While the White House is pouring millions into advertising to lure the young and healthy into the Affordable Care Act's insurance risk pool, a study shows how the health reform law turns the conventional wisdom about who's the most profitable insurance risk on its head.
The report isn't for light readers. Suffice it to say the new frontier of health insurance profitability boils down to three kinds of risk adjustment known as "the 3Rs." In insurance-ese, the Rs are Reinsurance, in which insurance companies receive funding to offset high claims costs of enrollees; Risk Corridors, which limit the carrier's losses or gains; and Risk Adjustment, which transfers funds from lower risk plans to higher risk ones.
The ACA risk adjustments are made by scoring different insurance populations and categories of disease. So, for example, a newborn child who's pre-tax insurance profit margin is in the deep negative numbers -- -339.4 percent for a baby girl -- become a 14.2 percent profit margin when the 3Rs are applied.
Or take a 62-year-old man with a negative profit margin of -8.8 percent. Apply the 3Rs, and you have an enrollee likely to yield a healthy 7.3 percent profit.
Similar adjustments apply for sick populations.
So when insurers grumble in the media about the high cost of the ACA's guaranteed issue rule -- the requirement to insure everyone regardless of health -- or having to treat women and men equally in their pricing, or only charge older people three times instead of ten times more -- remember, the ACA is adjusting their risks and turning them in many cases into upsides. Read more.