Scott Gottlieb on How Obamacare’s Bad Math Will Force Insurers To Downgrade Earnings
Some of the biggest health insurers are baking faulty math into their earnings forecasts by factoring in payments from Uncle Sam that may never materialize.
Two events this week could force a reckoning between their wishful arithmetic and common auditing standards – forcing insures to downgrade their earnings.
At issue are risk-sharing arrangements contained in Obamacare that are meant to help offset losses insures might take as the program gets started. Collectively, these programs have become known as “the three Rs” because of their three elements.
The first component is risk adjustment — a mechanism for transferring funds from plans that enroll low-risk members to plans that attract high cost enrollees. The second piece is a reinsurance scheme. The government will cover a percentage of the losses for high cost enrollees whose medical bills fall above a certain threshold.
It’s third element – the risk corridors — that’s likely to cause the earnings woes.
The idea here is to share the financial risk with Uncle Sam. If the actual medical claims for any individual Obamacare plan fall above or below 3% of some target amount, then the health plan will keep all the gains or losses itself. Here’s the rub. For anything outside that threshold, Uncle Sam will split the money with the health plan, essentially capping their upside and protecting their downside. Specifically, for the first 5% of gains or losses, the government will split it 50/50 with the plans. For anything above that, the government will take 80% of the extra gains or losses.