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This website provides analyses into assorted health care issues in the United States. With the aging U.S. population, there will be a significant increase in demand for health care services.  Under the status quo, these demands will place an extremely heavy burden not only on Federal and state governments but on citizens as health care costs continue to rise faster than inflation, wages, salaries, and benefits.

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Exchange Fix Stabilizes and Restores “Affordable” to Affordable Care Act

Download PDF Report: Reinsure ACA

This analysis drew its data and conclusions from an Excel based simulator. Details of this simulator are described in: APPENDIX – METOHDOLOGY and APPENDIX – EXCHANGE SIMULATOR . The downloadable simulator, permits users to change a variety of assumptions and to view the results in graph and table form. This Excel file contains no macros or VBA that may pay pose a security risk to users.

Download Exchange Simulator: ACA simulator


Before the Affordable Care Act (ACA), people with chronic and costly illnesses, if not buried in debt, were sorely stressed from medical liabilities they incurred. ACA shifted excess costs to insurers when it prohibited any health exclusions and annual and lifetime limits. Government reinsurance could further shift these excess costs away from insurers. This last effect would draw Billions of dollars from the Exchanges and allow premiums and costs more in line with pre ACA days.

Lower costs happen despite retaining all the essential health benefits added by ACA. Of note is that while the government reinsurance costs would rise significantly, subsidies for lower-income users drop by billions. When one includes the lower premiums and deductibles for users, combined savings can significantly exceed any increase in government costs. . Users benefit while government pays out more. The difference is in fact identical to a direct tax cut for the middle class.


Few issues generate as much controversy as the Affordable Care Act (ACA). As U.S. health care constitutes nearly 20% of GDP, $3 plus Trillion and over $10,000 for every person, the issues are both economic and political. One cannot easily solve the political issues. However, one can add perspective.

First, the bulk of ACA changes have broad acceptance and help make improvements to many different aspects of health care. Most controversy centers on Exchanges and Medicaid Expansion. Alternatives to Medicaid Expansion have not been very helpful, other than to free up Billions of dollars for other uses. More valid ideas exist for amending Exchanges. This analysis focuses on just one ACA amendment.

ACA removed a financial burden from people by prohibiting medical exclusions and caps on insurer coverage. However, those costs did not just disappear. Now insurers are left “holding the bag” for these costs. Government has helped with subsidies. Nevertheless, the long-term answer would be to shift further all the highest user costs from insurers to the government. Note the difference between “highest user costs” and “highest cost users”, as in high-risk pools. Reinsurance keeps everyone in the main pool and offers the most efficient method to achieve affordability. Not only does reinsurance relieve insurers of a costly burden, it also draws billions of “duplicate” dollars from the entire health care system.

Obviously, any major change will affect stakeholders in different ways. The following section highlights a few.

Health Insurer Stakeholders

This would present a mixed bag for insurers. Reinsurance will drastically lower their costs that are coming from a very small minority. Medical loss ratio (MLR) minimums will force down premiums. Exchange Insurers employ a cost-plus scheme that directly affects profit opportunity. Falling costs lower insurers’ profit opportunity; higher costs raise them.

Favorable for insurers is retaining a customer base on which to market additional services. Solve ACA Exchanges’ cost issue and insurers can expect greater user enrollment as well.

Federal and State Government Stakeholders

Reinsurance proposed here assumes Federal government funding. Medicaid costs do involve state government, but their role regarding Exchanges is little changed.

Small Employer Stakeholders

Reinsurance should be a major boon to small employers. Both before ACA and with ACA, small employer health insurance has always been higher than for large employers, not just from economies of scale, but also from many large employers being self-insured. Self-insurance eliminates the “middle man”, namely, the insurers’ markup that adds major costs for smaller employers. Small employers are more likely than large to grow, which could prove to be a jobs boost.

Individual Stakeholders

Lower cost is an obvious benefit for individuals. Another major benefit for individuals is that reinsurance would bring back insurers leading to far more competition on Exchanges. Network “shrinking” should decline along with some of the frustration with the current Exchange market.

Those not eligible for subsidy, though not by any means rich, will gain from lower premiums, deductibles and co-pays.

Young and Healthy Stakeholders

Most people would accept paying a fair share for insurance. However, the extreme skewing of health costs and ACA restraints tilt this unfairly. This has led many to go without insurance, or to pay the penalty as less onerous options. A major reduction in costs would make coverage palatable. There are always a few to argue that about the need for some female benefits. Perhaps they slept through biology class. ACA assures that males and females are treated equally.

Elderly Stakeholders

With reinsurance drawing billions from Exchange health costs, elderly are likely to benefit as much proportionately as younger, healthier people. Older workers are more likely than younger to be laid off in a downturn, and reform would provide an affordable option until Medicare is available.

Those on Corporate/Government Health Care Plans

By removing dollars from health insurance, Exchange costs will be more comparable to corporate and government plans. This may lead some who have an option to switch to join an Exchange and be insurance independent of their employer. It may also be a precursor to transition health insurance from employer based to individual based, or even single payor.


The following analysis draws its data from an interactive simulator explained further in the Appendixes. Six cases compare differences from before ACA to two reinsurance cases that bring user costs down to pre ACA days but with far better coverage. For each case, there are two side-by-side graphs below which are the assumptions for those graphs.


