we get enrollment going forward in the meantime? Are we just going to sit on it?
      B) Will there be any refocus on non-website means? The call center? Outreach? Was there a contingency discussion at all?
      C) What do the non-profits who are tied to the exchange do in the meantime?

      These are simple managerial issues that shouldn’t take up our time after the fact. Spending White House oversight now to catch up means that energy won’t be there for other issues that still aren’t resolved. That’s a whole other discussion. The pertinent point here is that the backers really do want this to work and a frentic focus on the website is distracting from the main point. The insurance will be available and people need to get in it; and there’s no dialogue going from where we are now to the next point and the point beyond that.

      I can only speak for myself, but the death spiral possibility is not my source of frustration. It’s coming from the sense that there’s a lack of understanding of basic data management or a lack of will to prioritize the completion of steps along the way to the end goal. Somebody has to do that and stop wringing their hands over the website.

    • Ms. McIntyre:

      Thanks for putting this info together. Your posts add even more quality to an already invaluable blog.

      I was unaware that the ACA included this type of safety net for the insurance companies. In other words, we as taxpayers pay to monitor and enforce the mandates to be sure people buy their products. We also pay for the subsidies so those products are somewhat affordable, and then we pay to set up and run the exchanges so those subsidized consumers can easily transfer money to those companies. Now I learn that we will also be paying if they actually enroll patients that are sick. Who was the ACA supposed to help?

      [Sorry for the snark—the point is that your efforts are very much appreciated. Carry on!]

      jon

    • I have worked in the insurance business for fourteen years and represent over one hundred carriers via a super agency in Texas. The author has no experience with the corporate mentality of insurance carriers when it comes to repetitive losses and mis-priced markets.

      Their response is rarely, “Ho hum, we will just wait and see how next year turns out.” No, the typical carrier response to a market which wasn’t priced properly is to abandon that market as quickly as possible. That is the response I have seen again and again as soon as the income statement turns negative. While all the backstops the author mentions are nice, they will have little effect if there are no carriers participating.

      • Obama and posse have stated multiple times that “single payer” is their long term goal. Insurance companies getting out of the business of health insurance would seem to promote that goal, and leave all that national insurance premium slush money under govt control, just where they’d like it to be. Insurers running away? – IMO, this is just exactly what President Incredible would like to see happen.

    • A huge caveat to this: the Risk Corridor program only applies to coverage bought through the exchanges. Assuming that you can get a decent amount of anti-selection outside the exchange, too, now that medical underwriting is not permitted. Note too that the Risk Corridor, and the individual Reinsurance program, are temporary 3 year programs, meant to stabilize things through a transition period. If 2014 turns out to be a “false start”, that transition period will be potentially longer than 3 years.

      No doubt we’ll all get by somehow, but the Risk Corridor might not do so much good this coming year.

    • Good post. This is another detail of the health care bill that I think very few of us knew about.

      It is also where the threat to “defund Obamacare” could really bite.
      Congress could refuse to fund the risk adjustment-corridors and then insurers would drop out right and left.

      The lack of any risk adjustment at all is why the individual insurance market has been so unstable for years.

    • Years ago I saw some research that said that people who seek and get insurance are on average healthier that those that do not. It looked like cautious people get insurance and their caution makes them healthier. So you may be even more right than you think you are. Of course that weakens the case for the mandate.

    • Here are two other factors that short-circuit the death spiral: First, most people buying coverage in the exchange will have premium tax credits (PTC). This means that the price they pay will be based on their income, plus the difference between the plan they choose and the “reference premium” — that is, the premium for the second-lowest-cost silver plan.

      Second, premiums outside the exchange are pooled together with premiums inside the exchange. If discrepancies arise between carriers, risk-adjustment and reinsurance mechanism compensate. And PTCs can only be used in the exchange.

      Suppose premiums in the exchange go up by 40%. Even such an extraordinary increase would not cause a mass exodus of healthy people from the exchange. Why? Someone with PTCs who enrolls in a plan with the reference premium won’t pay a penny more in premiums. What they pay will depend on income alone. If that person enrolls in a Plan X that, before the premium increase, cost $100 more than the reference premium plan, Plan X will now cost $140 more than the reference premium plan. Maybe that will cause the consumer to move to the reference premium plan, but it won’t cause the consumer to leave the exchange, because leaving the exchange would mean giving up the PTC and paying the full premium cost of coverage.

