Category Archives: reinsurance

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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Obama administration increases insurer subsidies

The Obama administration announced earlier today that it would increase the  rate of subsidy provided insurers under the transitional reinsurance program established by the Affordable Care Act.  This program, in effect for the policies sold in 2014, 2015, and 2016 on one of the individual insurance exchanges fostered by the ACA,  provides free specific stop loss reinsurance to insurers, something insurers would otherwise have to pay a lot of money to obtain.  The Center for Medicare and Medicaid Services  (CMS) announced today that instead of taxpayers giving insurers  80% of the losses on any individual for their claims between $45,000 and $250,000, it would now pay a full 100% of these losses.

The higher rate of reinsurance should not be interpreted as a sign that claims were lower than insurers expected — something that would run contrary to many of the recent insurer rate hike filings or the losses reported by many insurers.  It is not a sign of the success of Obamacare; rather it is an artifact of its problems.  If, for example, there were 14% fewer people enrolled in Obamacare than at the time the reinsurance rates were initially determined (7 million vs. 6 million), reinsurance payments could be, as here, yet more generous to insurers even if claims were 10% higher than originally projected.

There are several implications of today’s announcement.  First, it means that, on a percentage basis, the ACA is subsidizing exchange insurers for 2014 even more than regulations enacted under it had heretofore prescribed.  Since this same money paid to insurers could instead have been used to provide greater subsidies to poorer and middle class individuals trying to purchase health insurance, the candy distributed today to insurers is a bit troubling. Second, because CMS says it will actually have money left over from 2014 even after the increase in reinsurance rates,  and because enrollment in Obamacare remains considerably lower than was estimated at the time of its enactment, there is an increased likelihood of reinsurance payments to insurers being higher than originally authorized in 2015.

We can get some sense of the magnitude of the changes announced today.  To do so, I use data embedded in the Actuarial Value Calculator, a document produced by CMS for the purposes of figuring out whether various insurance plans met the standards for bronze, silver, gold and platinum policies.  For an average silver policy, for example, the reinsurance that would have been provided prior to today would have been expected to save insurers about 11% in expenses, and, quite likely, premiums.  With the new reinsurance parameters, the transitional reinsurance program will save insurers selling the same silver policies about 14%.

We can do the same exercise for platinum, gold and bronze policies.  The results are not much different.  The table below shows the results.

Metal Level Original subsidy New subsidy
Bronze 11% 13%
Silver 11% 14%
Gold 11% 13%
Platinum 10% 12%

Two foootnotes

1. This is actually the second time CMS has made the transitional reinsurance program for 2014 more generous.  Originally, the reinsurance would “attach” at $60,000.  If an individual’s claims were below that amount, no reinsurance would kick in. Leter, CMS changed the attachment point to $45,000.

2.  How could I do this computation so swiftly?  I’ve been preparing for testimony before the House Ways and Means Committee on, among other things, the effect of the transitional reinsurance program on insurer rate changes and I’ve been working on a talk on a similar topic for the R in Insurance Conference later this month.  So, all I had to do was plug the new parameters into my model, and out came the results. Be prepared.

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The Cons of the ACA

Recently, I was honored to speak before the PIAA, a group of insurance professionals, at the organization’s annual conference in Las Vegas.  The idea was that I would speak on the problems with the ACA and Ardis Hoven, M.D., past president of the the AMA, would speak on positives about the ACA.  I thought the format worked well and I appreciated the high level of discussion and civility of Dr. Hoven.

Here’s what I had to say. Since you can’t use footnotes or hyperlinks in a speech, I’ve provided a few additional annotations here to show the source of some of the information.

The Speech

I’m here to talk about the architecture of the ACA and its problems.

The ACA takes a bold risk.  It places our economy and our health on an metaphorical aircraft whose ability to fly is challenged by history. It proceeds on the assumption that, whereas almost all community rating systems in health insurance have crashed in ugly adverse selection death spirals, the craft engineered by the Obama administration and its consultants is so sophisticated that it will avoid such a fate.  Many will tout what they see as the success of the ACA thus far in reducing the number of uninsured and the absence of many catastrophic failures as evidence that the ACA flies.  But we have not seen turbulence. It is an open question whether, long term, the ACA can survive in its present form.