CASE 1. Pre Affordable Care Act

The following graph shows Exchange member costs under “Pre-ACA”. ACA will change two key (yellow) assumptions that bear noting. One is the “User Annual Limit” that caps what insurers will pay, and second is the Medical Loss Ratio (MLR) that reflects a typical MLR for individuals and small groups prior to ACA. Prior to ACA, insurers paid only to the annual limit, forcing members to absorb any excess costs. Insurers also could raise premiums to increase their margins, as there were no MLR limits on insurers’ profits.

The first bar in the left graph (50% of members) had costs less than their deductible (no blue bar) where insurers paid no claims. The next two groups (40% combined) did co-share with insurers (green bars), but the three groups at right (top 10%) were also forced to absorb their excess health costs (red bars). As regards premiums (line graph), they were low for healthier members but were often 5 times (or more) higher for older, less healthy members. Premiums averaged nearly $440/ month, not exactly affordable to many.

The right graph shows an often-overlooked cost item. The copper (3rd) bar shows government reimbursements ($18B) to hospitals and providers. It covers medical service costs for uninsured people. Analyses have found that the uninsured incur about half the health costs of insured. Government has always been deeply involved in health cost support prior to ACA, just in a less visible way. The low amounts in first two bars are due to only 10% Exchange members being insured.

10.0 M Exchange Population $15K User Annual Limit
$8,000 Avg Health Costs n/a Reinsurance Premium
$2,000 User Deductible 68% Medical Loss Ratio
40% Co-pay / Co-share 90% % Users Uninsured
$10,000 Max Out-of-pocket $2,000 Provider Reimbursemnt

Finally, bottom right shows a significant Insurer “margin” of $97 per month that insurers received. This is the difference between premium received and costs paid out. Self-insured companies get by with far lower margins, while individuals and small business withstand the brunt of insurers’ profits.

CASE 2.1. ACA 2017 Bronze 60%

Like Case 1, the following graph shows Exchange member costs under “ACA mid 2017” conditions and assumptions.

10.0 M Exchange Population n/a User Annual Limit
$8,000 Avg Health Costs n/a Reinsurance Premium
$6,000 User Deductible 80% Medical Loss Ratio
40% Co-pay / Co-share 70% % Users Subsidized
$10,000 Max Out-of-pocket $3,000 Subsidized Payments

The key change, however, was a shift of some $35 B excess cost (red bars) from ALL 10 million now insured members to insurers. This led to large increases in insurers’ costs that insurers passed back to users as premiums and deductibles.

ACA had hoped that with mandatory enrollment, healther members with lower costs would balance those with higher costs. A 3:1 max premium spread also forced up premiums for younger members. With only mild penalties, enrollment ran below expectations, requiring insurers to increase both premiums ($698) and deductibles (to $6,000). Not visible is how many did not enroll due to the effect of these actions.

In the right graph, Gov’t reimbursements for the uninsured are replaced by ACA subsidies for the poorer insured. These costs exceeded reimbursement savings for a small increase. Meanwhile, the sum of all costs rises to over $200 Billion.

CASE 2.2. ACA 2017 Silver 70%

The following graph shows costs for ACA Silver plans. One would expect user costs to decrease when insurers pay more on claims. However, higher insurer payments lead to higher margins, that rise above $100/month.

Those claims payments and added margins actually exceed initial user claims payments. The net effect is that that users come out worse on average. All this assumes an exact 80% MLR effect on margins. Meanwhile, total costs (last bar at right) remain high at over $200 Billion.

10.0 M Exchange Population $15K User Annual Limit
$8,000 Avg Health Costs n/a Reinsurance Premium
$3,500 User Deductible 80% Medical Loss Ratio
30% Co-pay / Co-share 70% % Users Subsidized
$7,000 Max Out-of-pocket $3,000 Subsidized Payments

Case 2.3. ACA 2017 Gold 80%

The following graph shows costs for ACA Gold plans. This is a repeat of Silver plans addressed just above. The more insurers pay, the more margins rise. Together, that raises user costs. Moreover, government subsidies to poorer insured are dependent only on their income. As health care costs rise, this forces government to increase subsidies to keep these insured users whole. If all 10 million users had gold plans, total costs under current ACA conditions would rise above $220 Billion.

10.0 M Exchange Population n/a User Annual Limit
$8,000 Avg Health Costs n/a Reinsurance Premium
$1,000 User Deductible 80% Medical Loss Ratio
20% Co-pay / Co-share 70% % Users Subsidized
$5,000 Max Out-of-pocket $3,000 Subsidized Payments

CASE 3.1. ACA -Base Reinsurance

With greater insurer payments inflating government subsidies and user costs even more, then one logical way to correct this is to lower what insurers pay. Just as ACA shifted user costs to insurers by increasing user protections, one can increase insurer protections by government reinsuring their highest costs. Reinsurance is not an insurer bailout but an efficient way to reduce their involvement in claims payments. MLR constraints will limit margins and any notion of bailout.

Like all Cases, the graph below shows Exchange member costs under “ACA with Government Reinsurance”. This shifts some $34 B of “excess” costs (red bars), but this time from insurers to government. With this shift in costs, the risk to insurers declines to less than what existed prior to ACA. The premium effects are dramatic. The highest Premiums (for older folks) drop almost in half compared to Pre ACA levels, while the lowest decline as well.

One can see the dramatic reduction of Total Exchange Costs by comparing the right graph above with any of the previous ACA cases. The axes on the right graph are fixed at $140 billion for Users, Insurers, and Government, and $280 Billion for all combined. In each of the ACA cases, the combined costs of all three parties were over $200 Billion.

