The CBO and CMS have both been pointing to the lack of sufficient risk adjustment mechanisms in the new exchange, and how that would hurt the public option. The new CBO analysis of the House bill demonstrates how weak the CBO believes the new risk adjustment mechanism will be:

Risk adjustment payments to health insurance plans are reflected in the top portion of Table 2 as outlays of $65 billion. Those amounts are offset by risk adjustment collections of about $69 billion, shown in the revenue portion of that table. Risk adjustment funds are collected from all insurers in the market for individual plans and then distributed to insurers based on how the characteristics of their enrollees compare to the average enrollee. Although risk adjustment collections and payments would be equal over time, CBO expects payments for risk adjustment to lag slightly behind collections, resulting in a net deficit reduction of about $4 billion between 2013 and 2019.

$69 billion is an incredibly small amount of money to set aside for risk adjustment. In the same time period, the government will provide $602 billion in affordability tax credits to people buying health insurance on the new exchange. Individuals getting tax credits would likely contribute roughly an equal amount of money out of their pocket toward premiums. Plus 30% of people on the exchange would get voucher from their employers to buy coverage, and not tax credits from the government. All told, probably over $2 trillion in premiums will be paid to insurance plans on the exchange. That means the risk adjustment mechanism would only redirect about 2-4% of all premiums on the exchange.

If this is how reform is implemented, that is a dangerously inadequate risk adjustment mechanism. It would definitely lead to adverse selection for the public option, and create a huge financial incentive for private insurance companies to try to game the system and drive away less healthy customers. The Dutch “managed competition” health care system, which has one of the best designed risk adjustment mechanisms, uses over 50% of the premiums as a fund to redistribute, based on the health of individual plans’ risk pools. This part of the CBO analysis should be another wake up call about what is the Achilles Heel of market-based health care system.