For reasons that will likely be discussed on this blog later, I have concerns, as do a growing number of people, that the Affordable Care Act (a/k/a Obamacare; a/k/a The Patient Protection and Affordable Care Act) is going to going to cost a lot more (net) than was projected and reduce the numbers of uninsureds far less than was projected. Part of that concern stems from my belief that fewer than expected individuals are going to purchase health insurance through the Exchanges. Moreover, those that do purchase insurance through the Exchanges are going to have very high medical expenses. The closest analogy to the Exchanges is the Obamacare-created Preexisting Condition Insurance Plans . As set forth in this report from the government’s Center for Consumer Information and Insurance Oversight, the PCIP has seen enrollment of less than 30% of what was projected but has seen claims more than 250% of what was expected. The $5 billion originally allocated to the program has run out and no new applications are being accepted. Prices haven’t gone up because the government rather than private insurers set the price in advance.
If my prediction is right and the Exchanges end up suffering from the same consumer behavior as the PCIP — or, more likely, worse — one would ordinarily expect the price of insurance policies offered through the Exchange to increase. Alternatively, insurers may just to stop their voluntary business of writing policies through the Exchanges. That’s the result of “adverse selection.” Either way, the result is likely to be that the Exchanges are not going to deliver what was promised, which may place pressure for yet greater rates of subsidization for policies purchased through the Exchange, with funding coming from who knows where.
Now, the bill’s proponents very much knew that Exchanges in which the law prohibited traditional medical underwriting could suffer from adverse selection. They knew that insurers might not sell policies within the Exchanges at all out of fear that adverse selection would materialize. One of several ways they addressed this possibility was through the creation of “risk corridors.” According to the government’s website on the program, “Qualified health plans with costs that are at least three percent less than the plans’ costs projections will remit charges for a percentage of those savings to HHS, while qualified health plans with costs at least three percent higher than cost projections will receive payments from HHS to offset a percentage of those losses.” I was going to take a hard look at how this system worked and I might still do so. But before I could even get to the merits of the program, I found something strange.
Let’s look at what is actually written in the statute.
The relevant text is section 1341 of the Patient Protection and Affordable Care Act, the pertinent part of which is codified at 42 U.S.C. § 18062(b)(1). It reads in pertinent part:
“(1) Payments out
The Secretary shall provide under the program established under subsection (a) that if-
(A) a participating plan’s allowable costs for any plan year are more than 103 percent but not more than 108 percent of the target amount, the Secretary shall pay to the plan an amount equal to 50 percent of the target amount in excess of 103 percent of the target amount; and […]”
This can not possibly be right. The phrase “50 percent of the target amount in excess of 103 percent of the target amount” makes no sense. What they meant, I am quite confident, was “50 percent of the allowable costs in excess of 103 percent of the target amount.”
How do I know? First, the italicized phrase makes no mathematical sense. The “target amount” is a computed number. It’s defined in 42 U.S.C. § 18062(c)(1)(A) as “The amount of allowable costs of a plan for any year is an amount equal to the total costs (other than administrative costs) of the plan in providing benefits covered by the plan.” “The target amount in excess of 103 percent of the target amount” is like saying “that part of $3 that is in excess of 103% of $3.” That number is always zero. Presumably Congress knows how to say zero when it wants to and it would hardly go to the trouble of drafting a statute if it was designed so that it never did anything.
Second, “target amounts in excess of the target amount” is not what gets said in the next parallel subparagraph. Here’s how it reads:
“(B) a participating plan’s allowable costs for any plan year are more than 108 percent of the target amount, the Secretary shall pay to the plan an amount equal to the sum of 2.5 percent of the target amount plus 80 percent of allowable costs in excess of 108 percent of the target amount.”
This at least makes mathematical sense. And similar sensible language appears in the next subparagraph (B) when they speak about what happens if your allowable costs are less than the target amount.
Third, the bill as written will not accomplish the apparent purpose of transferring funds from insurers that happen to do well to those that do not. Read, for example, the regulations that implement 42 U.S.C. § 18062. They say:
For a QHP with allowable costs in excess of 103 percent but not more than 108 percent of the target amount, HHS will pay the QHP issuer 50 percent of the amount in excess of 103 percent of the target amount.
77 F.R. 17238
Or read regulation § 153.150 (emphasis added):
§ 153.510 Risk corridors establishment and payment methodology. …
(b) HHS payments to health insurance issuers. QHP issuers will receive payment from HHS in the following amounts, under the following
(1) When a QHP’s allowable costs for any benefit year are more than 103 percent but not more than 108 percent of the target amount, HHS will pay the QHP issuer an amount equal to 50 percent of the allowable costs in excess of 103 percent of the target amount; …
It’s interesting that, so far as I can see, no one has hitherto spotted or commented upon the typo. Our brains have evidently compensated for the mathematical drivel contained in the law and attempted to make sense out of it. I wonder whether Congress will fix the statute and render it formally correct before issues with the content of the statute become apparent.