Whatever Happened to the 3 Rs? The downfall of the ACA.

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​Risk mitigation was built into the ACA but gutted by Congress. Here's our take on the demise of the ACA.

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 No, I’m not talking about reading, ‘riting, and ‘rithmatic.  Under the Affordable Care Act (ACA), the 3 Rs are Risk Adjustment, Reinsurance, and Risk Corridors. Initially, as I reviewed the ACA, I was concerned that individual and small group markets would “death spiral” within five years of insurance carriers being required to take all applicants regardless of pre-existing conditions.  Fortunately, the actuaries built in the 3 Rs as risk mitigation; shifting money among insurance companies to help those carriers who ended up with the highest-cost, sickest patients. 

So, buoyed by these fallbacks, the carriers forged ahead:

• Agreeing to take all enrollees
• Ignoring health conditions 
• Charging all members the same rates (by age) regardless of health
• Covering all pre-existing conditions
• Basing their rates on “old” pre-ACA claims data 
• Increasing benefits to the Essential Health Benefit levels
• Accepting that ACA individual penalties were quite low, and that young healthy individuals might not enroll  

The 3 Rs were important because without them, every year a carrier(s) whose paid claims were much higher than expected would need to increase their rates more substantially than their competitors, causing their members to jump to other carriers’ plans looking for lower rates. As members churn through carriers (who have to accept them), sooner or later, the losing insurance companies exit the market and the whole system starts a death spiral. ☠

But, wait. I just said we have the 3 Rs, right? So, why are we hearing warnings of the death of the small group and individual plan markets?  Well, just because these risk-mitigators were written into the law does not mean Congress can’t change them.

From hopeful beginnings to $14.8B in arrears
Having acted in good faith, today, the majority of insurance carriers have experienced losses.  Some have pulled out of states or counties (or are considering doing so) and some went out of business altogether. All while waiting to be bolstered by the protection of the 3 Rs. Yet, two of the programs are sitting in a deficit position. Here’s how they have fared:

• Risk Adjustment – Truly net-neutral, funds were transferred among carriers (from those with healthier populations to those with sicker populations).  

• Reinsurance – This program was estimated to be net-neutral, but it was possible that fees collected might not cover total paid claims for high-cost members.  In 2014, $9.7B in fees were collected and $7.9B were paid to carriers – with the excess rolling to 2015.  Unfortunately, 2015 fees were not adequate; $6.5B in fees were collected and payments owed to carriers were calculated to be $14.3B.  The program is currently in a deficit position, owing carriers $6.5B.  2016 data has yet to be released.
• Risk Corridor – This program with originally written into the regulations with the assumption that the Federal government would cover deficits. However, Congress removed the federal liability component in the 2015 and 2016 appropriation bills. After 2014 and 2015, this program has a deficit of about $8.3B owed to carriers.  2016 data has not yet been released.

Why are we only hearing about all of this now?
For a while, rates were stable, primarily because the data just wasn’t there yet.  It takes a while for millions of newly enrolled people to actually go in for care.  Originally for 1/1/2014, carriers based their rates off pre-ACA enrollment data, essentially using insufficient actuarial factors. After all, no one knew how many people would newly enroll on individual and small group plans, how many would move away from these plans due to Medicaid expansion, and how sick the resulting population would end up being.
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For the 1/1/2015 plans, insurance carriers were required to submit their requested premiums by the end of May, 2014 to State Insurance Commissioners – after only four months of very immature claims data (January 2014 – April 2014).  So again, “guestimate” actuarial factoring had to be incorporated. 
For the 1/1/2016 plans, carriers had more accurate claims data in their actuarial modeling to set rates.  Plus as of May 2015 (the filing deadline), two of the three risk mitigation programs had provided funds to carriers for the 2014 calendar year.  And the third program (the Risk Corridor) was slated to pay out before the end of the year.  Carriers remained optimistic.

Reality bites
In the fall of 2015, just as the new 1/1/2016 plans were about to hit the market for individuals to enroll, the hammer fell on the insurance industry.  Congress put the brakes on funding the Risk Corridor, leaving $2.5B in requested 2014 reimbursements unfunded.  Plus, the carriers could see the writing on the wall that their 2015 losses (totaling another $5.8B) also faced the same fate.  The carriers had three options:

• Pull all their plan offerings for 2016,
• Offer only some of the plans they had originally submitted, or
• Offer them all and hold their breath in the hopes the Federal dollars would eventually materialize. 

In Washington State, Moda pulled out of the market completely, while other carriers culled their plan offerings. 

In early 2016, the insurance carriers were once again calculating rates for the coming year – except now they could factor the loss of Risk Corridor payments from the prior years into their calculations.  But, right before the May 2016 deadline for submitting 1/1/2017 rates, another blow hit the individual market.  News broke that the Reinsurance program, which had a surplus at the end of 2014, ended 2015 with a $6.5B deficit.  The carriers were doing the math and knew that the Risk Corridor was facing over $8B in deficits, with no Congressional appropriations in the wings.  The result: for those carriers still in the individual market, the premium increases were huge. For others, the losses were too great and they either shut down or pulled out of states or counties completely for the 2017 calendar year. 

With the election heating up, the political cry of “Obamacare is failing” was a key factor contributing to a Republican majority sweep.  Too bad most Americans did not understand that the ACA was cut off at the knees before being given a chance to run the race.

The perfect storm
This was the perfect storm, and it was set in motion because the ACA promised one thing and Congress changed the rules of the game midstream.  Some say it was an orchestrated bid to make Obamacare look as bad as possible for the 2016 election cycle. Maybe. But, the carriers aren’t going to play this game while their losses continue to mount.  There are a number of lawsuits by carriers against the Federal government.  And now it seems that every week another insurance company is announcing their exit from offering coverage in states or counties.  With the losses throughout the industry, it is easy to see why entire insurance markets are on the brink of collapse.  Here are the Pacific Northwest statistics.
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Where do we go from here?
I fail to see how any of the new-fangled versions of the ACA – be it the AHCA or whatever the Senate is working on – can create an effective, stable system without providing a safety net for the insurance carriers. When we end up with single payor government coverage because all the private carriers bugged out, you’ll know that Congress’ failure to understand the value of the 3 Rs is what collapsed the individual market.  The insurance carriers erred in trusting the feds.  They won’t make that mistake again.  Once bitten, twice shy…it’s an actuarially proven fact.

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