How Did Obamacare Authors Ever Fool Themselves Into Believing They Were "Bending the Cost Curve" With These Kind of Incentives?

I guess I never really paid much attention to how the Obamacare "risk corridors" work.  These are the reinsurance program that were meant to equalize the risks of various insurers in the exchanges -- but as exchange customers prove to be less healthy than predicted, they are more likely to become a government subsidy program for insurers.

I never knew how they worked.  Check out the incentives here:

According to the text of Obamacare, the health law's risk corridors—the insurance industry backstop that’s been dubbed a bailout—are only supposed to last through 2016. For the first three years of the exchanges, insurers who spend 3 percent more on health costs than expected will be reimbursed by the federal government. It’s symmetrical, so insurers who spend less will pay in, but there’s no requirement that the program be revenue neutral

So what, exactly, are the incentives for cost control?  If you lose control of your costs, the government simply pays for the amount you overspent.  Combine this with the fact that Obamacare puts caps on insurer non-patient-cost overhead spending, and I don't think you are going to see a lot of passion for claims management and reduction.  Note after a point, excess claims do not hurt profits (via the risk corridor) but more money spent on claims reduction and management does reduce profits (due to the overhead caps).

Nice incentives.

Postscript:  There is one flaw with my analysis -- 3% is a LOT of money, at least historically, for health insurers.  Why?  Because their margins are so thin.  I know this will come as a surprise with all the Obama demonization of insurance profits, but health insurers make something like 3-5% of revenues as net income.  My Boston mother-in-law, who is a very reliable gauge of opinion on the Left, thinks I am lying to her when I say this, even when I show her the Google finance pages for insurers, so convinced is she by the NYT and PBS that health insurer profits consume a huge portion of health care spending.

All that being said, I am pretty sure if I were an insurer, I could raise prices slightly, cut back on claims overhead, and make a guaranteed profit all while the government absorbs larger and larger losses.


  1. norse:

    Well, if you ask the insurance companies to effectively author the law for you, incentives skewed their way ought to be hardly surprising.

    My new and improved health plan (that costs me 5k per year more than my old one) was supposed to incentivize shopping around, given that I now pay out of pocket... I did that for an ultrasound recently, they range from $400 to $2k around where I live. Ultimately I realized that regardless of which one I choose, my personal portion comes to $250 based on my insurance, so I picked the most convenient.

    Healthcare in the US has an utterly defective ineconomic and ineffective allocation system, but Obamacare had not a single step closer to a solution and made quite a few things worse. Ultimately all of this will self-solve once elective procedures will become sufficiently expensive that flight plus medical care abroad will always be cheaper, but as an engineer, I am offended by the wastefulness we're living with here.

  2. CK:

    Most of their profit, I believe, comes from earnings on the float of premiums received but not yet paid back out in claims. Underwriting profits are typically very small. They also earn money for administration of self-insured plans. It seems to me the idea was to encourage plans to be underpriced in year one to make them more attractive than they would be if priced for the actual risk pools that are emerging.

  3. CK:

    One more point is that mandated expensive policies with lots of mandated prepaid medical expenses disguised as insurance increases the float and thus the income earned on the float.

  4. randian:

    If I recall correctly, insurers also do not have to pay taxes on claims kept as reserves. That's how Berkshire Hathaway's insurers have billions of dollars in deferred taxes.

  5. brandonberg:

    They didn't have to fool themselves--they just had to fool the voters.

  6. oneteam:

    The liberal argument regarding the low margins of health care insurers is that wages are so outrageously high, that even when the profit margin is 3%, if you're paying the top employees salary and bonuses in the multi millions, the profit margin is useless as a gauge of how well they are doing financially.

  7. Sam Wah:

    And then there are kickbacks in the form of contributions to campaigns...

  8. Ignoramus:

    This may be a sign that another big wheel is coming off ObamaCare. The extension of the risk corridors is likely necessary because prior assumptions are so wrong. If the insurers aren't given more financial support from Obama & Co, they may not play because of this. If insurers start to withdraw, the whole plan collapses.
    But the literal language of the statute says "2016."

  9. randian:

    Isn't getting the insurers to withdraw the whole point of Obamacare? Use their withdrawal to propagandize for, and implement, fully socialized healthcare.

