Back to school: the 3Rs of the Affordable Care Act – part 1

by David Tesitor, CLU
HUERFANO, LAS ANIMAS — When the Affordable Care Act (ACA) was first made into law in 2010, some lawmakers had serious concerns about the government’s ability to pay for the program when the bills came due.  Since then, millions of previously uninsured Americans have jumped on the bandwagon and obtained health insurance by utilizing the Advanced Premium Tax Credits the Exchanges offer.  
Over the past year, the World Journal has published several articles explaining the plan, the Connect for Health Colorado exchange, and how it affects Coloradans, specifically those of us living in Huerfano and Las Animas Counties.  Readers in Colfax County, please be aware that the New Mexico exchange is different from Colorado exchange.  
The information we will present over the next three weeks will explain how newly enacted mandates may increase healthcare costs for consumers.  
Consumers can protect themselves against rate increases by understanding the reasons for rate increases and by checking in to the Colorado Connect for Health exchange every open enrollment period to evaluate their choices. 
This article will cover  the individual market, not small group business, and will explain the impact of the 3Rs on insurance companies.  It will help readers understand the complexities behind the law and its twenty thousand plus pages, not counting the many additional amendments which have been added.  For us old-timers, we knew the 3Rs as Reading, ‘Riting and ‘Rithmatic, but the 3Rs of the ACA are Reinsurance, Risk Corridors and Risk Adjustment.  These terms will  become a part of our financial vocabulary.  
The first reaction most people have when they anticipate their rates will increase is to curse insurance companies and think they are too big and are making huge profits and that their CEO’s are making more money than they should.  In this case though, the insurance companies are working hard to adjust and adapt to parts of the ACA which are changing the way they do business.  
To have a basic understanding of how premiums are determined today, we must first understand how they were determined in the past.  Before the ACA became law, insurance companies were able to determine their risk based on their ability to evaluate the insured’s health status.  They could ask detailed questions and agree to accept the contract or decline coverage.  At that time companies were in control of their risk assumptions and priced their policies accordingly.  
Today under the ACA, everyone is guaranteed  coverage without medical screening which takes the control of the risk factor away from the companies participating in the exchange.  This created a big problem the first year of the ACA because companies did not know what type of claims they were accepting.  To help insurers deal with the risks, another aspect of the law stipulated reimbursement programs which allowed insurance companies to receive additional money for larger claims:  hence began the 3Rs of the Afforable Care Act.
The problem for companies is that all companies must accept all risks and they have no control over who signs up for their plans.  The 3Rs which help shape pricing are Risk corridors, Risk adjustments and Reinsurance.  The easiest way to explain how they work is as follows.  
The more profitable insurance companies which have managed their risks and claims successfully will pay fees to the government through  the Centers of Medicare Services (CMS) which will in turn pay subsidies to the less successful companies which were not as fortunate in managing their risks.  This part of the Affordable Care Act was designed to help insurers share the financial risk of providing health benefits to healthcare customers during the first three years of operation, from 2014 through 2016.
Currently, the Center of Medicare Services (CMS) administers the reimbursement programs but the funding questions have not been totally resolved.  As a result, several weeks ago the Obama Administration agreed to increase insurer subsidies under the transitional reinsurance programs provided under the ACA.  Three weeks later, the US Supreme Court upheld one of the provisions of the ACA saying the advanced premium tax credits are constitutional in all 50 states, and those states on the federal exchange are also entitled to receive these credits.  According to Kevin Paterson, Interim CEO of Connect for Health Colorado, “The U.S. Supreme Court ruling has no impact on customers of Connect for Health Colorado® – or in other states like Colorado that operate their own state-based health insurance marketplaces. We are fortunate that Colorado’s legislature in 2011, on a bipartisan basis, opted to create a state-based Marketplace.”
Next week, we will discuss the implications of this announcement in part two when we dig deeper into the way taxes collected from individuals, businesses and insurance companies will be paying for the ACA for years to come.