Top Wall Street Analyst: Health Insurers’ Bailout Assumptions “Make Us Nervous”
Citibank’s Carl McDonald, one of Wall Street’s top sell-side analysts covering health insurers, suspects that the firms which he covers are being too optimistic about the money they’ll receive from Obamacare’s risk corridors:
The sizeable risk corridor receivable assumptions by the plans make us nervous — with no change in assumptions, we estimate the full year liability to HHS could exceed $1 billion. There won’t be nearly enough plan contributions to fund these requests (just one plan in our sample recorded a risk corridor payable, and it was for only $2 million), and what could soon be a Republican controlled Congress isn’t likely to appropriate additional funds. HHS intends to use 2015 risk corridor collections to fund any 2014 shortfalls, but it isn’t clear to us why health plans will suddenly start earning excess individual profits in 2015.
Obamacare’s three risk-mitigation provisions, which we’ve explained here, affect the whole individual market, not just exchanges. Mr. McDonald believes that the individual market now comprises 17 million people, about 6 million more than last year. My own estimate is that fewer than 2.5 million people are in the Obamacare exchanges, so that would imply about 3.5 million more who lost employer-based benefits and bought non-subsidized insurance outside the exchanges.
One billion dollars is not a lot of money in Obamacare terms. Nevertheless, stopping its payment will encourage health insurers to accept the necessity of post-Obamacare reform in 2017.
The Calculus of Consent
$1 billion is also not a lot of money in all federal health spending.
Medicare will spend $1 billion is about the next 14 hours, based on its annual spending of $600 billion.
Medicare will spend $1 billion on 2,000 to 3,000 transplants on senior citizens.
Why the complaint then when we spend $1 billion to help insurance companies transition to guaranteed issue coverage for several million persons under age 65?
Again I see this wild contrast between our generosity toward seniors vs, our stinginess toward younger persons.
I just came from a Blue Cross presentation. A senior can get a plan with zero deductibles across the board for $216 a month in MN, on top of his statutory Plan B premium of $110 a month.
Meanwhile, a person aged 60 spending $326 a month can buy nothing on the exchanges.Even before the ACA they would probably have gotten a $20,000 deductible for that amount of premium.
John, I am not sure what your end game is.
Without these paltry subsidies, insurers will drop out of the ACA because of guaranteed issue.
The only way they will come back is if they can start underwriting again.
And that is not all bad, but what happens to those with pre-existing conditions?
If you have a robust plan for high risk pools, I will listen.
Thank you. I have never been a big fan of high-risk pools, because they dump sick people onto taxpayers and healthy people stay insured. If underwriting is not allowed, then subsidize the patients directly, to overcome selection.
With respect to the relative size of one billion dollars: I like to push on an open door when I can. The Republicans are all over this and they can stop it by not appropriating. So, it’s a start.
John, your first paragraph comment about “subsidizing people directly” sounds rather like what ObamaCare is actually doing. Since you are normally not a fan of the ACA, I may have read this wrong.
Let me go at it this way.
If we allow full free market underwriting in health insurance, then young and healthy people will have low premiums, and older/sicker people will have high premiums or be declined altogether.
Since the older/sicker people are more likely to show up in hospitals, there has been varying pressures for the last 30 years to get those persons insured.
Obamacare took the route of guaranteed issue, which raises premiums a lot for the younger/healthier crowd.
This is in effect a tax on the younger insureds.
This leaves us with three choices:
a. go back to full underwriting, and ignore the older/sicker crowd
b. stay with guaranteed issue, and offer income based subsidies
c. go back to full underwriting, and then collect real federal taxes to support high risk pools.
If I was young, I would much rather pay an extra few hundred dollars a year in income taxes for high risk pools, versus paying hundreds of dollars extra per month for guaranteed issue.
But there has to be some tax increase here.
d. encourage health status insurance (but this is not likely to spread all that fast)
I cannot tell where your sympathies lie in the above choices.
NCPA has long advocated a universal tax credit. For many, that is a subsidy. What we’d like is to wipe out all the fragmentation: Medicaid, Medicare, small group, large group, exchanges, … and let everyone take that money and more (if they want) and buy the health plan that suits them
I myself write about “young healthy” and “old sick” but that is a jumble if we are writing about insurance. You can insure against becoming sick, but you cannot insure against aging. A 30-year old will be 40 in 10 years. There is no variance.
So, if people have not saved to pay for health insurance premiums that rise as they age, that is a question of income transfer, not insurance.
Thank you for bringing up health status insurance, which I am not going to address in this comment. People will have to read the paper by John Cochrane if they don’t understand it.
Thanks John.
I may be treading old ground here, but let’s say every individual gets a tax credit of $2500. I love the simplicity and the enormous reduction in regulation and bureaucracy.
Joe aged 30 is in great health and cannot get pregnant. His $2500 can buy a modest health plan for the whole year. Also assume Joe has a good income.
Mary aged 55 smokes, has diabetes, heart disease, and Crohn’s. Most insurance companies want nothing to do with her. Some company might take her on at $1,000 a month for very skinny coverage.
Mary has a modest income. Her $2500 credit lasts her less than 90 days.
You know what they say, hard cases make good law. How does the NCPA proposal deal with this?
Thank you. The answer is health-status insurance, but I am sure you expected that. What we have not satisfactorily addressed is what happens if someone does not pay premiums without a break.
Recall that the dollar figure is not locked in stone. It is based on the cost of Medicaid.
The combination of increased utilization of HSAs along with the recreation (reincarnation, if you prefer!) of subsidized state high-risk pools would save hundreds of millions of dollars.
John, you and I know that no insurance company is crazy enough to sell a decent policy to Mary age 55 in my example above.
For millions of older Americans, it is too late to buy a health status policy.
So I think you are saying that Mary should be able to take her $2500 credit and enroll in Medicaid.
I am all for that, actually.
But someone has to convince each state legislature that Medicaid should be expanded, albeit with federal tax credit dollars. Recent experience says that will be very hard to do.
Thank you, but that is not quite what I mean. I regret I cannot clarify in the comment section. However, if I were to get the reform that I envision, I would give Mary an explicit subsidy appropriate for her condition.
Ouch, I think. Do we want the government giving an extra annual credit of $1,000 for diabetes, or $8,000 for hepatitis C, or $12,000 for congestive heart failure?
We already have an explosion of questionable diagnoses.
I could support an increase in the credits due to age. But a government fee schedule for every disease, in the tax code?
seems impossible