Let us now talk about how the ACA flies.  It uses a variety of mechanisms to keep it aloft.  The problem is that almost every one of them has the potential for being undermined.

Individual Subsidies

The ACA depends desperately and in perpetuity on taxpayer funded policy subsidies provided directly to the insured. There is a premium subsidy based on household income. And there is another effective premium subsidy achieved through what is termed a “cost sharing reduction program” but this really amounts to people getting gold, platinum or diamond — my term — policies but only having to pay the silver price.  These subsidies have been crucial to the touted success of the ACA.  They have brought low risk individuals into the pool. Without the subsidies, the insurance market would need to depend solely on risk aversion to achieve price stability and escape the death spiral.  Prior experiments relying only on risk aversion alone have been notoriously unsuccessful.

For better or worse, the subsidy has had an immense effect. A recent study conducting by Avalere shows that 83% of Exchange enrollees have incomes at 250% or less of the federal poverty level for their households. The take up rate among those eligible for ACA exchange policies falls from 76% for those earning 100-150% of FPL down to just 16% for those earning 300-400% of FPL. Take up then plummets to 2% for those earning more than 400% of FPL and who are thus ineligible for subsidies.

This elasticity in the demand for health insurance is precisely why the forthcoming Supreme Court decision in King v. Burwell is of such great importance.  If the Supreme Court issues a square holding that the federal government lacks authority to pay the premiums where the state itself has not directly established an Exchange, and neither Congress nor the states does anything to fix the matter, expect insurers in those states rapidly to stop offering individual health insurance on the Exchanges. Indeed, clause IVB in the contracts those insurers negotiated with the federal government precisely in anticipation of King v. Burwell would permit those insurers not just to exit the market next year but to cancel existing policies midstream.

A side point, but one that might trouble this audience.  Every insurer that I know of is accepting payments from the federal government for cost sharing reductions.   But those payments are almost certainly illegal. Congress never appropriated any money for Cost Sharing Reductions.  So, under the law as written, insurers who want to play in the Exchanges are really supposed pay for cost sharing reductions themselves.

Of course, to my knowledge, that’s not happening. The money now landing in insurer’s bank accounts is coming from a fund set up for tax refunds that is, by law, dedicated exclusively to that purpose.  That, I believe is unlawful and, should another party ever control the Executive branch and want to look for a villain or want to extort various favors from someone whom they have over a barrel, might it not chase insurers for receipt of diverted funds?  There is a 1938 Supreme Court decision saying the Government can recover funds paid illegally and a 1990 Supreme Court decision saying that a claim of estoppel can not lie against the federal government.   So, before insurers become accessories or before they count as money on their balance sheets that they might have to pay back, they might want to look at these cases.

Reinsurance subsidies

There are also less visible features of the ACA that are designed to improve the probability of the airplane staying aloft. The ability of the ACA to fly also depends substantially for 2014, 2015 and 2016 on premiums subsidized by free specific stop loss reinsurance given to insurers who agree to risk their capital in untested Exchange markets.  It is, however, a form of support that is going to flame out after 2016.

How much support does it provide? If you use the data from the 2016 draft actuarial value calculator produced by CMS, you can compute that the subsidy will still be about 3% of premiums for 2016.  It was higher in 2014 and 2015. How will the ACA continue when prices increase at least 3% more just due to the elimination of this single subsidy.  The naive might think that 3% is not all that much.  And, without taking adverse selection into account, I would expect the market to shrink only by about an equal percentage.  But if history and economics tells us anything — and it does — because of adverse selection, the actual price increase will be greater and the resulting decline in enrollment will be greater.

I would not expect Congress to do any sort of mid-flight refueling of reinsurance subsidies, to continue my airplane metaphor. The policy justification for specific reinsurance subsidies seems rather thin.  If reducing the overall risk to insurers was the issue, aggregate stop loss, perhaps available at an actuarially fair price, rather than free specific stop loss reinsurance would make more sense.  And if the government, and, derivatively, the insurance industry, was fearful of there being no market for reinsurance where the risk involved was so untested, Congress could have made a guess and established a fair price and reinsurance facility itself. Moreover, if uncoupling household income from the ability to obtain medical care was a primary goal of the ACA,  why would Congress not just increase individual premium subsidies instead of sending that money to enrich, sorry guys, insurance companies?  This form of corporate welfare helps people at 350% of federal poverty level or even people at 1000% of FPL buying unsubsidized policies on the Exchange as much as it helps the person earning 150% of FPL who might desperately need more assistance. If one accepts major premises of the ACA, one might seriously question why such is the case.

