Companies selling individual health plans on Obamacare’s insurance marketplaces must grapple with the impending expiration of two of the law’s key early-stage programs, likely foretelling premium increases in 2017, as PricewaterhouseCoopers points out in a new regulatory brief.
The Affordable Care Act included a trio of provisions meant to counteract insurance marketplace uncertainty in its nascent years.
Collectively dubbed “the 3 Rs,” risk adjustment, reinsurance, and risk corridors were intended to act as shock absorbers for a newly reformed individual health insurance market in which participating firms were, essentially, shooting in the dark when setting premium levels and gaming out how sick and costly new enrollees would be.
Here’s a basic breakdown of how those three policies work: Risk adjustment is a transfer program which redistributes funds from insurers which paid out significantly less in medical claims to those which had to pay more; reinsurance is an insurance policy for insurance companies; and risk corridors take a percentage of the profits reaped by Obamacare insurers which set their premiums too high to those which set them too low.
Risk adjustment is the only one of these programs which will persist beyond 2017. Furthermore, the policies have provided significantly less buffer to insurers than originally hoped. That adds up to an added burden of uncertainty in Obamacare’s marketplaces, which may already contain more sick and costly enrollees than originally expected, according to insurers such as Blue Cross Blue Shield.
And when it comes to the insurance industry, uncertainty almost guarantees defensive pricing.
“The end of reinsurance and risk corridors payments will likely prompt insurers to raise premiums,” wrote PwC. “The loss of these programs increases the potential for financial instability for insurers.”
It’s important to note that those premiums are also likely to stabilize in the years following the 3 R’s expiration. But for the time being, insurance companies are still in some ways playing a guessing game when it comes to premium levels.
