How the Authors of Obamacare Protected Insurance Companies

Three provisions in the law offset the crisis they might face if too few healthy people and too many sick ones enroll.

Protection: Insurance for insurance. (National Journal)

The troubled launch of Health has raised plenty of questions about whether young, healthy people will enroll in coverage — and, if they don't, whether insurance companies will have to raise their premiums or give up on Obama- care's new insurance markets altogether. But the law's authors built in a safety net to help guard against that worst-case scenario. In essence, it's an insurance policy for insurance companies.

The backstop is an approach known as the "three R's." And health care experts say that, taken together, the three prongs will help insurers not only grapple with the transition to the new requirements to cover sick people but also ward off a future in which they raise premiums so much that healthy patients stay away. "All three of those significantly shield the plans from adverse selection," says Timothy Jost, a law professor at Washington & Lee University and a fan of the Affordable Care Act.

"Adverse selection" is the technical term for a bad risk pool — too many sick people, and not enough healthy people, signing up. The Affordable Care Act includes tools, like the individual mandate, to get young people into the system in the first place. If enrollment is truly disastrous, the three R's can't rescue insurance companies, but if it is merely middling and if the mix of sick and healthy patients is merely worse than expected, they can help insurers bounce back. Here's how they work.

Reinsurance: The most straightforward "R" is the temporary reinsurance program. It's a big pot of money from which the Health and Human Services Department will simply reimburse insurers for the cost of covering especially sick consumers. Once patients hit a certain level of spending, the government pays for most of their costs. The law provides $10 billion in re- insurance payments next year, then smaller amounts for the next two years. "That's going to be huge if plans get a worse-than-expected risk pool, because it's going to mean they're sharing an awful lot of the risk," Jost says. Reinsurance was included because everyone knows that some sick, expensive patients will enroll; this program guarantees that the government will help pay for them.

Risk corridors: This program is designed to protect the overall marketplace if more high-cost patients than expected sign up. If an insurer's real costs are higher than it planned, the government pays it part of the excess. If its costs are lower than it planned, the insurer pays the government. The ACA is a big transition for insurance companies, and they have to make their best guess about how much it will cost to cover people in the health care law's exchanges. Risk corridors are there to balance out the overall financial burden in case they guessed wrong. If literally every insurance company underestimated the cost of participating in the exchanges, says Larry Levitt, senior adviser for special initiatives at the Kaiser Family Foundation, they would all be compensated for that mistake. "Risk corridors absolutely would help to cushion the blow," he says.

Risk adjustment: The goal here isn't to stabilize the overall market the way risk corridors do. It's to make sure that one single company doesn't end up saddled with the most-expensive patients in a state. Under risk adjustment, insurance companies within a state pay each other. Companies with an especially healthy risk pool make a cash payment to companies that ended up with an especially unhealthy one. The federal government sets the parameters in most states, although, as with the exchanges, some states do it on their own.

The three programs are similar but address slightly different risks. The goal is to ensure that as the health-insurance industry transitions into the new marketplaces, individual companies aren't forced out of the market and that the system generally won't have to raise premiums next year to offset unexpected costs this year. That could be the beginning of the dreaded insurance "death spiral," in which sick customers beget premium increases, which makes coverage less attractive to healthier people. The authors of the health care law didn't want that, and they recognized that the people who sign up for Obamacare first will probably be the sick people who need it most.

Whether the programs are robust enough to handle Obamacare depends on how the enrollment process goes. The mix of sick and healthy enrollees still has to be right — about 40 percent healthy, according to HHS. Right now, it's not looking great, at least in the 36 states that turned to the federal government to run their marketplaces, but there's no way to make a prediction yet about the entire six-month enrollment process. "It's not like it provides 100 percent protection, but I think cushioning the blow is the right analogy," Levitt says. The three R's depend on enrollment being just bad enough, rather than the absolute catastrophe its opponents have predicted.