Risk Corridors: The Free Derivative

The ACA depends somewhat for 2014, 2015 and 2016 on another form of subsidies for the insurance industry.  It indirectly subsidizes premiums by providing insurers with a free financial derivative: risk corridors that reduce the amount of capital prudent insurers might otherwise need to stockpile or aggressive state regulators might require them to stockpile. This reduction occurs because Risk Corridors reduces the probability of insurers losing substantial amounts of money via participation in the Exchanges. To use a finance term, Risk Corridors reduces Value at Risk, which is a decent estimate of the amount of money participating insurers need to keep in more liquid and probably less lucrative investments.

If you run the computations — ask me how — it looks as if Risk Corridors reduces the amount insurers need to charge for Exchange policies by a little less than 1%.  Again, you might say, in what I suspect would be a deprecating tone, big deal. And, I agree that, taken by itself, the ACA is unlikely to crash based on a 1% increase standing alone.  But it’s all cumulative and the problem with death spirals is that once you find yourself in their clutches they are a bit like a black hole, very difficult to escape.

Insurers may not have to wait until 2017 for Risk Corridors to disappear.  They are already in grave trouble.  Congress also never appropriated any money for Risk Corridors. And this wasn’t an accident. The statute, as written, depends on assessments on insurers based on a formula to magically equal payments out to insurers based on a formula over the 3-year span of the program.  We are already seeing, as many predicted, however that such an assumption was unwarranted.  Due perhaps to loss leader pricing and the predictable propensity of consumers to pick precisely those plans that were charging too little relative to actuarial risk, it appears that, on balance, at least after what I would hope would be clever but lawful accounting, that few insurers are making enough money under Obamacare policies to provide any funding to the many insurers who gained volume at the expense of profitability. So, when the Obama administration suggested it might lawlessly raid other government accounts to fund Risk Corridor deficits, Congress responded in section 227 of the Cromnibus bill by walling off the plump Medicare Parts A and B trust funds and CMS operating accounts as a source to repay obligations created by the Risk Corridor program.

Might deficits in early years of Risk Corridors be funded out of profits in later years as the Obama administration has suggested? The omens aren’t good. According to a review of 2014 industry filings by Standard & Poors, Risk Corridors will likely collect less than 10 percent of what industry is expecting to be reimbursed. 14% of insurers will likely pay into Risk Corridors.  56% expect money out. The absence of Risk Corridor money will be fatal to some insurers.

Already, we are seeing the death and near death of some less well capitalized insurers, particularly the co-ops capitalized, I might add, not so much by private investors but by $2.4 billion from the taxpayers in a less well publicized cost of Obamacare. Low premiums are not of terribly great value if they end up bankrupting private insurers on whom the success of Obamacare depends.

Individual Punishment

Thus far, I have spoken of the carrots to get even people of low risk to participate in the Exchange marketplaces.  Obamacare is fueled, however, not just by subsidies but by punishment. Obamacare chose a different punishment model than for programs such as Medicare Part B or Medigap.  In those programs, and in some Republican proposals for Obamacare reform, if you don’t select insurance when you are first eligible, you just pay a lot more for insurance if you elect coverage later.  No commerce clause problems, no tax. Obamacare, by contrast, increases administrative costs by potentially assessing  a penalty each year if you don’t have coverage. The ability of this punishment to stem a death spiral depends on the size of the punishment and the number of people who are subject to it.  And what I now wish to suggest is that even without its formal repeal, the Individual Mandate was weak to begin with and has been further enfeebled by administrative moves taken in response to political uproar.

Consider, for example, a slightly fictionalized version of one typical American. According to the Kaiser Foundation Calculator, a 45 year old non-smoking person making $48,000 per year would expect to pay $3,742 on average for a Silver Policy.  Suppose, however, that the individual considers themselves to be only 30 in health years. The individual thus considers its average expenses that would be covered by insurance to be $2,941.  Would the $746 difference in tax created by the mandate be sufficient to get that person to purchase an Exchange policy.  Not if that person was risk neutral.  $746 in tax is less than the $801 excess in medical expenses.

