So what are the Three R's of Obamacare? It's Reinsurance, Risk Adjustment, and Risk Corridors. All are mechanisms designed to help insurers stay in business when the pool of sick people cannonballed into the Exchanges last year. The confusion begins because most folks don't understand that each works through a different channel with different funding mechanisms and payouts.
Here's a little explainer that I hope will provide insight into the trouble insurers are getting into because they have relied on these three mechanisms.
We will start with the two "temporary" programs, Transitional Reinsurance and the Risk Corridor.
TRANSITIONAL REINSURANCE
Transitional Reinsurance began in 2014 and is scheduled to end in 2016. This mechanism is designed to pay plans that insure higher cost individuals. All health insurance issuers and all self-funded plans pay into this fund (yes, everyone who has insurance pays this). However, only individual market plans with high cost enrollees receive funds.
In 2014 the reinsurance fund received $63 per covered person per year. If you have a family of five the insurer pays $315 to the reinsurance fund. For 2015 the fund is receiving $44 per covered person. The last year of the program is scheduled to be $27 but has not yet been finalized.
Originally the Transitional Reinsurance fund was scheduled to pay high claims in the individual market. The insurer would receive 80% reimbursement of a claim from $60,000 up to $250,000. For example, if a covered member with insurer A had a $160,000 claim the insurer would pay $60,000 plus 20% of the remaining $100,000 for a total of $80,000. The Reinsurance fund would pay the other $80,000.
Because the enrollment in individual plans was so low and everyone still paid in, the the geniuses in DC decided to change how they were paying out the Reinsurance. They lowered the threshold down to $45,000 and increased the coinsurance to 100%. So in the scenario above the actual payment would have been $45,000 for the insurer and $115,000 paid by the Reinsurance fund.
RISK CORRIDOR
The Risk Corridor program is one that is currently getting all of the attention. This three year program was set to transfer money from profitable insurers to insurers who suffered losses in Exchanges. It only applies to insurers who offer Qualified Health Plans (QHP). In this case any insurer who participated and had less than 97% of target amounts of claims pays into the funds and any insurer who had more than 103% of target amounts receives the funds. It was supposed to work in conjunction with the Minimum Loss Ratio provisions of Obamacare. In this program payments do not have to be net to zero. In other words, if there is money left over the government keeps it. Or, if there isn't enough money then insurers could get hammered with losses.
The goal of this program was to push insurers not to set their rates too high by promising to pay those who undercut their premiums with money from insurers who set their rates too high. In many cases insurers, especially the new non-profit insurance Cooperatives, assumed they would be receiving money from this mechanism.
Last year 86% of all insurers either recorded a receivable (30%) or no receivable or payable (56%) meaning that they all were either counting on funds or didn't plan to have to pay any funds. Initially HHS estimated that $2.9 billion dollars would be available for those insurers who were losing money. What is actually paying out is around $362 million. Yes, that is 13% of the original target.
The outcomes have been brutal, especially for those insurers who were just starting up or are regional or local carriers that weren't flush with capital to begin with. As of this post it appears that 11 of the 23 Obamacare financed Insurance Cooperatives have announced they are shuttering their plans. In almost every case the main culprit is the extreme reduction of Risk Corridor funds they were counting on to keep them afloat.
RISK ADJUSTMENT
The Risk Adjustment program is the only permanent program under Obamacare's reinsurance vehicles. This is designed to transfer funds from insurers who have lower insured risk profiles to insurers with higher risk profiles. The program has a net to zero payment system meaning that there should always be funding for it. This could mean more payments for profitable insurers and more receivables for insurers who suffer heavy losses.
This program includes all insurance plans in the individual and small group markets that are not grandfathered regardless of whether or not they are in the Exchange. It has been hard to determine how much this fee will cost insurers as the volatility in the marketplace is pretty intense. Until there is credible claims data, insurers will have to hope their actuaries have excellent crystal balls.
CONCLUSION OR JUST THE BEGINNING?
While these three items appear to be getting all the attention it's important to note this is just the beginning, and in most cases, a very small sliver of the new costs insurers are facing due to Obamacare.
If you really want to see how your costs are impacted we must also include the PCORI fee that indexes annually but sunsets in 2019, the annual Health Insurance Industry Fee that according to most insurance carriers will account for 3%-4% of your premiums annually, the Health Insurance Marketplace fee that HHS has set at 3.5% in states using the Federal Exchange, and finally, the soon-to-come Cadillac Tax on premiums in excess of a set amount. The Cadillac tax will be a 40% excise tax on insurance companies who have plans with premiums that are considered "too high".
THE REAL CONCLUSION
We all have been hoodwinked and Democrats keep telling us that Obamacare is working. They are right: it's working for the government.
A government which now has assembled a 3.5% fee on your premiums for Exchange operations, a 4% tax on insurance premiums that insurers must pay, a $2.08 PCORI fee that each insured person must pay, a $63 (now $44) per insured person fee for reinsurance, an unknown amount that profitable insurers must pay to insurers who incur losses through risk adjustment, and lastly an overwhelmingly underfunded risk corridor program that is causing insurers to consider closing their doors because they can't financially stay in business.
So much for the promise of $2500 savings in our insurance premiums. With the government piling on layer after layer there's no way your insurance premiums won't keep going up.