  10. Ignoramus:

    I've been in the camp that ObamaCare was intended to fail long-term as a way to move us to single payer. But with the long phase-ins, I thought that the intent was to have a slow train wreck, not a relatively fast one like we're seeing.

    Note that the literal language of the statute says "2016." Prior extensions and waivers have had fiscal effects but the persons and entities that benefitted weren’t Evil Healthcare Insurers. So this could be a really big deal politically.

    As I write, the share price of UnitedHealth Group, which is the largest health insurer and a good proxy for the industry, is holding steady in the low $70s. It was around $20 when ObamaCare got enacted. I can't square this with the idea that ObamaCare will put insurers out of business in the long-term.

    What's not being talked about much is that for the moment ObamaCare is not affecting much those that have plans with "solid" employers. The relative value of getting your insurance paid pre-tax by your employer, as opposed to being a freelancer who has to fend for himself in the individual market has only gone up, no? That's if your well-paid, and not making say $40,000 where the employer will do the math and decide to dump you on the exchanges. If there are any exchanges, given where this may be heading.

  11. Mondak:

    I don't think you are right because you might not be looking at timing or data content on this.

    The claims process in American health insurance tends to be very "siloed" from the rest of the company. There are lots of laws on timely payments / adjustments / denials so that claims must be paid in at most 30 days, with sub-classes such as over 65 paid / resolved in 14 days.

    While the risk corridors (and other risk adjustments) are calculated on an ongoing basis, they reset on a yearly basis. This means in eyes of the law, if you see your doctor on December 31st 2014 and he notes you have a missing leg, on January 1st 2015, in the eyes of the law, the leg has grown back (until another face to face visit confirms it for the year).

    Claims systems (with a few exceptions) do not calculate risk scores. They are transitory systems where claims go in and payments / denials go out. The data then goes into a secondary system to calculate and keep track of what each patient's ongoing risk score is. Chart reviews and claims data comes in for months after the close of the books to get a final score. Because the real close of the risk score system can be 18 months after an event, it would be a disaster financially to relax your claim system - regardless of if the risk corridor would potentially pick up the slack. Most of the claim process is really adjusting payments "claimed" to what has been agreed on. e.g. x-rays are often submitted for thousands of dollars and routinely adjusted down to about $50.

    A very small subset of diagnosis go into the risk score calculation. Claims systems are generally working the other side of things to find out what needs to be paid based on the TREATMENT provided. While the claim system does match Diagnosis with treatments (e.g. don't pay a claim for kidney transplant when the diagnosis was stubbed toe), they are less concerned with diagnosis than they are with the treatments / payments.


    1. Feedback loops are indirect internally with those who care about risk adjustment dollars isolated from those who care about claims

    2. Even if feedback got back, it is VERY delayed

    3. Claims and risk deal with very different things when viewed through the eyes of a modern health insurance landscape.
    4. There are plenty of things wrong with ACA, this is not one of them.

  12. marque2:

    Well true, but the liberal argument is everyone except for them is overpaid. I don't know what the CXO's of Aetna make but if we cut their salaries 90% it wouldn't make dent in the cost "problem."

  13. MingoV:

    "... health insurer profits consume a huge portion of health care spending...."

    I agree that profits don't account for a huge proportion of spending. Administrative costs do. Many health care insurers spend over 20% of premiums on administration and overhead. Leaner admin and more efficient claims processing could cut the 20% to 12%. But bad administrators never seem to get fired.

  14. randian:

    You don't liberals complaining much about exorbitant government salaries. I still hear plenty of government employees talk about how their their pensions are justified because they could be making SO MUCH MORE MONEY in the private sector, when in fact they likely make MORE than the private sector (especially in bottom-tier jobs) before their pensions are considered. Misinformed idiots.

  15. randian:

    You have failed to ask why administration and overhead is so high. Government regulation is the primary culprit. Those supposedly low overhead government programs suffer from massive waste and fraud. They ignore inter-agency tasks when figuring overhead. GAO's work on behalf of Medicaid, for example, isn't counted as part of Medicaid's overhead, which grossly understates Medicaid's real overhead burden.

  16. mesaeconoguy:

    But as we now know, that “literal language” means nothing, or as the lawyers say, it’s “open to construction.”