Alternatively, eliminate $3,000 from the person’s income. Now, because the premium the individual would have to pay is more than 8% of household income, the individual is exempt from the individual mandate. There are a significant number of uninsured people thus exempted from the mandate on grounds that they are simply too poor to purchase Obamacare.

But there’s more to make sure, as the CBO recently confirmed, that only one in six of the uninsured will actually be subject to the mandate.  There is the absurdly expanded hardship exemption. There’s the health sharing ministry exception mostly for evangelical Christians. And there’s the peculiar 3 months off exemption (26 USC § 5000A(e)(4)).

In short, one of the reasons Obamacare will have difficulty flying is that we are afraid of our inability accurately to determine whether people can really afford insurance and at what price.  For now, though, if one wants to rely on sticks, the stick is actually too weak and hits too few people.

The Employer Mandate

Another key component of the ACA has been the employer mandate.  Or, at least it was supposed to be a key component.  In fact, in what a lot of people, including me, think is a very dangerous precedent that will, one day, bite ACA proponents in the proverbial behind, the Obama administration simply decided, without any apparent discretion, to delay enforcement of the law for one year and, for the current year, to apply the statute only to employers with more than 100 employees, even though the number the statute picks is 50. If a change to the tax code is so complicated that it takes mid sized businesses with financial advisors 5 years to understand it, perhaps that’s a sign there is something more fundamentally wrong.

At any rate, the employer mandate is, for lack of a more sophisticated term, stupid. If it actually works, it keeps people off the individual exchanges, which is exactly what should not be happening. The employer mandate perpetuates both symbolically and literally the counterproductive tie between a poorly functioning and lumpy labor market and something as important as health.  It puts the employers’ decision as to what sort of coverage best suits the employee ahead of the ability of the individual to choose.  The tax deductibility of payments helps the wealthy more.  The lack of portability between jobs decreases the sort of continuity of care that might improve health. It is everything a good liberal should hate.  (Indeed, some have had the courage to note the many flaws with the current law.) And so I wonder if King v. Burwell comes out against the government, whether the employer mandate, which has barely made it on to the Obamacare Aircraft, might be abortively deplaned with eager Republicans and Democrats in need to save face actually coming together on this issue.  Indeed, if I were a Limbaugh-style Republican who wanted Obama to fail, I would actually insist on the employer mandate continuing as a way of starving the individual exchanges of healthy people who might stabilize their prices and of helping high income voters more.

Conclusion

One’s perspective on the ACA can’t be whether it helps insurers or whether it helps the medical profession.  In fact it shouldn’t even be on whether more people have health insurance.  The positive factor to be considered is whether it has improved health.  I will concede that, on balance, it probably has — slightly. Many medical interactions are beneficial and, although supply of medical practitioners has not increased much, there are 2-4% more such interactions thanks to the ACA.   In any event, whether the ACA marginally improves health is not the exclusive test.  These programs have to be paid for and they come at a heavy price.  The CBO now estimates the ACA will increase our budget deficit by $849 billion dollars through 2026. It is not, contrary to prior representations, paid for.

If you forget about Medicaid expansion and take the net increase the uninsured as a result of the ACA and divide that by the cost of providing coverage to them, it turns over 10 years to average with premium subsidies, cost sharing reductions, the 3Rs, and administrative costs about $7,600 per person.  And in addition to racking up our already bloated deficit, there will be be taxes, fees and subsidies that have their own perverse incentives. Some have estimated the cost of providing a currently uninsured person an additional year of a quality life at over $200,000 possibly over $1 million. That’s enough that we have to look hard at whether there might be some better and simpler alternatives.

As we move forward  ought to be looking not at Obamacare vs. The Bad Old Days Where Evil Insurers Deprived Sick People of Coverage but rather to a variety of alternatives ranging from, yes, Bernie Sanders Single Payer plan to, better,  libertarian plans to use market mechanisms more effectively  to perhaps better yet, lots in between.  Yes, Obamacare has gotten off into the air, but if they would honestly call “Mayday,” it is my hope that a variety of people would try to help out.

