This doesn’t get mentioned too often but ran across this article that does a pretty good job explaining how insurers are basically protected from any catastrophic losses for 3 years by the Feds.  It’s a $25 Billion dollar risk fund that goes for 3 years which offers a cap for big individual claims. 

You can be assured with this relative to claims there’s a 3 year pad for those insurers participating.  You can read below and see how this shuffles out to protect the carriers.  The funding comes in from the fee of $63 for each insurance policy issued.  When this all began there was quite a bit of press about this cost being passed back to the consumer and more than likely in some complex accounting formula it’s probably in there.  At any rate in the case of care, the insurers are only on the hook for 2% over projected costs and then the the government re-insurance kicks in.  As you can see the formula is not real simple but not overly complex and certainly there would be a lot of accounting to provide the numbers to receive reimbursements.

Getting Health Insurance In the US Has Become Way Too Complex And Difficult For Many In One Form Or Another With Spastic Algorithms and Math Models That Too Often Fail-Attack of the “Health Insurance” Killer Algorithms With Flawed Models

There might be a “small hope in hell” that your formula is right…and that’s the crux of the issues today as the models are not playing out as designed, as Emanuel Derman states “you are dealing with people” and they don’t work that way so again this is interesting and not to cast doubt all over the place, but like so many of the formulas out there today, will it work?  What’s going to happen in 3 years?  BD 

Obamacare contains a $25 billion federal risk fund set up to benefit health insurance companies selling coverage on the state and federal health insurance exchanges as well as in the small group (less than 50 workers) market. The fund lasts only three years: 2014, 2015, and 2016.
The government's risk management program for the insurers has three parts:

  • A revenue neutral Risk Adjustment System designed to level adverse claim costs between health plans. 
  • A Reinsurance Program that caps big claim costs for insurers (individual plans only).
  • A Risk Corridor Program that limits overall losses for insurers.

Of the $25 billion, $20 billion is earmarked for the Reinsurance Program and $5 billion goes to the U.S. treasury. 
First, the Reinsurance Program caps big individual claim costs for insurers––in 2014, 80% of individual costs between $45,000 and $250,000 are paid by the government, for example.

Then comes the Risk Corridor program. Participating health plans will receive payments from the federal government in any of the following circumstances:

  • The plan's costs for any benefit year are more than 103% but not more than 108% of the health plan's targeted amount. The feds will reimburse 50% of all costs in excess of 103% of the medical cost target. 
  • If the plan's costs are more than 108% of the annual target, the feds will first pay the health plan a flat 2.5% of the target and then reimburse the plan for 80% of their claim costs above the targeted amount––with no upside limit.

Target cost is simply defined in the new law as a health plan's "total premiums (including any subsidies) reduced by the administrative costs of the plan." It is whatever the health plan projected its premium needed to be to pay medical costs.
So, a plan is on the hook for all claim costs up to 102% (2% more) than the target cost.The statute very specifically limits funds collected to $25 billion over the three years––$12 billion in 2014. The source of these funds is the Obamacare $63 annual "Belly Button Tax" assessed on almost all people covered under a health insurance plan.


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