Obamacare Stability Rests On Shaky Risk Adjustment

Set forth below are brief excerpts from my recent blog entry on Risk Adjustment under the Affordable Care Act that has been posted on Forbes The Apothecary.  To read the rest, you’ll need to go to that site.

What’s interesting, though, is what happened at almost exactly the same time as I released my Forbes blog entry.  New CMS Administrator Andrew Slavitt, whom I noted in the article had actually expressed concern about Risk Adjustment,  told Inside Health Policy, an outstanding trade publication, that some changes to the risk adjustment methodology in the draft Notice of Benefit and Payment Parameters for 2017 may instead be implemented in the 2016 plan year. CMS’ proposal calls for the 2017 risk adjustment to use a blended rate from earlier years and account for patient use of preventative services. I know that may not be the sexiest announcement ever made, but it’s important.  I’m not going to pretend that my blog entry motivated Mr. Slavitt to start looking hard at CMS methodology — although he would be well educated if he started each day with The Apothecary.  But, along with his recent actions taken to reduce the ability of insureds to game the Special Enrollment Period, Administrator Slavitt’s critical attention to Risk Adjustment suggest a willingness to take a fresh look at Obamacare implementation failings. 

The Affordable Care Act originally appeared to promise a choice of plans on the Exchanges across at least two spectra: the amount of cost sharing an insured would have to assume and the degree of choice the individual would have in selecting their healthcare providers.  Although this ability to customize both choice and “metal tier” was generally considered a feature of Obamacare, it has turned out to pose significant issues.  And here’s why: plans with the greatest degree of choice (PPOs) and the lowest amount of cost sharing (mostly Platinum) are magnets for the unhealthy.  So, unless there’s something to neutralize the extra costs to the insurer created by this “magnetic attraction” or unless insurers can simply decline to offer plans with high choice or low cost sharing, the freedom to select a plan in fact becomes destructive.

The choice touted by proponents of Obamacare induces a weakened form of an adverse selection death spiral. The whole system may not immediately collapse, but the system’s physics becomes highly unstable. The plans most attractive to the unhealthy become unavailable. The unavailability occurs either because insurers can’t persuade regulators to let them charge the high rates needed to break even or because all but the sickest insured’s won’t buy them at such a price. The most expensive 20% of individual insureds, after all, cost on average more than 60 times as much per person as the least expensive 50%. The Platinum refugees then migrate to the second most attractive plans —  in our case often Gold or Silver. (Remember Silver plans have low cost sharing for poor families). But then these plans become disproportionately populated by the sick and can also become considerably more expensive.  If there is a point of stability, it is likely to be one in which there is far less choice of physician and far more cost sharing than originally contemplated.  Most people might end up in a Bronze HMO.

The stability of Obamacare likely rests significantly on the arcane and challenging technology of  Risk Adjustment.  Run it poorly in ways insurers can game and look for the market to fall into a Bronze HMO basin of attraction or collapse altogether.  Run it without the strictest safeguards for medical privacy and see a mass rebellion from insureds. Obamacare would have a better chance at stability with a diversity of plans if Risk Adjustment worked considerably better than has so far been the case.

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How The Obama Administration Raided The Treasury To Pay Off Insurers

As discussed earlier, I have moved most of my blogging on the Affordable Care Act over to Forbes blog site: The Apothecary.  Here’s where you can find my latest entry.  It’s about Obama administration lawlessness in running the Transitional Reinsurance program.

Here are a few paragraphs to whet your interest.  To see more, go here.

This is about a raid conducted in the murky twilight of the Federal Register. It’s a scheme in which the Obama administration collected less in taxes from health insurers (mostly off the Exchanges) than they were required to do under the Affordable Care Act, created a plan to pay insurers selling policies on the Exchange considerably more than originally projected, and stiffed the United States Treasury on the money it was supposed to receive from the taxes. It’s a different bailout than the Risk Corridors program. That, at least, was originally authorized by statute.  This is about a diversion that took place in spite of a statute that explicitly prohibited it.  And the consequence of the diversion of funds was to enrich insurers and, probably, to keep more insurers selling policies on the Exchanges than would otherwise be the case.