  17. sean2829:

    I don't things are quite as bad for healthcare spending as this post seems to indicate. Consider that most people who are signing up on the exchanges to get subsidized care likely don't have much money to spend. Healthy people are choosing bronze plans that leave them on the hook for $6500 (single) or $13,000 (family) after they've paid their (subsidized) insurance premiums. I suspect many of these folks will go broke WITH insurance if a serious problem is found. Considering that going to a doctor or hospital is a financial crap shoot these days since many things are not covered and the price is rarely known ahead of time, I don't expect to see a surge in people seeking medical care. In fact, Bloomberg had an article that shows that the rate of growth of the number of people employed in healthcare was cut in half last year and this year, employment is stagnant. Perhaps the old dynamic of people being un-insured will be replaced by a new dynamic of paying premiums to be insured only to find doctors are hard to find and you still can't afford to get healthcare.

  18. marque2:

    False by law they can only spend 20% and when we all got those refunds a few years back it was only because of a 1-2% overage.

    The 20% isn't wasted overhead either - it goes into things like fraud prevention. When leftists claim that the system would be more efficient if government run - check out medicaid - they don't count many of the hidden costs and don't account for the estimated 15% fraud.

  19. Ignoramus:

    But this may finally go too far. Extensions and waivers have cost money not Congressionally approved, but here it will be for the benefit of Evil Health Insurers.

  20. Matthew Slyfield:

    "How Did Obamacare Authors Ever Fool Themselves Into Believing They Were "Bending the Cost Curve" With These Kind of Incentives?"

    Point of order: They did / are bending the cost curve, they just bent it the wrong way.

  21. john mcginnis:

    Want to know the price up front --

    The problem is, and people are figuring this out -- Health Ins does not equal Health Access.

  22. Greybeard:

    One big constraint in Obamacare is keeping the doctor/patient relationship untouched. The most expensive piece of medical equipment is the doctor's pen.
    The part of Obamacare that receives the most attention (the insurance rules) isn't the part that is designed to bend the cost curve. I personally think it bends it the wrong way with overly generous minimum requirements in the insurance policies.

    The Incidental Economist ( had a series with more detail on the risk corridors back in January. Here is the TL/DR:
    The risk corridors were designed to help manage the risk of not knowing how many healthy people and how many sick people would sign up. It'll take a couple years for this to settle out and companies have to get rate approval from the states starting this spring.
    Any gains or losses within 3% of the company's expected medical spending just hits their bottom line. The next 5% is shared 50% by the government. Anything over that the company gets to save or eat 20%.
    Medicare Part D has permanent risk corridors. In 2006 insurance companies paid Medicare almost 2.75 billion. In 2007 they paid over a half a billion.

  23. Settin it str8:

    Keep in mind that "reserves" are required by law. It's not as if insurers keep reserves for tax purposes. Reserves are required to make sure the insurer doesn't spend/distribute so much that in the event of losses, there aren't funds to cover them.

  24. randian:

    Actually, they do keep reserves for tax purposes. Warren Buffet has talked at length about how he uses insurance reserves to improve Berkshire Hathaway's tax liabilities. That's why the government is suing them for tax evasion. They don't like it when we peons use the law in our favor.

  25. curmudgeon:

    Not yet mentioned is that the risk corridors are funded by a $67/head tax on individual and small business policies, at least for the first 3 yrs. One of the executive proclamations
    by BHO was to exempt union and large company health plans that are essentially self funded with management by an insurance company but no insurance purchased. Plans
    so structured were exempted from the $67/head tax placed on plans purchased directly from an insurance company.

  26. Zach:

    You can go to the SEC's EDGAR site and search for a form called a DEF 14A for a particular company. Inside this document is a "Summary Compensation Table" that will list the CxO salaries. I ran the numbers for Aetna which, based on my knowledge of the numbers on Google Finance, had a 2013 net income of $1.913b on expenses of $44.106b. for a profit margin around 4.3%. Their CxO's were compensated for (as best I can tell) $34 million. If they paid their CxOs nothing, their expenses would drop to $44.072b, for a profit margin of around...4.3%. Like Warren's mother in law, my mother is also a parrot of the left and is always harping on CEO salaries. I've committed these numbers to memory for my next fight with her.

  27. oneteam:

    Zach... you're obviously overlooking the secret compensation they were paid through Haliburton's rape of the Iraqi oil fields. ;-)