Patients are still playing games with Obamacare

(Bloomberg View) — With insurers pulling out of the Obamacare exchanges, and the remaining plans contracting towards inexpensive Medicaid-style offerings with limited choices of doctors and hospitals, it was a safe bet that regulators would be scrambling to figure out how to stabilize the exchanges. They've now stepped in with a sort of early holiday present, releasing their proposed rulemaking for the 2018 marketplaces on Monday, instead of in November. These rules suggest meaningful changes to how the insurance market would operate, especially in its risk-adjustment program.

And what is the risk-adjustment program, you may ask? Well, back when the law was passed in 2010, it contained three programs designed to transfer money between insurers who made more money than expected, and those who lost it. This was supposed to cushion the transition to a new market, whose costs were hard to calculate.

These programs generated a lot of complaints about "backdoor bailouts" until the Republican Congress forced them to be revenue-neutral — which is to say, to limit payouts to the amount that the programs had taken in from the insurers, without any infusions of government cash to sweeten the pot. But since they stopped being a way to funnel money to the struggling insurance industry, they've fallen off the media radar.

Nonetheless, they're still important — or at least, the risk-adjustment program is. (The other two expire at the end of this year.) Basically, this program looks at the health status of the patients covered by each insurer, and transfers money to insurers who cover sicker patients from insurers whose pool was healthier than average.

Why is this necessary, when Obamacare forbids companies from turning anyone down because of their health status? Because even if you can't turn patients down, there are ways to tweak your offerings so that they are more attractive to healthy people, effectively cherry-picking a pool of especially healthy (and therefore profitable) patients, while leaving other insurers to pick up the sicker and more expensive ones. For example, you could offer a free gym membership bundled with your insurance, which will presumably be more interesting to 23-year old triathletes than 64-year-old patients with multiple disabling conditions. You could put a lot of work into building a snazzy app that would probably get you more millennial customers than grumpy middle-aged people like myself. Or you could make your coverage cheap but hard to use, which healthy people won't notice but sick people very much will.

It's hard to write regulations to stop this, so the law effectively says, "Go ahead and cherry pick; we're going to take your excess profits and transfer them to the insurer that got stuck with all the sick people."

However. While that sounds simple in theory, in practice, deciding what constitutes an especially unhealthy pool is harder than it sounds. The administration is proposing two significant rule changes for 2018. One is to factor in prescription drug data to patient risk scores as well as age, sex and diagnoses. The other is to change the scoring for "partial year" customers who enroll outside of the normal open enrollment period. This second change is clearly aimed at quelling insurers' worries that people are gaming the law by buying insurance to cover an expensive illness, and then dropping it as soon as they've gotten treatment.

I described the problem they're trying to solve at the beginning of the year:

People who sign up during special enrollment, insurers say, "run up much higher medical bills and then jump ship, contributing to double-digit rate increases and financial losses." Customers are also exploiting the three-month "grace period" when they can stop paying premiums and still get treatment from providers. And the article suggests that at least some Americans have realized that under current regulations, they need to be insured for only nine months of the year to avoid the mandate penalty. So you can sign up for insurance, cram all your spending into that shorter time frame, and then stop paying for the last three months.

Obviously the administration thinks this is not just insurers' whinging in order to get more favorable regulatory treatment. They've already cracked down on allowing people to enroll outside of the normal open-enrollment process by requiring better documentation that you've actually had a "qualifying life event" such as marriage, divorce or the birth of a child. Now they're looking to change the risk-adjustment formula to reflect that fact that people who only enroll for part of the year may be more expensive than their health status would suggest.

The question that remains is, "Will this work?"

I'm not sure it's going to do much. Gaming is one of the few true existential threats to the exchanges, because the whole point of gaming the system is to get a lot of expensive treatment while paying little in premiums. If this is widespread, then the problem is not going to be that a handful of insurers get especially costly patients; the problem is going to be that the entire exchange insurance pool has less money being paid in premiums than it is paying out in health care costs. Moving a little money around between insurers in that situation is the regulatory equivalent of rearranging the deck chairs on the SS Obamacare just as it steams into an iceberg.

The new proposed rule seems like an admission that gaming remains a problem despite the stricter documentation requirements. Which means that until the administration enacts stronger measures to stop it, the exchanges will remain in trouble, too.

Megan McArdle is a Bloomberg View columnist.

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