(A version of this Health Alert was published by Forbes.)
Health insurers have not had much to cheer about lately, when it comes to Obamacare. They have been losing money on exchanges, and there is little hope that will change. So, a large health plan in Pittsburgh has asked judges to give it Obamacare money the Administration promised, but Congress declined to appropriate.
As reported by Wes Venteicher and Brian Bowling of the Pittsburgh Tribune-Review, Highmark lost $260 million on Obamacare exchanges in 2014, and claims it is owed $223 million by taxpayers. Unfortunately, it received only about $27 million. And things are getting worse. To date, Highmark has lost $773 million on Obamacare exchanges.
It is not that Highmark has been singled out by anybody. On the contrary, the Administration announced last year it was only going to pay about 13 cents on the dollar for all insurers’ exchange losses, via Obamacare’s “risk corridors.” This was not the Administration’s preferred course of action. The Administration wanted to pay insurers one hundred cents on the dollar, which it had promised them.
However, it could only pay out monies it had collected from insurers which had profited more on exchanges than expected. Because both the Administration and most insurers badly miscalculated the risk in Obamacare’s exchanges, there were very few winning insurers, and the revenue a fraction of what was expected.
No problem: Taxpayers would cover the rest – or so the Administration and insurers initially claimed. I was among those analysts who recognized Congress needed to appropriate funds to cover the losses. And Congress was not inclined to do so. As a consequence of having dragged Obamacare over the legislative line in 2010, health insurers lost any sympathy from Republican politicians, who now control both chambers in Congress.
No industry which relies on government revenue, which health insurers increasingly do, can afford to be in that position for long. Government-dependent businesses go to great lengths to flatter politicians of both parties in pursuit of so-called bipartisan solutions. When they win, they win big. One recent example is the Medicare “doc fix” of April 2015, through which a broad coalition of health industry lobbyists managed to get near-unanimous Congressional consent for a budget-busting bill that significantly increases the federal government’s control of the practice of medicine.
Health insurance executives likely look back with some regret at their decision to go all-in on Obamacare in 2010 without any Republican support. Once the GOP took over the Congressional majority, its members attacked a number of suspect Obamacare cashflows that were being paid out to insurers, apparently in violation of the law. It was a remarkable development: Republican politicians who opposed the law were demanding it be executed as written, while the Administration and its insurer allies were demanding it be bent, folded, and mutilated to guarantee revenues to insurers in accord with their business plans.
Insurers had a small win last December, when they got a one year delay in a fee levied on employer-based policies, which funds Obamacare. It can reasonably be expected that the fee will be kicked down the road again this December, and next December, et cetera, as Obamacare becomes just another unfunded liability.
However, insurers also suffered a major loss when a federal judge decided just a few days ago that the Administration was illegally paying insurers from another pot of Obamacare money, so-called cost-sharing reductions. These are subsidies to insurers which enroll Obamacare beneficiaries whose incomes are so low they cannot afford Obamacare’s high deductibles and co-pays, despite tax credits that reduce their premiums. Insurers receive subsidies to reduce these beneficiaries’ out-of-pocket payments.
However, Congress has not appropriated funds to pay out these subsidies, so the Administration cannot pay them, according to the DC Federal District Court. In the wake of this freshly issued judgment, Highmark’s decision to ask a judge to give it taxpayer dollars not appropriated by a Congress which seeks to repeal Obamacare is a real swing for the fences.
On the other hand, taxpayers can be relieved that only Highmark, one other insurer in Oregon, and the Iowa Insurance Commissioner (on behalf of a failed co-operative health plan) have decided to go for a judicial bailout. The rest of America’s health insurers are in the same boat, not having received as much taxpayer money as the Administration promised. Almost all of them have accepted that fact, and moved on from their failed attempts to wring more money out of Congress to prop up Obamacare.
I wonder if insurers lost as much as they did in 2014 because they were purposely trying to gain market share? Some of the CO-OPs had that strategy, which went badly wrong.
My understanding is that insurers priced their exchange plans assuming the average age of their risk pool would be between 40 and 42. It turned out to be between 49 and 51. No wonder medical claims turned out to be so much higher than expected. Oops.