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Reinsurance reduction will add 7% to gross premiums for 2015

That’s in addition to whatever increases are caused by medical inflation and adverse selection

 

As we draw to what was originally to be the close of the 2014 regular open enrollment period for policies sold on Exchanges under the Affordable Care Act and as the evidence comes in on the actual numbers and demographics of purchasers, it’s time to start thinking about 2015. In this post, I’m not going to speculate today about the effects of the expanding the “hardship exemption” from the individual mandate on insurers’ experience in 2014, the effect of the “Honor System” in extending the time in which individuals can purchase coverage on the Exchange without medical underwriting, or on the effects of any of the other the myriad changes in the law that have been promulgated by the Executive Branch since Congress passed the ACA in 2010. Instead, I want to focus on the effect of statutory changes in the government-created reinsurance program on likely premiums in 2015.

First, a refresher. One of the ideas behind Obamacare was to lure people into the Exchanges with carrots and sticks.  The most frequently discussed carrots were advanced premium tax credits that reduced the effective price of insurance for many individuals and, for many of those receiving the premium tax credits, contracts with extra benefits (cost-sharing reductions) for which the purchasers do not have to pay. Not only, however, are Exchange policies subsidized by reducing the price to the consumer but also by reducing the cost the insurer faces in paying claims.  A key mechanism for this latter reduction for the first three years of the program is free “reinsurance” provided to all insurers for slices of their claims. Of course, the reinsurance isn’t really free; there’s a $63 per insured life tax levied on other health insurance policies in order to make policies on the Exchange more attractive, a transfer whose justice will not be considered today.

The reinsurance works in 2014 by having the government reimburse insurers for 80% of the amount of any insureds claim between $45,000 and $250,000. Thus, if an insured had claims of $105,000, the government rather than the insurer would pay for $48,000 of the claim while the insurer itself would pay for the remaining $57,000.  If an insured had claims of $30,000, the insurer would pay the whole bill.  And if an insured had claims of, say, $300,000, the government would cover more than half — $164,000 — while the insurer itself would pay the remaining $136,000.

Sample of the data embedded in the Excel spreadsheet for The Actuarial Value Calculator
Sample of the data embedded in the Excel spreadsheet for The Actuarial Value Calculator

One can use information contained in the government’s own “Actuarial Value Calculator” to estimate the effect of this reinsurance on Exchange premiums.  (I’ve placed a graphic above this paragraph showing some of the information in the Calculator.)  Based on my computations using Mathematica and done in connection with a recent academic conference, the reinsurance should lower the price of an Bronze policy by about $450 (11%), a Silver policy by $531 (11%), a Gold policy by $545 (11%) and a Platinum policy by $616 (10%).

The parameters of the reinsurance policy will change in 2015.  HHS currently says that instead of “attaching” at $45,000, reinsurance will only kick in if an individual’s claims exceed $70,000. And instead of reimbursing the insurer 80% of the slice between the attachment point and the $250,000 limit, the government will now reimburse just 50% of the slice. The table below shows the results of this change in reinsurance on the expected value of the reinsurance policy. If one assumes that medical inflation will be 4%, the value of the reinsurance will range from $192 for Bronze policies to $243 for Platinum policies. These computations are all again done using Mathematica based on data provided by the government itself in its Actuarial Value Calculator.

Value of reinsurance subsidy in 2015 for varying rates of medical inflation
Value of reinsurance subsidy in 2015 for varying rates of medical inflation

Insurers will need to compensate for the diminished reinsurance by raising prices.  How much?  The table below shows the answer: somewhere between 7 and 8% depending on the type of policy being sold and the rate of medical inflation.

Increase in premiums for 2015 just to cover reduction in reinsurance subsidies
Increase in premiums for 2015 just to cover reduction in reinsurance subsidies

If one adds regular medical inflation to the increases induced by reduced subsidization, here’s a picture of what we get. To obtain a single result for each rate of medical inflation, I’m going to weight the metal tiers according to their rough proportions in the market as last measured.

Projected premium increases for 2015 with reinsurance subsidy reductions taken into account for varying rates of medical inflation
Projected premium increases for 2015 with reinsurance subsidy reductions taken into account for varying rates of medical inflation

The results of combining ordinary medical inflation with reinsurance reductions are a bit scary.  While most people seem to believe the ACA system can survive premium increases of 6% or 8%, what we see is that even if medical inflation is kept to 4%, the results of combining medical inflation with subsidy reduction is a 12% hike.  And, if insurers are nervous about pricing in 2015 due to higher than expected claims experience in the early parts of 2014 or the persistence of problematic demographics such that they expect ordinary claims inflation of 10%, then we start getting into premium increases of about 18%.

