I’m in between OMG got to get things done deadlines right now, so I just want to refer to a great post by Adriana McIntyre:
I’ve argued in the past that delaying the individual mandate for a year wouldn’t provoke a full death spiral; it would be an uncomfortable hiccup, but it’s not enough time for the whole market to unravel. More importantly, there are deep-in-the-weeds protections baked into the Affordable Care Act: risk adjustment, reinsurance, and risk corridors.
These programs—collectively called the “three Rs”—aid insurers if they wind up enrolling a population that is sicker and more expensive than projected. They do a crucial bit of policy work: we want plans competing on efficiency and quality, not their ability to attract the healthiest patients.
The programs have related functions, but risk corridors will play the biggest role if the individual mandate does get delayed. Their entire purpose is to stabilize premiums during the first three years of Obamacare, when it’s especially difficult for insurers to price plans.
Here’s how it works: exchange plans (QHPs) projected how much their risk pool would cost overall in 2014, their “target” cost. If they’ve significantly miscalculated—or, say, if a mandate delay causes adverse selection that they couldn’t have predicted—HHS will take action:
The risk corridor mechanism compares the total allowable medical costs for each QHP (excluding non-medical or administrative costs) to those projected or targeted by the QHP. If the actual allowable costs are less than 97 percent of the QHP’s target amount, a percentage of these savings will be remitted to HHS (limiting gain). Similarly if the actual allowable cost is more than 103 percent of the QHP’s target amount, a percentage of the difference will be paid back to the QHP (limiting loss).
There are transfer systems in place to compensate health plans that have very sick populations with funds from both health plans that have very healthy populations and the general fund (this was one of the taxes batted around but not changed during the debt default end game). This will keep health plans in business if the mandate does not work too well the first year. There are some loopholes that create perverse incentives for health plans that I’ll outline in a later post.