Can Obama Bailout the Health Insurers?
This blog’s readers are ahead of many other witnesses to the ObamaCare train wreck, having had the benefit of a November 11 blog post explaining the “risk corridors” by which the taxpayer will subsidize health insurers who lose money in the ObamaCare health-insurance exchanges.
That blog post argued that health insurers are in a pickle, because the Administration cannot indemnify them fully from the larger than expected losses that they will likely experience in the exchanges.
Now, it looks like the Administration will try anyway. When the President announced that he would not enforce the provisions of PPACA that caused insurers to cancel millions of policies, insurers reacted badly. Karen Ignagni, CEO of America’s Health Insurance Plans, the industry’s trade association, stated that “changing the rules after health plans have already met the requirements of the law could destabilize the market and result in higher premiums for consumers. Premiums have already been set for next year based on an assumption of when consumers will be transitioning to the new marketplace.”
In a nutshell, insurers fear that Obama has given policy-holders a free option. If they want to keep their old polices they can, and if they want to go into exchanges they can do that. The problem with this free option is that it amplifies the adverse selection that we are already seeing. ObamaCare’s subsidies for people with household incomes below 400 percent of the Federal Poverty Line are only available in the exchanges. Lower-income earners are also likelier to be sicker. (This is called the “health socioeconomic gradient”.) Therefore, given the choice, higher-income earners will stay with their plans and leave the poorer and sicker to go into the exchanges.
This may be a non-event: Most state Insurance Commissioners have ridiculed the President’s notion that three years of business planning can be unraveled less than two months before the new system launches. Nevertheless, a few crusading Insurance Commissioners might well bully insurers into continuing policies. After all, the Insurance Commissioner of Washington, D.C., was fired for criticizing the President’s flip flop!
In order to prevent further blowback by insurers, the U.S. Department of Health & Human Services immediately published a letter that promised, in obscure language, that it would somehow figure out how to exploit the risk corridors to fully immunize the insurers from losses: “Though this transitional policy was not anticipated by health insurance issuers when setting rates for 2014, the risk corridor program should help ameliorate unanticipated changes in premium revenue. We intend to explore ways to modify the risk corridor program final rules to provide additional assistance (emphasis mine).”
The final rules themselves were only published on October 30. Promising to unravel them only two weeks later is pretty shocking. The black letter of the law states that the government can indemnify only 50 percent of an insurer’s costs between 103 percent and 108 percent of target; and 80 percent of costs greater than 108 percent of target.
Those figures cannot be fiddled. What can be fiddled are the numerators and denominators that determine whether the ratio of actual to target cost is greater than 108 percent. Pp. 65058-65059 of the final rules delve into the mind-numbing depths of detail of these calculations. For example, “stand-alone dental claims would not be pooled along with an issuer’s other claims for the purposes of determining ‘allowable costs’ in the risk corridors calculation.”
Can these calculations be manipulated enough to fully immunize insurers from their ObamaCare losses? Time will tell. I’m sure many bureaucrats and actuaries are already hard at work on the challenge.
I initially thought the risk segmentation by allowing insurers to extend existing health plans for another year was theoretical and mostly small. Then I read an interview with someone from the Society of Actuaries that said the actuaries were “freaking out”.
Everyone is freaking out, even the president looks frazzled.
Oh, for sure. I saw a conference with him the other day and he had no idea what was happening.
he’s a puzzled man right now
“changing the rules after health plans have already met the requirements of the law could destabilize the market and result in higher premiums for consumers. Premiums have already been set for next year based on an assumption of when consumers will be transitioning to the new marketplace.”
The administration makes political decisions, without looking at the economic consequences. How much longer can this go on? Why even have experts if you aren’t going to use them?
The cabinet is useless. There are no advisors, everyone is just shooting from the hip right now
“After all, the Insurance Commissioner of Washington, D.C., was fired for criticizing the President’s flip flop!”
Worth it.
I would take the same. Part of being in public office is being able to handle criticism.
And apparently Obama can’t, but we all knew that before.