Is there a workaround?

It is fair to say that the Obama administration has not been reluctant to change implementation of the Affordable Care Act in response to changing circumstances.  And, I suspect that if the Obama administration starts getting hints that insurers selling on the Exchanges are either thinking of pulling out of the Exchanges or of raising premiums significantly, one of the ways it will respond is by altering the parameters of the reinsurance program.  The attachment point, limit and reimbursement rate are all matters as to which the Obama administration has regulatory flexibility.  Indeed, it changed the 2014 reinsurance parameters favorably for insurers late into the process. And, of course, by providing a lower attachment point, higher reimbursement rate and/or a higher limit, the government can increase the effective subsidy created by the free reinsurance and thereby reduce pressure on insurers to raise premiums.

If, for example, the Obama administration were to go to, say, a 65% reimbursement rate rather than a 50% rate for 2015 and were to go to a $60,000 attachment point rather than a $70,000 one, a 4% increase in medical inflation might result in a lesser 9% increase in premiums rather than 12%.  And even a 10% increase would result in a lesser 14% increase in premiums rather than an 18% one.

The problem with this “fix,” however is that it costs money.  And, by statute, the government is supposed to spend $4 billion less on the reinsurance program on claims for 2015 than it spent on claims for 2014.  That’s why HHS reduced the reinsurance parameters for 2015 in the first place.

I can foresee two ways around this limitation.  The first is for the Obama administration to engage in creative math and find a theory under which the projected cost of its reinsurance program aligns with statutory requirements.  While cynics may be fond of my projection of this response, there is a serious question as to the extent that principled actuaries in the Executive branch will permit this “methodology” to be used. The second possibility is for the Obama administration to stockpile funds from 2014  and use them to pay reinsurance in 2015.  Section 1341(b)(4)(A) of the ACA appears to make this possible.  This scheme only works, however, if the government actually has money left over from its 2014 reinsurance pool.  And, while lower than expected enrollments in the Exchanges increase the probability that there will be money remaining, that potential surplus could well be eaten away if claims for 2014 are higher than expected.

A result of improper conceptualization

Amidst all the technical detail, it’s worth thinking about how this could have happened. How could the architects of the ACA, who were acutely aware of the risks of an adverse selection death spiral, create a system in which there were built in pressures to increase premiums? I think the answer comes in examining the rhetoric of the reinsurance program.  It was not articulated as a subsidy but rather as a way of reducing the risk of entering the Exchanges. See here, here and here for examples.   If adverse selection or moral hazard drove claims costs up, the government would significantly insulate insurers from that risk by providing reinsurance. This, along with Risk Corridors in the first three years of the program, and Risk Adjustment thereafter, was supposed to provide insurers with comfort as they deliberated whether to enter an untested market for health insurance in which most of their conventional underwriting mechanisms were prohibited. And, indeed, the Transitional Reinsurance program does reduce risk. Based on my computations, it reduces the standard deviation of losses for Bronze policies from $16,403 to $11,430 and for Platinum policies from $17,215 to $11,598.

If one conceptualizes the transitional reinsurance program merely as a risk reduction policy, it makes sense to phase it out as insurer experience with the purchasing pools in the ACA.  Insurers gain confidence in how to price their policies.  But what appears to have been forgotten in that calculation is that these reinsurance subsidies also save insurers lots of money.  And insurers will need to respond to the phasing out of these substantial subsidies by raising premiums.  Whether that tunnel vision in conceptualization contributes to an implosion of the ACA, at least in some states, remains to be seen.

 

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The ACA’s transitional reinsurance tax: the numbers are funny again

Most sellers of health insurance in the United States outside of health insurance Exchanges will be forced to add $63 per member on to premiums for 2014 to cover a new tax imposed by the Affordable Care Act on the sale of such policies. That tax revenue coupled with $2 billion out of the federal treasury will go to subsidize individual policies sold on the federal Exchanges, probably lowering their gross premiums by about $525 per person.  If, however, enrollment in the federal Exchanges remains considerably lower than projected and enrollment in non-grandfathered, non-Exchange plans does not compensate for the reduction, the revenue collected from the tax is likely to be in excess of that which needs to be paid to support the statutory subsidies.  The $63 per member tax, which has precipitated considerable protest, thus might end up being overly high. And if the Executive branch can exercise its discretion to delay or waive taxes for one part of the ACA based on alleged new developments, why not for another?

