(Bloomberg View) — With insurers pulling out of the Obamacare exchanges, and the remaining plans contracting towards inexpensive Medicaid-style offerings with limited choices of doctors and hospitals, it was a safe bet that regulators would be scrambling to figure out how to stabilize the exchanges. They’ve now stepped in with a sort of early holiday present, releasing their proposed rulemaking for the 2018 marketplaces on Monday, instead of in November. These rules suggest meaningful changes to how the insurance market would operate, especially in its risk-adjustment program.
And what is the risk-adjustment program, you may ask? Well, back when the law was passed in 2010, it contained three programs designed to transfer money between insurers who made more money than expected, and those who lost it. This was supposed to cushion the transition to a new market, whose costs were hard to calculate.
These programs generated a lot of complaints about “backdoor bailouts” until the Republican Congress forced them to be revenue-neutral — which is to say, to limit payouts to the amount that the programs had taken in from the insurers, without any infusions of government cash to sweeten the pot. But since they stopped being a way to funnel money to the struggling insurance industry, they’ve fallen off the media radar.
Nonetheless, they’re still important — or at least, the risk-adjustment program is. (The other two expire at the end of this year.) Basically, this program looks at the health status of the patients covered by each insurer, and transfers money to insurers who cover sicker patients from insurers whose pool was healthier than average.
Why is this necessary, when Obamacare forbids companies from turning anyone down because of their health status? Because even if you can’t turn patients down, there are ways to tweak your offerings so that they are more attractive to healthy people, effectively cherry-picking a pool of especially healthy (and therefore profitable) patients, while leaving other insurers to pick up the sicker and more expensive ones. For example, you could offer a free gym membership bundled with your insurance, which will presumably be more interesting to 23-year old triathletes than 64-year-old patients with multiple disabling conditions. You could put a lot of work into building a snazzy app that would probably get you more millennial customers than grumpy middle-aged people like myself. Or you could make your coverage cheap but hard to use, which healthy people won’t notice but sick people very much will.
It’s hard to write regulations to stop this, so the law effectively says, “Go ahead and cherry pick; we’re going to take your excess profits and transfer them to the insurer that got stuck with all the sick people.”
However. While that sounds simple in theory, in practice, deciding what constitutes an especially unhealthy pool is harder than it sounds. The administration is proposing two significant rule changes for 2018. One is to factor in prescription drug data to patient risk scores as well as age, sex and diagnoses. The other is to change the scoring for “partial year” customers who enroll outside of the normal open enrollment period. This second change is clearly aimed at quelling insurers’ worries that people are gaming the law by buying insurance to cover an expensive illness, and then dropping it as soon as they’ve gotten treatment.
I described the problem they’re trying to solve at the beginning of the year: