January 17, 2014
The Supposed Health Insurer Bailout!
by David Axene
Health costs and healthcare premiums continue to increase much faster than the rest of the economy, which cannot continue without some type of intervention. Without some long-term improvement in the economics of healthcare we, as individuals and a nation, are faced with exceptional long-term economic challenges.
As a professional who spends his entire career on healthcare issues, I get very annoyed when I read articles that put an extremely biased and misleading spin on the emerging healthcare reform activities known as ACA or Obamacare. Whether one is for or against ACA, it is good to have accurate reporting regarding it to help refine one’s thinking and personal preferences. Sensational articles add little value and create unnecessary confusion in the marketplace.
An excellent article written by former associate Bob Laszewski in his Jan. 6, 2014, blog titled “Will There Be an Obamacare Death Spiral in 2015? No” was recently taken completely out of context by the Weekly Standard in a second article released in their blog Jan. 13, 2014, (i.e., “Bailing Out Health Insurers and Helping Obamacare”). It’s a big disappointment to see this type of questionable journalism.
As part of the transitional plan to implement ACA, carefully crafted, but not perfect, risk-mitigation programs designed to both protect and fairly allocate revenue among the participating health plans were embedded in ACA. These alliterative risk-mitigation provisions have been called “the 3 R’s.” They are:
- Risk Adjustor – sharing of revenue between plans to be sure revenue reasonably matches the spread of risk among the plans.
- Reinsurance – special protection for plans hit with a higher-than-expected number of catastrophic claims.
- Risk Corridors – risk-sharing program that reduces excessive profits on some plans and uses that to fund higher-than-expected losses on other plans.
The first one is a program that will continue long into the future. The latter two are transitional. They will end after three years, when the program is designed to be stabilized.
Because of the high level of uncertainty and risk associated with ACA, the federal government wisely incorporated risk-mitigation programs. All are designed to minimize material financial obstacles for volunteer participant carriers to be part of ACA. Without the 3 R’s, it is very likely the number of participating plans/carriers would have been much smaller. One of the keys to long-term ACA success is high participation by the public and the maintenance of a reasonable competitive market for the public to choose from. We have yet to see the results of these programs, but they are there to be sure we have a viable marketplace. This is definitely not a bailout for health plans. Rather this is a carefully crafted plan to mitigate unfortunate implementation risks in an uncertain environment.
Now for a discussion of the controversial blog:
The initial blog did not suggest, despite the accusation in the second article, that Obamacare is almost certain to cause insurance costs to skyrocket. The blog accurately discussed the risk corridor program and how this mitigates risk in the initial years.
The second article expressed shock “that it will also subsidize those same insurers’ losses.” ACA, by design, utilizes private insurance companies and health plans to underwrite insurance coverage offered through ACA and the exchanges. The uncertainty about who will sign up, their health status, the propensity to use healthcare services, etc. makes it nearly impossible for a carrier to predict what it should charge. ACA has created a logical marketplace with standardized benefits (i.e., Essential Health Benefits) and consistent plan designs (i.e., the metallic plans–Bronze, Silver, Gold and Platinum). Even with these features, ACA creates uncertainty, and stable premium pricing is required to have a viable and competitive marketplace. The likelihood of premium rate stability is enhanced if over a transitional period the “big worries” are mitigated. These include:
- Selection bias among various carriers.
- Some assurance that people will sign up.
- Significant shock losses centralized in a single carrier.
- Surprising cost of health care for this population.
The long-term risk adjustment process solves the first issue. The individual and employer mandates help resolve the second. The transitional reinsurance program and transitional risk corridor protection resolve the third. The last concern is subject to a two-way risk sharing. Those carriers that “guessed” too high and overcharged will give up some of their revenue. Those carriers that “guessed” too low are protected. This is not a bailout; this is an equitable risk protection to ensure an orderly implementation of ACA.
The second article goes on to say that taxpayers subsidize big companies’ business expenses. This, again, does not specifically address the real issue. The transitional reinsurance program provides catastrophic reinsurance protection for all health plans in the exchange marketplace (i.e., initially claims in excess of $60,000 up to $250,000) primarily funded by a $5.25 per month per person charge for all health plans whether or not they are in the exchange marketplace. Because those in the exchange are receiving a reinsurance benefit, I am not sure this is subsidizing anything. For those out of the exchange, they are paying a fee and not receiving any benefit. This could be considered a tax to those carriers. Most, if not all, carriers are building this fee into their cost structure, so it is being passed on to the public. However, the government has already proposed an increased reinsurance benefit and is already talking about reducing the premium.
The second article continues: “Insurers don’t have to pay out all of their costs,” suggesting that the risk corridor program is a bailout. No, this isn’t a bailout. It is a temporary protection to help smooth out the premium rates. Those carriers overcharging will get less money and those undercharging will receive some subsidy until the cost structures stabilize. This is a short-term program providing assistance to the carriers as they calibrate costs under ACA. This is not a bailout. This is a two-way risk protection mechanism. It does rely on a balanced marketplace. To the extent the ACA rollout is flawed and carriers are all on the unfavorable side of the risk curve, the government will have to provide assistance, but the intent of the program is to be balanced.
In summary, we need more accurate reporting of the actual situation. There are some concerns about the implementation of ACA, and they are real; they aren’t fabricated. Fortunately, the 3 R’s are going to help mitigate some of these issues. Without the 3 R’s there would be more serious issues than there will be with them. If the program failed, if no carriers participated, if no one signed up, there would likely be a major government takeover. That would be a serious issue with a federalization of the health insurance marketplace. That did not happen and will likely not happen.
Perhaps reflection as to why ACA emerged might be helpful. Health costs and healthcare premiums were escalating far faster than we can afford. They continue to increase much faster than the rest of the economy, which cannot continue without some type of intervention. One hopes that ACA will be able to help resolve some of the concerns and issues. Without some long-term improvement in the economics of healthcare we, as individuals and a nation, are faced with exceptional long-term economic challenges.
Maybe we should be talking about this!