The Center for Medicare & Medicaid Services (CMS)  has many options for addressing the surplus.  It might choose to to use the surplus tax revenue either to cut similar taxes in the subsequent years of the program or to rebate the excessive tax back to health plans and others who paid it. CMS might, I suppose, inflame people from both ends of the ideological spectrum by gifting insurers with more generous reinsurance this year.  Or CMS might simply squirrel the surplus away to provide reinsurance after the normal sunset of the program in 2016. I suspect, however, that  CMS is likely to use the surplus to increase the generosity of reinsurance provided in subsequent years of the program such as next year. Doing so could mask problems of adverse selection that could otherwise result in large premium increases. Such a choice would not  necessarily be a bad thing: it just highlights yet again the expense of the ACA, the fragility of attempts prior to its passage to model its effects, and the problems with thinking about its interlocking web of provisions in a linear, reductionist manner.

Here’s a more detailed explanation.

The Affordable Care Act subsidizes both insurance purchases made on the individual Exchanges and  individual policies still sold off the Exchange that conform with various ACA rules.  Doing so lowers the price of insurance and decreases the systematic risk associated with selling policies in a new regulatory environment in which the population of insureds may have different (and worse) health profiles than those previously composing the insurance pool.  A key way that the ACA does this is through a program of “transitional reinsurance” provided free of charge to insurers willing to write policies in the individual market — so long as those policies haven’t been exempted from the requirements of the ACA by being “grandfathered.” The program is “transitional” because it is supposed to end after three years. One way of thinking about all this is that free reinsurance lowers both the mean and the standard deviation of the net claims distribution faced by eligible insurers.

Under section 1341 of the ACA and the regulations CMS has developed to implement it, the transitional reinsurance program is ultimately supposed to break even. If tax revenues that fund it are less than the expenditures it requires, CMS has provided in 45 C.F.R. § 153.230(d) that reinsurance payments are cut in that year in order to prevent a deficit. If tax revenues that fund the transitional reinsurance program are greater than the expenditures it requires, CMS has stated in 45 C.F.R. § 153.235(b) that the surplus will be spent in subsequent years of the program on reinsurance benefits.  The program also works with a one year lag: money is collected and paid in each year is for claims made the preceding year.

The Center for Medicare and Medicaid Services has funded the transitional reinsurance program this year by levying (with the help of its IRS friends)  a $63 per insured life tax on most (but not all) health insurance policies sold in the United States this year. (The payments are deductible for for-profit enterprises). CMS says it is planning an exception to the tax for self-funded plans that are also self-administered, a rule that, as shown in the graphic below, CMS previously said (correctly) it lacked statutory authority to issue and that will significantly benefit labor unions. This tax revenue, coupled with a required $2 billion from the United States Treasury, is estimated to yield $12 billion to be paid in 2015 for claims arising in 2014.  CMS will use the the money to provide a form of stop-loss reinsurance that attaches at $45,000 of claims per member and that provides 80% reimbursement for claims up to $250,000. In earlier versions of the regulation, the attachment point was a less generous $60,000.

Comparison of regulations: March 11, 2013 v. October 30, 2013
Comparison of regulations: March 11, 2013 v. October 30, 2013

How would you spend $12 billion?  Well, using the “continuance tables” (statistical claims distributions) contained in CMS’s “Actuarial Value Calculator,” one can show that the expected payments under the reinsurance system created by CMS for 2014 will range from about $433 per member for a bronze plan up to about $597 for a platinum plan. The weighted average expected payment will be about  about $525. The enhanced size of this subsidy, rather than other miracles of Obamacare, may explain in part, by the way, why premiums on the Exchanges came in somewhat lower than some had projected. If CMS is planning on spending about $12 billion on transitional reinsurance and it spends $525 per insured person, simple division shows that it takes about 23 million people who might trigger the reinsurance obligation in order to exhaust the fund.