      What about the minority of people buying coverage in the exchange without PTCs? If premiums go up by 40% in the exchange, they’ll be doing something similar outside the exchange. It won’t be the way it is in today’s individual market, where coverage is medically underwritten, and a healthy person can get the same coverage outside a purchasing pool for a much lower price when the purchasing pool gets contaminated by adverse selection.

      • The exchange credits may mitigate somewhat the death spiral, but I wouldn’t say it will short circuit them. One of the keys to keeping a death spiral at bay is the enrollment of young people. Here’s the thing to remember – not all young people under 400% of poverty will get the tax credits. In fact, in most states the credits disappear somewhere between 250 – 300% of poverty. This means a 25 year old earning $30,000 usually will have to pay the full cost of his insurance. So he/she will have to pay the full increase in premiums, making it more likely they drop out of the pool. There’s some further mitigation in that as premiums rise the point at which subsidies disappear gets higher, but that’s small comfort to the people stuck paying the new, higher rates – or rather, not paying them because they decide they can’t afford it. Such as those outside of the exchanges in the individual market.

        And of course, in the initial round, as the young drop out, those unsubsidized premiums rise further, launching the death spiral. The fact that some people are insulated from the rising premiums doesn’t mean the market as a whole is insulated. And that will result in a death spiral.

        • A fair point, Sean – as usual! :) My sense is that the bulk of young adults expected to buy on the exchange are at the lowest income end of the range, where credits will not disappear, and where they’ll be supplemented by cost-sharing reductions. If you’re a young adult not offered ESI, you’re typically at a pretty low-paying job. But some no doubt will be in the situation you describe.

          The combination of an individual mandate, subsidies, and the 3 Rs means that the individual market under the ACA, including exchanges, might be more like MA than like other states that implemented full community rating in the individual market. MA did not experience a death spiral, but other states did. On the other hand, the ACA subsidies are less generous than MA subsidies, and many, many factors that promoted enrollment in MA are not present with ACA, so what we are likely to see is something between MA and other community-rated states. My guess is that in states that operate their own exchanges, enrollment into subsidized coverage will be much higher, as a general rule, than in states with federally-facilitated exchanges, so there will be higher individual market premiums (hence more risk of a spiral) in the latter group of states.

        • Sean
          Thanks for the comment. I am confused on something you point out however.

          Why do credits scale down after 250-300% in some states? The 400% ceiling in statute, no?

          Brad

          • If the reference premium is sufficiently low, once income reaches a fairly high level (even if below 400% FPL), the household’s income-based payment equals or exceeds the reference premium. At that point, you’re right that the household has a statutory right to a PTC. However, the PTC amount is $0. That’s because the PTC amount is calculated by subtracting the household’s income-based payment amount from the applicable reference premium.

          • Brad: Basically the subsidies are $0 when the unsubsidized premium comes in less than what ACA caps people’s personal share of the premium at. A single 25 year old earning $40,000 (about 350% of poverty, give or take) would be expected to pay 9.5% of their income towards their insurance, which would be $3,800 or $316 a month. But the Silver plan that subsidies are calculated off of is probably, depending on state, likely to be closer to $200 a month or so, or $2,400 a year.

            I know the response some will have – Hey, that 25 year old’s premiums are ‘too low’ to qualify for subsidies, why is this a problem?’ Well, considering that this 25-year old has already decided that he won’t buy insurance at $100 a month (and there are plenty of $100 a month policies out there today, they’re all going away on December 31 though), I’m not exactly sure why the ability to buy a $200 a month policy is supposed to be more enticing.

    • Good exchange.

      Stan, are you saying that if the exchanges wind up with a preponderance of older and sicker insureds, the premiums for policies sold outside the exchange will go up also?

      Let me be specific.

      Let’s say that Aetna stays off the exchanges, for the most part, and then introduces a policy off the exchanges that is a big hit with young people.
      (not because of underwriting, which disappears.)

      Will the premium for the off exchange policy be higher than normal actuarial rates?
      \
      thanks

      • Oh, yes. Two of the 3 Rs with which this conversation began seek to ensure that premiums charged in the individual market reflect the total risk level within that market as a whole, not the enrollees within any particular plan. So if Aetna has mainly young healthy adults outside the exchange and offers coverage only outside, and Kaiser has mainly older sicker people, Aetna will make payments into the reinsurance and risk adjustment systems, and Kaiser will receive payments from those systems. Who knows whether those two Rs will fully equalize differences between carriers, but that’s the objective.