10.0 M Exchange Population $15K Reinsurance Threshold
$8,000 Avg Health Costs 10% Reinsurance Premium
$3,500 User Deductible 80% Medical Loss Ratio
30% Co-pay / Co-share 70% % Users Subsidized
$5,000 Max Out-of-pocket $3,000 Subsidized Payments

Reinsurance greatly lowers user and insurer costs, though increasing costs to government. The total combined costs drop to $130 Billion, some $70 Billion below curent levels.

Every dollar for which an insurer is liable more than doubles the claims cost. This is because insurers add an overhead margin to claims paid. They then recoup via premiums and deductibles from users. If government is liable, there is that much less for insurers to pay. And if they don’t pay, they they also have to cut their margin to remain MLR compliant.

The government is currently paying some $42-45 Billion in subsidies to insurers. As premiums decline with reinsurance, so do subsidies. The net result is a modest $8 Billion increase to about $52 Billion in government costs. Contrast that with at least a $35 Billion reduction in user costs. That has the same effect as a $27 Billion ($35B-$8B) tax cut, and nearly all of that is for the middle class.

What should surprise nobody is that when risk shifts to government, there is no middle man (private insurer) to add overhead for marketing and profit. This is one reason why Medicare and Medicaid cost materially less per person than does private insurance. Government doesn’t charge extra for “risk.” Medicare also fixes prices, relying on doctors in private practice for input, but that is another story.

Less well known is that many of those same private insurers that ACA forced to reduce margins to “only” 15% to 20% perform nearly all the same administrative tasks for Medicare and Medicaid for less than 5%.

CASE 3.2. ACA -High Reinsurance

There is one more appeal to the reinsurance model. Lowering the threshold from $15K to $5K in graph below, transfers the bulk of insurer risk and related cost. Insurers are at risk only for lesser amounts. As claims bypass the middleman and his markup, Exchange premiums decline to near Medicare levels. All the while, insurers can remain in (or return to) Exchanges with an opportunity to sell additional benefits and find ways to lower costs even more. Reinsurance retains the creativity and inventiveness of private enterprise to reign in costs.

10.0 M Exchange Population $5K Reinsurance Threshold
$8,000 Avg Health Costs 5% Reinsurance Premium
$1,000 User Deductible 80% Medical Loss Ratio
30% Co-pay / Co-share 70% % Users Subsidized
$5,000 Max Out-of-pocket $3,000 Subsidized Payments


Without changing essential business processes in use today, one can greatly reduce Exchange costs by implementing ACA reinsurance. Shifting most risk from insurers would be like insuers being third party administers for self-insured companies. One major insurer benefit is they retain a built-in customer base where they can market features beyond ACA’s essential benefits. Like other countries with single payor systems, the U.S. can still have a vital albeit smaller private insurance market able to offer health features beyond basic government benefits. They are also free to adapt to special conditions of their markets.

Best of all, Congress could make the threshold adjustable to rebalance, as needed, consumer affordability and private insurer sustainability. That is a fiscally conservative idea with a major benefit both to the middle class and to the health of all Americans.




To find a solution, one needs to understand the problem. Health care insurance is not like most insurance policies about which many are familiar. With most insurance, there is a fairly symmetrical form to their costs: some low, some high, most near the middle. Acceptance occurs when those with lower costs feel the “premium” is worth the protection.

However, health costs are extremely skewed, with a huge majority of low cost members expected to cover extremely high costs of a tiny minority. Adding a mandate to buy health insurance simply adds to the discontent.

The first step was to develop an exponential math equation that would roughly mirror the actual health cost distribution where the top 1 % consumes 20% of all costs, the top 5 % – 50%, and the top 10% – 60% of all costs. Then build a table with 100 cells of equal population sorted by cost. The graph below does this and highlights how skewed health costs are. With an average cost for the U.S. of about $10,000/year, it was necessary to limit the right axis values in order to view any of the lower costs for 90% of the population.

ACA further limits insurers to a maximum ratio between highest and lowest premiums of 3:1. Insurers responded by increasing deductibles in order to maintain reasonable premiums. The result was deductibles rising to the $4,000 to $6,000 range. Even with high deductibles, premiums are still uncomfortably high. Deductibles are often far above 80% of the members. These lower cost members never collect any of the insurer’s co- payments. Even at $2,000, few members exhausted their deductible (red line) in the next graph.


Nearly all agree of the need to shift costs from insurers to government. This analysis considers two ways. In an effort to bring down costs, some favor funding (state run) high-risk pools that remove high cost members from the main pool.

Applying this to the highest 4% cost members yields the graph above. With High-risk Pools, Health Insurers have total protection only from those in the pool. They still retain the risk that one or more of those in the main pool will incur exceedingly high costs. With over 95% of members still at risk for substantial claims, insurers will cover this risk by raising premiums, deductibles, or both. As pools often have stricter conditions, users face obstacles for even small claims.

Another way to shift risks and costs to government is with reinsurance, a form of which ACA included until Congress blocked its funding as a “bailout of insurers.” A permanent form of reinsurance is needed like shown in the next graph.

Several kinds of reinsurance are available. “Treaty” transfers risk when overall costs exceed a threshold. “Facultative” is the recommended form for health reinsurance. It covers only an individual’s excess costs. Insurers already have systems in place, as the logic is identical to annual limits of yesterday. Only now, costs are forwarded to government, not returned to the user. An important conclusion is that reinsurance protects health Insurers from high costs over the entire pool. They can more readily define risk and do not need to add more risk for potentially large claims from any member.

