Originally Posted by FD
100% of the new premiums would be used to recoup the losses from paying old premiums in your example. Thus, 0% are used on health costs and so it all has to be paid right back out. Every new dollar of premiums gets paid out in rebates.
Another way of thinking about it is this: any subscriber premiums in excess of 25% of health costs have to be reimbursed. Without changes to those costs, it doesnt matter how much you increase premiums, it all has to be reimbursed.
They have to pay 80% if they don't pay 80% then it's reimbursed. Regardless is still gives them more money for operating cost assuming everything else equal. If they are currently taking in 100K in premiums and are now paying 60%(60K) out in claims they are going to have to recoup that. So what does insurance company do, raise premiums to 150K so they recoup 1/2 of what they lost by paying 80%. If they can find cuts elsewhere like all important jobs they may have to do that as well.