        And I carefully used the word “carrier.” Another ACA provision requires each carrier that offers individual coverage both within and outside the exchange to pool all its individual enrollees together. So if Aetna offered coverage both within and outside the exchange, and young healthy guys enrolled outside the exchange and older geezers like me enrolled inside the exchange, premiums in both settings would reflect a blended rate that averages the two pools together. But if a carrier stays out of the exchange or for some other reason has a total pool of individual market enrollees that departs, in actuarial risk, from the statewide average, risk-adjustment and reinsurance operates as a second line of defense that tries to keep premiums in line with average levels in the individual market as a whole.

    • Stan, the risk adjustment system you describe is very much like what is done in Germany, Switzerland, Holland, and numerous other countries that allow private non-profit insurers to be in the national health scheme.

      But if these regulations have teeth, won’t that wipe out all the profit that any insurer could make? An insurer with younger healthier clients can make money all year, but then have to transfer millions to the adjustment fund.

      I had NO idea that the ACA had such a mature risk adjustment scheme.
      The way you describe it, the private insurance market as we know it is over.

      • I’m not completely sure, but I believe that the risk adjustments and reinsurance are done largely prospectively, based on the characteristics of enrollees. There’s some kind of retrospective adjustment. I don’t really understand all the details, but I’m sure there’s plenty of room for insurers to profit by denying claims.

    • Stan: hard to tell. But change the 25-year old’s income to $35,000, or make them 30 years old – broadly speaking the effect is the same, with some marginal changes. Remembers, the elimination of subsidies starts at around 250% in many states (see this paper I co-authored: http://www.nationalcenter.org/NPA653.html), which is around $28,500 or so, I believe.

      And remember, there are plenty of healthy 35 year old people strolling around who are above 400% of poverty and just had their premiums from their plans in the individual market raised by 50% or 100% or more (or less, I imagine too). No subsidies = no mitigation of death spiral effects coming from this group either.

    • Prospective adjustment has proven rather easy for insurance companies to manipulate within Medicare Advantage.

      So I guess they will survive and prosper. Darn.

      Retrospective adjustment is a much harder discipline.

    • The key step in the death spiral isn’t the insurer taking losses, it’s the insurer raising prices. And pricing isn’t up to insurers alone.

      It might seem perverse but I could imagine some state regulators, particularly in states that were hostile to reform, requiring rate increases based on losses and premium unadjusted for the corridor. If they did, then in those states it would be death spiral full bore.

    • Re: the short-term potential for a death spiral: everyone should remember the timing of when issuers (health plans) must finalize their rates for 2015. In the typical state, that date will be in May, 2014.

      Because of perfectly-normal claim lags (especially for big complicated cases), and because of delays in when the typical person will enroll to satisfy the individual mandate, issuers will have little or no credible claims data at the moment they must re-rate. They will be “flying blind” as they re-rate for 2015, just as they largely “flew blind” when rating for 2014.

      One could speculate that issuers will freak out, and raise rates in 2015 “just because”. However, one thing that state rate-review system are pretty good at is the prevention of rate increases “just because”. I think these facts bode well for a successful ACA implementation.

    • Nice post. It’s details like this that make me increasingly certain that the ACA in its current form won’t live to be five years old.

      The ACA is starting to look like one of those radioactive, bombarded nuclei that wants to decay into something simpler. This version denies insurers the chance to do the only thing they’re good at (sharply differentiated pricing/benefits for different risk tiers) … and instead creates all sorts of odd add-ons in an attempt to get private insurers to act like a government program (universal service at set prices, with lots of behind-the-scenes transfers and adjustments to make the math work out.)

      If insurers begin to back off at some point, this all morphs into single-payer, no? If the government gets tired of propping up the system, we revert to a genuine market system that covers fewer people.

      The only other option: runaway costs and a soaring system of IRS-mandated penalties that keep people tied into ACA pricing that they despise. In that case, we get a different government.

    • Thanks George. I remember your writing about HMO’s in the
      1990′s. As you describe, the ACA is trying a kind of private sector
      socialism through the insurance companies. When it fails, I hope
      the response is real socialism through the expansion of Medicare.
      (to age 55, and to those with crippling illnesses like MS.) The
      taxes required to do this are less than the taxes required for all
      the ACA subsidies. And a lot easier to enforce!