“This may be a non-event: Most state Insurance Commissioners have ridiculed the President’s notion that three years of business planning can be unraveled less than two months before the new system launches.”
His entire system came down to a website, which even 11 year olds are able to make. Must be a big blow to his pride.
Definitely, it sure seems like he is worried. His presidential career relies on the outcome of this act.
I have tooted this horn before, but here goes:
Every single nation that uses private insurers and has universal coverage — Germany, France, Switzerland, Holland, Singapore, all of them — make liberal use of risk adjustment.
if you ban underwriting, then you must protect insurers who are stuck with an abnormal number of bad risks. Otherwise the insurers will leave the market.
Here in the USA, the Republican-authored plan called Medicare Advantage also uses risk adjustment.
So I am a little miffed, and will continue to be miffed, when risk adjustment is presented as some sort of awful plot by Obama.
Dr Goodman is usually “right on” in his analyses, but I think he is playing to the crowd a little in the way he presents risk adjustment.
If I have misconstrued his intent, call me on it.
Otherwise, let’s have a better discussion of risk adjustment!!
Mr. Hertz, I agree with you that if the state will forbid actuarially accurate underwriting, there needs to be risk adjustment. I wrote about this in a lengthy 2009 study (http://tinyurl.com/onwmcfk).
This blog advocates health-status insurance, which avoids annual risk adjustment in favor of a net-present-value (NPV)of the costs of changes in the patient’s health status, and is paid from the old insurer to the new insurer, rather than a centralized “clearinghouse”.
I think that, if underwriting is politically intolerable, risk adjustment is appropriate. However, the risk-adjustment payments have to be determined in a quasi-market fashion, not dictated by government.
Since this article was published, the Administration has, indeed, fiddled the risk corridors. On Monday, the Federal Register will post a new rule (http://tinyurl.com/q7n3z6y) that moves the goalposts. Most importantly, the attachment point for 2014 will be lowered from $60,000 to $45,000.
What can explain this other than a desire by the Administration to keep the insurers on board?
Thanks John. Your article on Medicare Advantage was very good.
It seems clear that prospective risk adjustment is just too easy for insurance companies to game, especially in the USA where there are endless CPT and DRG codes to manipulate.
I believe that Germany uses retrospective risk adjustment, where health plans with better risks are literally ordered to surrender some of their profits at year end to the pool that sustains all insurers.
That would be a tall order to impose in America, though I guess we have something like in Major League baseball and the NFL.
At that being said, I don’t quite follow how markets would introduce risk adjustment as you seem to imply. Why would the winners even care about the losers?
Thanks
I think the debate over prospective versus retrospective risk adjustment is a legitimate one, but only necessary if there is open enrollment as per Medicare Advantage, Obamacare exchanges, Medicaid managed care, etc.
Even in Switzerland, where the term of the contract is five years, they still must do risk-adjusted payments at the end of the period. This is what Aetna is trying to do with its new group-retiree Medicare Advantage product (http://tinyurl.com/oxvz92x).
However, there is still the problem that the beneficiary cannot switch plans before the end of the term, be it one or five years.
The advantage of health-status insurance is that the beneficiary can switch plans whenever he wants and move to a new plan with enough money to make it profitable for the new health plan to enroll him, even if he has HIV/AIDS.
The losers don’t “want” to pay the winners. It is the type of health insurance individuals will demand when the tax code is reformed to eliminate the discrimination against individually owned health insurance.
If you knew that you would buy your own health insurance for the rest of your life, and not as a condition of employment, you would ask the carriers: “What happens if I get diagnosed with cancer and want to switch plans? I need to be immunized from re-underwriting.”
Whether the market would develop such that the health-status insurance is sold separate from the comprehensive health insurance, or would be bought by the health insurer (as reinsurance) and sold as a bundle to the subscriber, I cannot predict.
However, the dollar values of the health-status insurance payments per disease are well described in Prof. Cochrane’s Cato Institute publication (“Health Status Insurance: How Markets Can Provide Health Security”, Policy Study No. 633, February 18, 2009).