Title: Statistical Implications of the Revenue Transfer Methodology in the Affordable Care Act,
Abstract: The Affordable Care Act (ACA) includes a permanent revenue transfer
methodology which provides financial incentives to health insurance plans that
have higher than average actuarial risk. In this paper, we derive some
statistical implications of the revenue transfer methodology in the ACA. We
treat as random variables the revenue transfers between individual insurance
plans in a given marketplace, where each plan's revenue transfer amount is
measured as a percentage of the plan's total premium. We analyze the means and
variances of those random variables, and deduce from the zero sum nature of the
revenue transfers that there is no limit to the magnitude of revenue transfer
payments relative to plans' total premiums. Using data provided by the American
Academy of Actuaries and by the Centers for Medicare and Medicaid Services, we
obtain an explanation for empirical phenomena that revenue transfers were more
variable and can be substantially greater for insurance plans with smaller
market shares. We show that it is often the case that an insurer which has
decreasing market share will also have increased volatility in its revenue
transfers.