The problem, however, is that, given recent developments, there are unlikely to be 23 million persons in 2014  (a) who might trigger the reinsurance obligation (“reinsurance triggering”) and (b) who are insured by reinsurance-eligible insurers (“reinsurance eligible”). You could just take my word on this point and skip to the end of this entry or, better yet, follow the accounting done here.

An accounting

Let me concede, temporarily and for the sake of discussion, that there will be 6 million people on average in 2014 who are paying premiums based on policies purchased in the individual Exchanges.  That’s hard to believe given (a) that the number with a month to go is probably about 3.2 million (President Obama’s alleged 4 million enrollment reduced by 20% shrinkage for nonpayment); (b) that the number of insured in the Exchanges would have to be 7 million post March for there to have been 6 million on average during all of 2014; and (c) Vice President Joe Biden’s augury that 5 million would be a “heck of a start.”  I will grumpily concede it nonetheless.

How many off-Exchange purchasers should we then add?  Here the numbers are slippery too.  I am indebted, however, to some careful work by the Kaiser Family Foundation on this point.  You can read it here. The highest estimate I have seen for the number of nonelderely persons covered by  a plan purchased directly from an insurer at any one time in a calendar year is 19 million.  But many of these 19 million will (a) not have insurance the entire year; (b) will have insurance that is secondary to other insurance and thus unlikely to accumulate the $45,000 attachment point in claims; and (c) will be in grandfathered policies not eligible for reinsurance and persisting through 2014 only by dint of President Obama’s magic waiver of the terms of the ACA.  When one looks at the situation at any given point in time — which is the proper basis for figuring out an average — it looks as if there might be 13-14 million who have some form of individual health insurance and 10-11 million who have primary health insurance coverage of the sort that might trigger a reinsurance obligation.

So, should I add 11 million to the 6 million and say that there are 17 million insureds that might trigger a reinsurance obligation?  No! That would ignore two substitution effects.  We know from various studies that a lot (perhaps 65% – 89%) of the people purchasing policies on the Exchanges simply swapped non-Exchange policies that would not be eligible for the other big federal subsidy — premium tax credits — for Exchange policies.  So, even if we assume, contrary to the evidence, that only half of the Exchange purchasers came from the ranks of the uninsured, that means there are really only 3 million new purchasers of policies eligible for reinsurance. Moreover, the 10-11 million figure isn’t right anymore either.  For 2014, individual insurers have to choose. They can stop selling their policy altogether, they can expand benefits to conform with the tougher requirements of the ACA and obtain a right to reinsurance or, at least in some instances, they may be able to grandfather their policy and avoid many ACA mandates but forfeit a right to reinsurance. I have not seen any good statistics on how many of the 11 million will persist into 2014, but I would be surprised if more than 80% did.  So, rather than 11 million, it seems to be the better upper bound on the number of extant non-Exchange, reinsurance eligible policies is 9 million.

It thus seems to me as if the better upper bound on  the number of policies that might trigger a reinsurance obligation is 12 million: 3 million genuinely new policies plus 9 million sold outside the Exchange but eligible for reinsurance. This means, however, that if CMS’s estimates of claims under the ACA are correct, a reasonable upper bound on reinsurance payments under section 1341 of the ACA are likely to be at most $6.3 billion ($525 x 12 million) rather than $12 billion.

Given all this, there are two aspects of CMS’ s behavior that are a bit puzzling.  Why is CMS not adjusting the reinsurance benefit for this year say to provide 100% coverage rather than 80% coverage and/or removing the $250,000 cap on claims triggering reinsurance? Or, given the belief of the President that he has discretion to waive taxes in light of changed circumstances, why is CMS not waiving, say, half of the taxes that would otherwise be owed.  (Not that I think this is constitutional).

The answer to the puzzler, I suspect, is either a cognitive failure or a very clever strategy. It is possible that it has not dawned on CMS that changing enrollment patterns means that it will not be able to exhaust the $12 billion it expects to receive pursuant to section 1341. More likely, however, someone at CMS has done the math and has been delighted to discover a slush fund that it can use the money to provide extra generous reinsurance next year and thus keep the price of premiums down.  How will we know? If we see an announcement from CMS in the next few months changing the parameters for the 2015 reinsurance plan to be considerably more generous, believe that it is the result of collecting “too much” in taxes in 2014. In the meantime, however, we have another example of ACA “details” that don’t seem to stand up under close scrutiny.

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