Another advantage is for those with chronic illnesses. If they incur common injuries or sicknesses having nothing to do with their chronic illness, they still have pool coverage common to all. Unlike high-risk pools, reinsurance offers ALL members equal treatment for any illness or injury.

Finally, one can compare the costs of high-risk pools versus reinsurance. In the graphs above, assigning the top 4% to high-risk pools is equivalent in cost (but with greater risk) to setting a $22,000 average reinsurance threshold.


At this point, there are 100 cells (members) each representing 1% of the population. Now consolidate the100 cells into six groups or “buckets”, where the total cost of each is higher and the population is smaller than the preceding group.

This led to population groups (in ascending cost order) of 50, 30, 10, 5, 3, 2 = 100. The result is having the cost for each group and total. The actual total cost is not important. What is important is knowing the percent of total costs are in each group. Applying these percents to any cost total determines the costs for each group. Total cost is simply a product of Exchange members and their average costs.


With costs by group defined, the next step was to build the precise and detailed logic or rules of how insurers process all health claims. All insurers must abide by the same rules in the table below, but not necessarily using the same values.

Step Description Paid by…
1 Deductible Member
2 Co-pay/Co-share % by Member, balance by Insurer
3 Out-of-pocket Maximum Limit on what member pays. With ACA, Insurer liable for excess
4 Reinsurance Threshold Limit on what insurer pays. (Gov’t) Reinsurer liable for excess
5 Who Pays Excess Costs – 3 Cases 1. Pre-ACA – Members paid
2. ACA mid 2017 – Insurers pay
3. ACA Reinsurance – Gov’t pays
6 Derivation of Premiums using cost + accounting All health costs paid by insurer + a Margin to cover overhead – max set by Medical Loss Ratio limits
7 ACA Subsidies /
% eligible & Avg Gov’t Subsidy or
Pre ACA Provider reimbursements


All the graphs above drew their data from an interactive simulator that covers 3 Cases or phases of ACA health care.

  • Phase / Case 1: Pre ACA using earlier business processes
  • Phase / Case 2: ACA in 2017 using current processes
  • Phase / Case 3: Amended ACA adding a new process for government reinsurance

In addition to three basic cases, one can change 14 values that determine payment of costs and derivation of premiums:

  1. Exchange Population (+/- 10 million)
  2. Average Health Care Costs (now about $10,000)
  3. Insured member Deductible $
  4. Insured / Insurer Co-payment %
  5. Insured Maximum Out-of-pocket $
  6. Annual Limits for users (now outlawed by ACA)
  7. Government Reinsurance Threshold $
  8. Reinsurance Co-payment % (in lieu of premium)
  9. Medical Loss Ratio (70%+/- pre-ACA, 80% ACA)
  10. Uninsured pre ACA whose costs Gov’t reimbursed
  11. The reimbursement amount paid to providers
  12. Number of subsidized Exchange members
  13. Cost of Gov’t Payments for subsidized members
  14. Finally, toggle between 5:1 or 3:1 premium ratios

All the graphs in this document, plus the table below are available for download and experimentation in an Excel spreadsheet. This Excel file contains NO macros that can interfere with network security. It does contain over 2,400 “formulas”. This interactive ACA simulator is available at “insr.us/reinsureaca”


The table below shows assumptions and results for six cases. One is before ACA, three are cases representing Bronze, Silver, and Gold ACA, and finally two showing ACA with Reinsurance. Identical logic applies to all cases. Focus on the top three rows and their sum, “Total Cost All Sources” row, in yellow. While Government costs go up, User and insurance go down.

Today those combined total costs are running over $200 Billion. Note in the last two columns with reinsurance, total costs drop significantly to about $130 Billion. The $8-10 Billion increase in government is more than offset by member decreases of $40 Billion, and by insurer decreases of $50 billion. Reinsurance literally “drains” billions of dollars from Exchanges.


The table below shows the detailed calculations for the final case, “ACA with High Reinsurance”. The assumptions are in yellow in column D. The eight blue shaded rows describe the computations immediately below each. Section D, “Reassigned Excess Costs” shows who bears excess costs (user, insurer, or this in case, government) and how much are those costs.

Download PDF Report: Reinsure ACA

Download Exchange Simulator: ACA simulator


Highlights for ACA Reinsurance Fix

Below is a process flow diagram of major components that impact ACA reinsurance. It contains three columns representing health claims process [1] before ACA, [2] the current ACA process, and [3] ACA with government Reinsurance.

Initially, the process is identical for all three, but it diverges when handling “excess” costs as shown by the three red bordered boxes. Shifting those excess costs to government as reinsurance dramatically drives down total costs for both insurers and users. The two boxes at top right add the effect of lower health care costs on government subsidies to arrive at the combined net savings from users and government.

This process diagram is a picture of an Excel spreadsheet in which one can change the assumptions in yellow highlighted cells.

