Obamacare and the 3Rs: When Healthy Becomes Unprofitable
Obamacare creates a new profile of insured. Consumers can no longer be denied because of a pre-existing condition, and having coverage is mandated by law. Before the Affordable Care Act kicked in, insurance companies managed risk by having a healthier pool of members. Since this can no longer be controlled, Milliman — an actuarial company — set out to understand the affect this change has on insurers.
The report explains the federal government tried to mitigate risks being introduced with the law through the 3Rs: transitional reinsurance, risk corridor programs, and risk adjustment. The last provision is permanent, giving it more weight in the report than the first two.
The Centers for Medicare and Medicare Services defined the scope of the Rs. All insurers and third party administrators participate in reinsurance. The program lasts for three years, and grants funding to issuers that incur high claims costs for enrollees. Risk corridors apply to all qualified health plans, will also last for three years; it is intended to limit losses and gains. The risk adjustment is permanent. “Non-grandfathered individual and small group market plans, inside and outside the Exchange” are part of risk adjustment programs, which takes funds from lower risk plans, moving them to higher risk.
The analysis by Milliman evaluates men, and women of varying age groups, splitting each section into “pre-3Rs” and “post-3Rs.” In doing so, the researchers found that “in most cases, the precise opposite of what one would expect without these programs. In several important ways, the nuances and interactions inherent in the 3Rs can generate impacts that actually turn traditional risk management practices upside down.”
Men, previously a profitable demographic for insurers, become liabilities, while women, the elderly, and newborns see their profitability increase. “With few exceptions, profit margin increases dramatically with age when considering all ACA impacts. This occurs despite restrictions under the ACA requiring that the oldest applicants be offered premium rates no more than three times the youngest adults.” In a 3R-less system, older individuals would be subsidized by younger male enrollees.
“The implementation of the 3Rs could create an incentive to attract an maintain a block of business that is demographically older and more female than one’s competitors. A key condition in order for this result to hold is that the market as a whole enrolls a standard mix of members (i.e. ranging from young to old and healthy to unhealthy).” Payments from plans are the result of payments into plans, meaning that risk adjustment is a zero-sum game. Given the difficulties recently experienced in enrolling in health care, “many markets may not end up enrolling a typically standard mix of individuals.” Under such a system, plans may not be protected from the risk of enrollees skewing to one demographic or another.
When a member has a condition that is “subject to risk adjustment” Milliman discovered they become more profitable to the insurer. Medical conditions were classified into Hierarchical Condition Categories (or, HCCs), which contribute to a member’s score. A total of 127 HCCs were identified, and of these, there are five that will result in a loss for insurers. Most (54) result in a profit of 20 to 100 percent of premiums. The next highest count (32) will produce profit margins between 100 and 1,000 percent of premium; seven exceed 1,000 percent profitability.
The majority of HCCs appear to be profitable for the insurer, according to Milliman’s work. Conversely, “insurers that cover only members without a condition recognized by the HHS HCC model will make payments into the risk adjustment pool large enough to produce an average pretax loss of approximately 5.0 percent of premium.” Ultimately, the “analysis suggests that nearly all additional members with conditions included in the HHS risk adjustment model will likely lead to favorable financial results for a plan compared with the assumptions used to price it.
At the other end of the spectrum, all additional members who do not have an HCC coded in 2014 will result in worse financial results for plan. In addition, there may no longer be the same incentive to attract the ‘young invincibles’ to help pay for older members. It may actually be a detriment if a company insures a large proportion of young policyholders.”