It’s also no surprise that many insurers will respond by withdrawing from at least some states or counties within states while sharply raising premiums for the plans offered in the markets they choose to stay in.
Part of the problem here is that the ACA’s main beneficiaries
(i.e the persons who were once uninsurable, and the persons who receive large subsidies) are not a voting bloc. The 5 million or so families in this group are certainly not organized, and I suspect some do not vote at all.
This is why the Congressional Republicans are not afraid to harm this group. I am not saying the Republicans are all wrong in their insistence on constitutional correctness.
I am saying that when a program has 50 million high-voting beneficiaries (i.e. Medicare), both parties in Congress have been willing to ignore the fine points of the appropriations process.
Let me put it another way. Why has there been zero push (that I know of) to craft some legislative fixes to the ACA? There was no trouble finding $32 billion to smooth over the doc fix, but no one can find $3 billion to patch up the risk corridors?
I guess the proximate reason is bad blood in Congress.
But why no pressure to put the bad blood aside?
There’s no pressure or at least very little because thanks to gerrymandering, many more congressional legislators are from safe districts these days. They don’t pay a price for not compromising and, if anything, they get rewarded by their constituents for it.
Lots of legislators on both sides now see the other side as not just wrong but evil which means compromising by definition means making a deal with the devil. They won’t do it. The fact that a lot of poor people don’t vote makes it even easier to sustain that approach for conservative republicans.
The ACA is specific about limits on where this funding comes from and Obama has told Congress “It’s the law. You can’t change it.” What Congress is doing is upholding the ACA law as written. One reason is that, without such budgetary limits, the law may not have passed. Is it reasonable to use taxpayer funding that, if originally proposed, would not have been accepted? Note that Gruber boasted that the law had been passed by use of deliberate lies. What is happening is that the administration is getting what it asked for – and that is not what it wants. Don’t blame Congress for the problems built into Obama’s program from the start. Blame Obama and the Democrats. They created this.
A further thought occurs to me: Has Obama considered petitioning congress to move assets from some other non-critical program to the ACA? With no harm to anyone but the politically advantaged operatives involved (and I’m sure they could be bought off), Obama’s Green Energy program could be shut down until the economy is booming and government is looking for a way to slow it down. If supporting the unaffordable care act is so critical, take money out of some other harmful unpopular programs like Head Start, which has proven to have no long term advantages, or Common Core which actually is demonstrating negative results. It’s called budgeting. The rest of us do it.
I would challenge Congressional Republicans to make the same trade-off. They rely too much on judicial action and not enough on the power of the purse to defund Obamacare.
Bob Hertz says
“(with Medicare), both parties in Congress have been willing to ignore the fine points of the appropriations process.”
Please give an example, Bob
Medicare is not subject to the appropriations process because it’s an open ended entitlement. If you meet the eligibility criteria, you’re entitled to the benefits and whatever the program turns out to cost, it costs and the bills get paid.
They call it a “mandatory appropriation,” which gets around the constitutional requirement nicely. Recall it is also (like Social Security) deliberately branded by the government to mislead people into thinking they have paid into an insurance program during their working years.
It worked for the Banking industry but now an open ended, taxpayer funded bailout won’t be saving the formerly ACA loving Health Insurance industry. Cry me a river. A one year $260 million loss (and nearly three quarters of a billion dollar loss over past three years) is a ginormous miscalculation in expected revenue versus actual revenue.
A quarter billion dollars is no small discrepancy and, other than opening the taxpayers wallet to throw in good money after bad, it will not be resolved.
As I said in an earlier post, Obamacare will become the Post Office of the healthcare industry – government funded losses in the billions year after year.
Joe, I am going to defend the insurance companies on this particular risk adjustment issue.
From my limited reading, I think that the insurers had some tangible reason to believe that many of their losses in 2013-2014 would be covered no matter what.
But the budget reconciliation bill of late 2014 stated that payouts would be limited to the paltry amounts collected from insurers that made money.
There are many segments in our economy that enter into business plans based on expected federal subsidies, from farmers to defense contractors. I am not saying this is a wonderful thing. I am only saying that the insurers were not stupid, and that paying them their full subsidies is not rewarding stupidity.