Open Process Flow Diagram: ACA Flow Diagram

Download Interactive Spreadsheet: ACA Process Flow

The above diagram captures most of the effects of government reinsurance. An even more comprehensive analysis is provided in the Post titled:

Exchange Fix Stabilizes and Restores “Affordable” to Affordable Care Act

Both posts identify the multiple effects when government reinsurance is reinstated for ACA Exchanges. Both analyses show that government reinsurance when implemented:

  1. Can decrease health insurance costs by 40% or more for small businesses, key generators of jobs in the U.S.
  2. Is equivalent to a $25 Billion middle class tax break for Exchange members (difference between member savings and net new government spending)
  3. Clearly defines maximum risk for insurers, abolishing the costs of unlimited risk, leading to far lower premiums
  4. Increases competition and user choice as health insurers have positive incentives to participate in Exchanges
  5. Provides health insurers with a large built-in market to up-sell additional products and services
  6. Continues reliance on private health insurers to come up with creative solutions for cost containment and reduction

ACA Health Insurance Exchanges – Not All are Competitive

Download PDF Report >>> ACA Exchange Premium Extremes


The Affordable Care Act (ACA) created state run Insurance Exchanges to stimulate competition among health insurers. Some believe that private insurers are better suited to manage the complex health insurance market. But are they?

Kaiser Health News (KHN) recently published premiums that private insurers charge on ACA Exchanges. KHN identified 10 ACA Exchanges with the highest premiums, and 10 with the lowest. They found extreme differences and attributed them to competition or lack thereof. This analysis confirms those conclusions by comparing actual Medicare costs for those same areas.

Detailed cost data published by Medicare show that medical costs for seniors are fairly consistent across these 20 ACA Exchanges. Though costs for seniors are much higher than for those under 65, they provide a valid proxy for all medical costs when comparing one market area with another.

Medicare payments are based on service costs with pricing input from the American Medical Association. Medicare adjusts for regional differences so costs are consistent across the nation. Medicare essentially ignores hospital and doctor billing prices.

Private insurers, on the other hand, derive their costs more from provider billing prices which have been shown to be highly inconsistent.  (http://insr.us/hospbill) Insurers do negotiate discounts from billing prices, but if the billing basis is inconsistent, it is harder to get a consistent result.

If there are few dominant providers, insurers have less leverage over discounts. If there are few dominant insurers, they are less inclined to aggressively set lower premiums.

Only one conclusion supports the enormous differences in premiums between the high and low cost ACA Exchanges. In areas where little competition exists, whether it be providers or insurers, private insurers are unable or unwilling to offer competitive pricing. The belief that private insurers are better suited to restrain market prices rings false in these instances.


For years, health insurance markets have been divided into areas that coincide with county lines. The ACA insurance Exchanges continue to abide by these market boundaries.

Kaiser Health News (KHN) analyzed these “market areas” and found huge differences in ACA Exchange premiums. They identified 10 most expensive market areas and 10 least expensive areas (listed in Appendices 3 and 4).

ACA Exchanges insure people under 65, and premiums are derived from expected costs based on historical costs in the counties that make up each ACA Exchange.

Medicare publishes medical costs data down to the county level. Though Medicare costs apply primarily to seniors, one can map those costs to align with the 20 market areas. It does not matter that Medicare’s costs are much higher than for those under 65. The relative costs are what are important.

If two market areas have similar Medicare costs, it is fair to assume that medical costs for those not in Medicare will also be similar. Conversely, if Medicare costs are far different, one expects non Medicare costs will also be different.

Medicare data include all costs, while ACA Exchange data is only for premiums. Is this apples and oranges? Well no, because ACA requires insurers to offer plans identical in coverage and which differ only in cost sharing.

With identical coverage, the costs of each plan are identical. All that differs is the cost sharing. Plans called “Bronze” have premiums that cover 60% of expected costs, “Silver” which cover 70%, “Gold” – 80%, and “Platinum” – 90%.

Knowing this, one simply divides the premium by the percent coverage to derive total expected costs. If premiums for a silver plan are $280 per month, total expected costs would be $400 per month (280 / 70% = 400).

Since the KHN report applied to Silver plans for a 40 year old, premium costs were divided by 70% to get total expected costs. Direct cost comparisons can now be made between 40 year olds on ACA Exchanges and seniors on Medicare.


Kaiser Health News (KHN) recently published premiums that private insurers charge on ACA Exchanges. KHN identified 10 ACA Exchanges with the highest premiums, and 10 with the lowest. They found extreme differences but did not include an analysis of the causes.

The graph below shows monthly Silver Plan premiums for a 40 year old in the 10 LOWEST ACA Insurance Exchange Areas. As the labels at right show, those market areas occur over multiple geographic regions.

The green bar at bottom of the graph shows the average premium which is just over $170 per month.

Premiums 10 lowest

Like the first graph, the graph below shows monthly Silver Plan premiums for a 40 year old in the 10 HIGHEST ACA Insurance Exchange Areas. Again the labels at right show those market areas occur over multiple geographic regions.

The green bar at bottom of the graph shows the average premium which is more than $400 per month.

Premiums 10 highest

Combing the highest and lowest, the graph below compares the monthly premiums, gold for the highest cost areas and green for the lowest. The differences in premiums are huge. The lowest ACA Exchange areas have average premiums less than half (about 40%) the premiums of the highest.

Prem hi vs lo

Having a direct comparison between high and low premiums, the next step is to compare all these 20 ACA premiums with another measurement common to all the same market areas. Medicare spending fits that bill, as it not only occurs in every area, it also comprises half of ALL medical spending in them.

This works only if Medicare costs are an appropriate proxy for ACA Exchange costs. To test, one needs comprehensive data on personal health care (PHC) spending by age group. Medicare provides that data which covers millions of people though only through 2004 as shown in the graph below.

