Can Obama Bail Out the Health Insurers?

Beacon readers are ahead of many other witnesses to the Obamacare train wreck, having had the benefit of my November 7 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 Obama 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 available only 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, DC, 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.

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[For the pivotal alternative to Obamacare, please see the Independent Institute’s widely acclaimed book: Priceless: Curing the Healthcare Crisis, by John C. Goodman.]

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