The transitional reinsurance program as implemented, however, has become entirely unmoored from the statute that created it. It has instead embarked on a progressively stranger course in which two of the most recent diversions were  underassessing health insurers to pay for the program and then using the first $2 billion collected not to pay the United States Treasury as called for by the statute but instead to pay off insurers selling individual health insurance policies on the Exchange and, some times, off the Exchange.  Indeed, not only has $2 billion from the 2014 money been diverted from the Treasury to insurers but it looks as if at least an additional $800 million from the 2015 money is heading in the same direction.

By combining the two revisions of the original reinsurance parameters, the Obama administration made the program about 40% juicier for insurers . To the cynical eye, this could be seen as one of several administrative cures for the Obama administration’s politically understandable yet completely illegal decision to starve exchange insurers of potential customers who would now, by administrative fiat, often be permitted to keep those dreadful policies that the Affordable Care Act was supposed to eliminate. With foolish campaign promises as the motivation, one illegality begat another.

And now let’s take a closer look at the Obama administration’s legal justification for shoveling money to insurance companies on whose graces the success of Obamacare rests . You can read it above.  CMS contended that, because the statute was silent or ambiguous; it gave CMS discretion.  According to CMS, the statute used “shall” when it came to the $10 million to be collected for reinsurers in 2014 and used only “reflects” when it came to the $2 million for the Treasury, implying that the collection of money for reinsurers was more mandatory than collection of money for Treasury. Besides, argued CMS, the premium “stabilization” purpose of the ACA would be enhanced by funneling more money to insurance companies.

This reading of the statute makes no sense, however. The ambiguity exists only by virtue of ignoring a provision of the statute never even mentioned by CMS its legal analysis. By sending out a specific bill to health insurers and third party administrators to cover the Treasury payments, CMS had clearly collected money under the program in part pursuant to section 1341(b)(3)(B)(iv), the part that requires $5 billion for Treasury.  Look at paragraph (b)(4): “Notwithstanding the preceding sentence, any contribution amounts described in paragraph (3)(B)(iv) shall be deposited into the general fund of the Treasury of the United States and may not be used for the program established under this section.” But this diversion of funds collected for the Treasury into the hands of the insurers was precisely what CMS now purported to find justification for in the language of the statute.  CMS’s argument is particularly strange given the“miscellaneous receipts statute” which says that agencies generally can’t just keep money they collect; rather they must “deposit the money in the Treasury as soon as practicable without deduction for any charge or claim.”

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Why the House Lawsuit Over Cost Sharing Reductions Might Win But Won’t Kill Obamacare

As discussed in my previous blog post, I have moved most of my blogging activity on the Affordable Care Act to Forbes Apothecary site.  Here’s a summary of what is discusses.  To see the rest, go here.

The most glaring problem with the argument in House v. Burwell brought by House Democrats is that it rests on a false premise: Obamacare could not function unless it provided an appropriation for cost sharing reductions.  This is just not true.  As I now show, for better or worse, the ACA could function in a very similar way even if no appropriation was made for cost sharing reductions.

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Moving to The Apothecary

Dear Readers,

I’m pleased to announce that Forbes has invited me to write for them as part of their prestigious The Apothecary blog.  I’ve taken them up on their offer.  It should mean a considerably greater readership. The first post will be up soon.   Both it and the post to follow will be, immodestly, among the best I’ve ever written. So stay tuned!

My acceptance means, however, that this blog, acadeathspiral, is going to enter a new phase of life.  It won’t be dead but it will be quieter.  For a while, I’ll simply provide links to the latest Apothecary material.  After a few months though, it will either be material that outside the topics on which Forbes wants me to blog, doesn’t fit certain formatting restrictions of The Apothecary or when I’ve “used up” the two blogs per month I am supposed to do for Forbes.   So don’t stop periodically checking this site.

I want to thank everyone for their readership.  I’ve learned a lot writing these entries and hope that you’ve enjoyed reading them.

Seth J. Chandler


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