Health Spend all ages

The top line, seniors 65 and older, incurred a sharp increase in health care spending 1987 – 1996. Since 1996, cost increases have been proportional among all age groups. A closer look within Medicare age groups is done to assure Medicare is an acceptable proxy for all health care spending.

The following graph subdivides Medicare only costs into three age groups. The sharp rise in 1996 average cost was most affected by those 85 and older. Since 1996, all age group’s costs have risen proportionately. As cost trends for all age groups are similar since 1996, Medicare costs offer a good proxy for medical costs of other age groups as well.

Health Spend Medicare

The graph below combines the prior graphs of total Personal Health Care Spending per capita into seven age groups. The four left bars include all groups under 65 years old. The next three bars (aqua, gold and light blue) represent the three Medicare age groups. The last two bars on the right show national averages for all those under 65 (red) and all those 65 and older (green).

HC Spend all n avg

It is clear that health costs rise rapidly with age, accelerating more in senior years. The average costs for 40 year olds are included in the second (yellow) bar from the left which costs average less than $400 per month.

Averages for Medicare health costs, as shown in the far right green bar, are some three times greater than for 40 year olds. While this data is only through 2004, all medical costs have risen at about the same rate. One can expect Medicare costs today to still be about three times that of a 40 year old.

The above graph shows costs. To directly compare these total costs with ACA Exchange premiums, just covert premiums to total costs. As noted in the Methodology, divide premiums by 70% to get expected costs for each ACA Exchange.

The next graph shows these total estimated costs for each of the 20 market areas. For the 10 most expensive areas, costs average about $600 per month. For the 10 least expensive areas, total average costs are about $245 per month, 40% of the high cost areas. The graph is the same as that for premiums above, but with 40+% higher monthly costs.

HC Cost hi vs lo

With total costs available for all, the graph below compares Medicare costs with costs of 40 year olds in each of the 10 lowest cost ACA Exchange areas. The low Medicare costs in the 4th series is Hawaii, which is the only outlier in this series.

In these competitive ACA Exchange areas, the average spread between Medicare and ACA is over four times. On a national average as shown above, the spread is around three times which shows competition really can reduce premiums.

Medicare vs 10 low

Before comparing total Medicare costs with the highest cost ACA Exchange areas, it is helpful to know what Medicare costs are in the highest cost areas relative to lowest cost areas. The graph below shows Medicare costs in all 20 market areas. While there are variations in total Medicare costs between market areas, there are no trends that favor either high or low cost ACA Exchange areas.

Medicare 20 hi n lo

The conclusion drawn from this graph is that high cost ACA Exchange areas have Medicare costs similar to low cost ACA Exchange costs. Nothing is inherently different for seniors.

The next graph compares total Medicare costs with total costs of 40 year olds in each of the 10 highest cost ACA Exchange areas. As expected, seniors’ Medicare costs are higher than are 40 year olds costs. However, with the national average spread around three times for this age group and Medicare, the difference here is one tenth of that, less than a 30%.

Since Medicare costs are not so different between high and low cost areas, the only conclusion is that ACA Exchange costs are too high. These high cost estimates have led to private insurer premiums far higher expected.

Medicare vs 10 hi

In conclusion, Medicare costs do not differ much between high and low cost ACA Exchange areas. By extension, health care costs for a 40 year old should not differ by much. Yet, the difference in premiums is huge.

If the insurer has near monopoly power, it has little reason to demand deep discounts. Insurers’ margins are constrained by ACA law to 20%. In short, 20% of a higher cost is more profitable than 20% of a lower cost. So why press harder for lower costs?

If the provider has near monopoly power, the insurer has little leverage since there are no competitive providers as an alternative. Either way, individuals in some ACA Exchanges are paying higher costs than expected.

Medicare doesn’t worry about either dominant insurers or dominant providers. It has a national payment scale, and with Medicare amounting to half a provider’s business, the providers are virtually forced to accept Medicare’s terms.


There is a solution that could remedy this situation. Amend the ACA with a proviso to apply only to any ACA Exchange market area in which the spread between insurers’ premiums and Medicare payments is greater than some threshold.

If the spread exceeds that maximum, ACA could create a public insurance option and where the public option requires providers to accept both Medicare and the option or neither. Public option premiums would key off Medicare payments plus an added profit margin to level the playing field with private insurers. This would force competition regardless of whether the insurer or the provider was dominant.


One further check on Medicare as a proxy is a deeper dive into its major components to see if any are skewing total costs. The two graphs below highlight hospital admissions and emergency room visits per thousand beneficiaries in the 20 ACA Exchange areas. As expected, variations exist, but no consistent pattern appears between Medicare admissions between ACA Exchange areas.

CMS Hospital

CMS ER visit

There is one outlier and that is Medicare costs in the highest cost ACA Exchange area, a ski resort area. Here Medicare hospital and emergency room visits are markedly lower. It is likely that seniors living here may be more active in winter sports. This suggests they may be generally fit than the average senior, and thus incur fewer hospital and ER visits.


Source for the 10 least expensive and 10 most expensive ACA Health Insurance Exchange areas were compiled by Kaiser Health News (KHN) from data developed by the Kaiser Family Foundation Program for the Study of Health Reform and Private Insurance, healthcare.gov, and ACA Exchanges. The costs analyzedwere for a 40 year old person.