Bob – while I agree with what you wrote about the goal posts being moved mid way through the game due to the republican led Budget Reconciliation Act in 2014, it seems to me that Highmark probably lowered their premiums in order to gain market share and basically shot themselves in the foot. I’d be curious to see how the few other insurances who seem to be making money have been successful whereas with Highmark and United healthcare haven’t been.
My assumption is that those insurance companies who are profitable are the ones who took a pragmatic look at the industry and based their premiums realistically at the expense of market share. The failing insurances tried to undercut their competitors with very low premiums because they had a false sense of security -with the unlimited tax payers purse promised to them in the future.
As the article title says, those failing insurances swung for the home run because they thought they had an unlimited amount of outs. When the budget reconciliation act changed the number of outs per at bat, they struck out.
United’s exchange policies were generally more expensive than many of their competitors. In 2016, United participates in 34 states yet it only had 795,000 exchange members at the end of the first quarter. Losses will exceed $1 billion for 2015 and 2016 combined and the company will withdraw from all but a handful of states after this year. It’s average market share was only in the mid single digits which is probably not a big enough base over which to spread administrative costs.
The biggest problem with the exchange plans is that United and others underestimated the average age of the risk pool. They expected it to be 40-42 years old and it turned out to be 49-51. That’s a big deal. Before the ACA, only 20% of the uninsured were 50 or older but they’re over 40% of exchange members. It’s a classic case of adverse selection.
I’m not aware of any insurer that is making its target profit margin on exchange business. They’re all either losing money, breaking even or are marginally profitable at best.
Barry, I agree. I recall one thing more that is relevant. The risk corridors were included in the final Obamacare legislation as a temporary measure, as incentive for insurers to participate from the start – the date Obamacare was first implemented. A similar strategy was used for Medicare Part D startup.
Why would insurers need such an incentive? Because they had little to no experience pricing plans with certain Obamacare requirements (primarily underwriting without a pre-existing conditions restriction, but others too such as expanded enrollment periods, or greatly liberalized eligibility rules, etc.)
Discounting for temporary cost fluctuations attributable to volatility in utilization, medical care costs and therefore medical insurance costs, have gone only one way – up. Obamacare is a mechanism for pouring yet more federal money into the medical delivery system. Economic law of demand says that not likely to stimulate medical cost reductions, in fact it’s likely to stimulate further cost increases. That being the case it makes little sense for any insurer to chase market share by offering inadequate premiums. The business you write with inadequate premiums, will have a double premium increase at renewal, because you must make up for the first year’s inadequacy plus the second year’s expected cost trend. You then stand to lose whatever added market share you might have gained in the first year and perhaps lose even more, because of the double premium increase. This is true even you are subsidized for first -year financial losses. Besides which, contracting with a government entity at any level carries its own risks – e.g., that it will unilaterally change the deal and leave you with losses you could not have anticipated.
According to Andrew Sprung, who digs into this material a lot, the few carriers not losing money are those with very narrow networks and narrow drug formularies.
In this way, they make their policies unattractive to persons with extensive pre-existing conditions.
They appeal to the pure price-shopper, who has no ailments and is only trying to get catastrophic coverage.
At my agency, we have men (almost always men) who come in say, give me the cheapest plan you can find so that I avoid the penalty. They buy the cheap HMO.
We also have persons who come in with a list of drugs and doctors. They wind up with United or Humana.
Bob, one of the fundamental medical underwriting principles is that when individuals have a choice of coverage, the skimpiest coverage will draw the healthiest overall enrollment.
Appears Andrew Sprung found new evidence in Obamacare that this medical underwriting principle can still be regarded as fundamental.
John, you are right, but then why did United and similar carriers produce broad network products and expect to make money?
Maybe they thought they were in the employer market, where there is a lot of pressure to maintain wide networks.
Maybe they were not cynical enough.
The individual market is cut throat — no good deed goes unpunished.
I don’t like trashing industries, but medical insurers said to hell with the public. There’s an endless trough of money waiting for us. Except, except… They’ve made their bed. Now lie in it. Or crony capitalism is a double edged sword and there are 2 ends. They now find themselves at the end of the pointy one..