Long-Term Implications of the Revenue Transfer Methodology in the Affordable Care Act

The Affordable Care Act introduced a revenue transfer formula that requires insurance plans with generally healthier enrollees to pay funds into a revenue transfer pool to reimburse plans with generally less healthy enrollees. For a given plan, the issue arises of whether the plan will be a payer into or a receiver from the pool in a chosen future year. To examine that issue, we analyze data from The Actuary Magazine on transfer payments for 2014–2015, and we infer strong evidence of a statistical relationship between year-to-year transfer payments. We also apply to the data a Markov transition model to study annual changes in the payer–receiver statuses of insurance plans. We estimate that the limiting conditional probability that an insurance plan will pay into the pool, given that the plan had paid into the pool in 2014, is 55.6%. Further, that limiting probability is attained quickly because the conditional probability that an insurance plan will pay into the pool in 2024, given that the plan had paid into the pool in 2014, is estimated to be 55.7%. We also find the revenue transfer system to have the disturbing feature that once a plan enters the “state” of paying into the pool, it will stay in that state for an average period of 4.87 years; also, once a plan has received funds from the pool, it will stay in that state for an average period of 3.89 years.