KHN is a nonprofit news organization committed to in-depth coverage of health care policy and is an editorially-independent program of the Kaiser Family Foundation, a non-profit private operating foundation, based in Menlo Park, Calif., dedicated to producing and communicating the best possible analysis and information on health issues.

APPENDIX 3: 10 Least Expensive Areas (Counties)

$154: Minneapolis-St. Paul. Anoka, Carver, Dakota, Hennepin, Ramsey, Scott, Sherburne and Washington counties.

$164: Pittsburgh and Northwestern Pennsylvania. Allegheny, Armstrong, Beaver, Butler, Crawford, Erie, Fayette, Greene, Indiana, Lawrence, McKean, Mercer, Warren, Washington and Westmoreland counties.

$166: Middle Minnesota. Benton, Stearns and Wright counties.

$167: Tucson, Ariz. Pima County.

$171: Northwestern Minnesota. Clearwater, Kittson, Mahnomen, Marshall, Norman, Pennington, Polk and Red Lake counties.

$173: Salt Lake City. Davis and Salt Lake counties.

$176: Hawaii. All counties.

$180: Knoxville, Tenn. Anderson, Blount, Campbell, Claiborne, Cocke, Grainger, Hamblen, Jefferson, Knox, Loudon, Monroe, Morgan, Roane, Scott, Sevier & Union counties.

$180: Western and North Central Minnesota. Aitkin, Becker, Beltrami, Big Stone, Cass, Chippewa, Clay, Crow Wing, Douglas, Grant, Hubbard, Isanti, Kanabec, Kandiyohi, Lac qui Parle, Lyon, McLeod, Meeker, Mille Lacs, Morrison, Otter Tail, Pine, Pope, Renville, Roseau, Sibley, Stevens, Swift, Todd, Traverse, Wadena Wilkin and Yellow Medicine counties.

$181: Chattanooga, Tenn. Bledsoe, Bradley, Franklin, Grundy, Hamilton, Marion, McMinn, Meigs, Polk, Rhea and Sequatchie counties.

Source: http://www.kaiserhealthnews.org/Stories/2014/February/13/10-Least-Expensive-Health-Insurance-Markets-In-US.aspx


APPENDIX 4: 10 Most Expensive Areas

$483: Colorado Mountain Resort Region. Eagle, Garfield and Pitkin counties, home of Aspen and Vail ski resorts. Summit County premiums are $462.

$461: Southwest Georgia. Baker, Calhoun, Clay, Crisp, Dougherty, Lee, Mitchell, Randolph, Schley, Sumter, Terrell and Worth counties.

$456: Rural Nevada Esmeralda, Eureka, Humboldt, Lander, Lincoln, Elko, Mineral, Pershing, White Pine and Churchill counties.

$445: Far western Wisconsin. Pierce, Polk and St. Croix counties. (across the border from St. Paul, Minn.)

$423: Southern Georgia. A swath of counties adjacent to the even more expensive region. Ben Hill, Berrien, Brooks, Clinch, Colquitt, Cook, Decatur, Early, Echols, Grady, Irwin, Lanier, Lowndes, Miller, Seminole, Thomas, Tift and Turner counties.

$405: Most of Wyoming. All counties except Natrona and Laramie.

$399: Southeast Mississippi. George, Harrison, Jackson & Stone counties. In Hancock County, the lowest price plan is $447.

$395: Vermont.* (Unlike other states, Vermont does not let insurers charge more to older people and less to younger ones. Its ranking therefore will differ depending on the ages of the consumers)

$383: Connecticut. Fairfield County. (The southwestern-most county, which includes many affluent commuter towns for New York City.)

$381: Alaska. All counties.

Source: http://www.kaiserhealthnews.org/Stories/2014/February/03/most-expensive-insurance-markets-obamacare.aspx?p=1

APPENDIX 5: Source-healthcare spending by age group:



APPENDIX 6: Source-Medicare Costs and Utilization by geographic area:

Table_State County_All_December 2013.zip from Centers for Medicare & Medicaid Services (CMS).

Website: http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/Medicare-Geographic-Variation/Downloads/State_County_Table_All.zip


APPENDIX 7: Some Relevant Provisions of the Affordable Care Act.

It now appears that some market areas have less competition and the only way for an insurer to offer qualified plans is for ACA to ease a bit regarding condition (B) “ensuring sufficient choice of providers”.


1311(c) (1) Qualified Health Plans

(1) IN GENERAL.—The Secretary shall, by regulation, establish criteria for the certification of health plans as qualified health plans. Such criteria shall require that, to be certified, a plan shall, at a minimum—

(A) meet marketing requirements, and not employ marketing practices or benefit designs that have the effect of discouraging the enrollment in such plan by individuals with significant health needs;

(B) ensure a sufficient choice of providers (in a manner consistent with applicable network adequacy provisions under section 2702(c) of the Public Health Service Act), and provide information to enrollees and prospective enrollees on the availability of in-network and out-of-network providers;

(C) include within health insurance plan networks those essential community providers, where available, that serve predominately low-income, medically-underserved individuals individuals, such as health care providers defined in section 340B(a)(4) of the Public Health Service Act and providers described in section 1927(c)(1)(D)(i)(IV) of the Social Security Act as set forth by section 221 of Public Law 111–8, except that nothing in this subparagraph shall be construed to require any health plan to provide coverage for any specific medical procedure;

1311(c) (2) Rule of Construction

RULE OF CONSTRUCTION.—Nothing in paragraph (1)(C) shall be construed to require a qualified health plan to contract with a provider described in such paragraph if such provider refuses to accept the generally applicable payment rates of such plan.


Download PDF Report >>> ACA Exchange Premium Extremes

MSNBC misses on Medicare reforms

Lawrence O’Donnell commented on Medicare reforms in Obama’s State of the Union speech. He seemed to imply that Obama was shifting from “fee for service”, the current model, to  “capitation”, or HMO model. That is neither what Obama said nor implied.

What the Affordable Care Act (ACA) promotes is not the HMO or capitation model, but “payment for results”. This is something of a hybrid of “fee-for-service” and “capitation”. Fee-for-service IS unsustainable while a Medicare HMO would put the entire cost risk on the providers — both the risk [1] for the cost of each incident AND [2] for the frequency of incidents.  That is too much risk for Providers. But there is a middle road.

“Payment for results” in the ACA “constrains” the cost for an incident but for NOT the frequency of incidents. So if twice as many seniors got the flu, providers would receive flu reimbursement for each senior treated.  Just as occurs now, there is no added risk to providers if more people get sick or injured.

What changes is the reimbursement for an individual incident.  “Payment for results” ends the one-for-one fee-for-service where hospitals and doctors are reimbursed a dollar for every eligible dollar billed.

However, Medicare’s “results” payments would apply only to combined groups of hospitals and doctors called “Accountable Care Organizations” (ACO). To encourage formation of ACO’s, ACA offers a carrot. If the ACO members working together can treat, for example, a flu incident for less, Medicare will first pay the ACO that lower cost but it will also share with the ACO the savings between billed cost and an imputed fee-for-service cost.  Further, Medicare would make one combined payment to the ACO and not be involved in how the ACO divides that payment between hospitals and doctors.

Along with the carrot is a stick. If the ACO over-treated (higher cost) or mistreated that led to a relapse (poor result) and additional treatments,  the ACO would not get reimbursed the full amount for these “extra” services. The ACO’s have a two-edged incentive to become more efficient.

With fee-for-service, efficient providers that bill less are paid less. Medicare keeps ALL the savings, so why should providers bust their butts to lower costs. Under ACA these ACO providers now get to share in the savings.  This idea is not only good for providers and Medicare, but the entire health insurance industry. Providers are rapidly forming ACO’s across the country, not just for Medicare patients but for the entire population. Even some insurers are forming ACO’s, becoming both the insurer and provider.

For decades, hospitals or doctors have competed somewhat “softly” in that you never see price wars between providers.  The business model of for-profit insurers closely mirrored the “cost-plus” model of some  military contracts that led to $600 toilet seats.  Insurers had limited incentive (or success) to put heavy pressure  on providers. Instead, insurers spent more time cherry picking their membership to reduce claims instead of constraining  provider costs.

Under ACA’s prohibition of excluding people with pre-existing conditions, insurers will no longer be able to cherry pick their membership. To compete, they will have to focus more attention on lowering provider costs. Hence, their incentive is also to promote ACO’s.

Finally, the ACA made payment for results a pilot program since this model is untested in the United States. Not being mandatory, the CBO has not factored in any savings arising from this program.  The savings could be substantial and we have some evidence that savings will occur.

One analyses on this site, “Medicare – Fewer Benefits or Less Waste” compares Mayo Clinic’s all-in costs versus the highest cost 20% of hospitals. Mayo’s prices are higher than industry average, but their intensity was lower (fewer days, fewer treatments). If the 20% highest cost hospitals had costs comparable to Mayo’s, the savings could exceed $250 BIllion over 10 years. A significant savings indeed.

Response to Essential Health Benefits Bulletin

Download PDF Report >>> Response to Essential Health Benefits Bulletin


Health and Human Services (HHS) Bulletin sets guidelines for defining Essential Health Benefits (EHB). It ingeniously allows each State to have a say in its own EHB definition, yet provides a method to bring closure to the process should any State not reach an agreement. It also allows States to add benefits, but at their own expense. With federally providing premium assistance to lower income enrollees, it is important that only minimum State EHB premiums be supported.

The bulletin will likely require every State to add or enhance some services that are not now offered to small groups and individuals. This may lead to a premium increase for small groups and individuals not eligible for premium assistance.  Until actuarial efforts identify these costs, this remains an unanswered issue.  Everyone is concerned about higher costs, but Insurers have added concerns about adverse selection. The Affordable Care Act (ACA) mitigates this concern by reinsurance and risk adjustment provisions in the act. Continue reading

Health Care Reform – Accountable Care Organizations

Download PDF Report >>> Health Care Reform – Accountable Care Organizations


Kaiser health news recently came out with two documents providing clarification on Accountable Care Organizations or ACO’s that were included in the Affordable Care Act (ACA).

The mainstream media rarely  discussed this. It comprised only seven pages of the health care law and dwelt  with Medicare to which few critics paid serious attention.

For providers of health care, this offers a major change in the way Medicare operates. It delivers care at lower cost while maintaining quality.   The ACO model can also apply to all patients, not just Medicare.  Savings while maintaining quality care can run into the hundreds of billions of dollars.

A study of 4,272 hospitals found utilization levels at two of five most expensive hospitals more than 30% greater than at Mayo Clinics. The study covered Medicare patients who died. If that same service ratio held for all patients, those hospitals could generate annual savings of $170 Billion with no change in prices. The savings occur if they had hospital days and physician visits similar to Mayo. Continue reading