We have long believed, and have so written, that America’s health insurance companies entered into a Faustian Bargain with the federal government, when they agreed to support ObamaCare in return for a mandated market of over 30 million new customers and substantial caps (temporarily) on the losses the insurers might incur. Perhaps, it was necessary and unavoidable, but it was a Faustian Bargain nonetheless.
Everyone who can read (or comprehend what is read to them) or who watches television or listens to the radio understands that every American is now mandated to buy health insurance with an array of benefits (need them or not) that are also mandated by the government. Fewer people understand what it took to get the insurance industry to embrace ObamaCare given that the companies had to take all comers, including those who were already sick (and, sometimes, very sick), could not charge people more because they were sick, and could not use health experience to rate policies based on age, gender, lifestyle or past health history. Why would insurance companies agree to abandon every vestige of actuarially based risk management and agree to such pricing uncertainty?
Enter the ObamaCare Risk Corridor.
The Risk Corridor provisions of the Affordable Care Act are designed to give insurance companies a three-year risk mitigation window. Theoretically, the risk mitigation is a two-way street, which also protects the government from having the mandate create inordinate profits for the insurance companies. Most observers, we included, believe the Risk Corridors will produce a significant net outlay from the government (the taxpayers) to the insurers rather than the reverse.
Here’s how the Risk Corridor works. The government absorbs (for up to three years) most of the risk for insurers who provide complying health plans, thereby providing a strong inducement for issuers to participate in the health insurance exchanges set up by ObamaCare.
A target is established for allowable costs (or benefit outlays) for the participating insurance companies. The company absorbs the first 102 percent of these costs. The government then steps in and reimburses the insurance companies 50 percent of all allowable costs between 102 percent and 108 percent of the target. If an insurer’s “allowable costs” are 103 percent or more of their “target amount,” the government shares these losses with insurers 50/50 up to 108 percent. And when costs exceed 108 percent of the target, the government covers 80 percent of the excess over 108 percent. And while it is true that if the costs incurred by an insurance company are lower than the target, thereby producing “excess profits,” the insurer pays the government to mitigate the excess, we think this is really window dressing to create an aura of risk symmetry. We don’t believe anyone expects the flow of risk-corridor money to go from the insurers to the government. We certainly don’t.
Some have called the Risk Corridors a bridge over troubled water, and given the level of risk imposed on the insurers, ObamaCare would have been impossible to craft without this protection. Many on the right, have referred to the Risk Corridors as an outright impending multi-billion dollar bailout of the participating insurance companies. While we think that’s a bit overstated, the Risk Corridors do warrant considerable concern.
As is true with all government subsidies to industry, there is huge potential to distort the marketplace, or at least the public’s perception of the marketplace. Let’s face it; ObamaCare had to provide Risk Corridors because insurers have virtually no experience for pricing the unpredictable risk pool, with which they will have to contend under ObamaCare. They have to guess what the ratio of young to old or healthy to sick policyholders will be because they have to accept all applicants and they can’t rate the policies based on risk. Insurers may have a tendency to err on the side of soft premium pricing knowing that the government will provide a safety net against inordinate losses, at least for three years. This, of course, would be very shortsighted because those real-cost chickens will come home to roost when the three-year Risk Corridor window has run its course. Underpricing premiums during this window would, of course, cause a surge in premiums after the 2016 premium year.
And here is where the slope gets very slippery. If there is a huge increase in premiums either because insurers defer increases during the three-year Risk-Corridor window and then apply them in 2017, or because insurers adjust premiums in 2015 and 2016 to reflect actual experience as they go along, pressure may very well grow to make the Risk-Corridor risk-sharing permanent. This is precisely what has happened with the annual doc fix regarding reimbursement to physicians. Should this occur, then the predictions from the political right of an insurance industry bailout will be proven to have been prescient.
Wait! There’s more.
Then there is the ObamaCare Reinsurance provision that is also written to be temporary. The reinsurance entity will be required to collect payments and use the amounts collected to make reinsurance payments to health insurance issuers that cover high-risk individuals for the three-year period, January 1, 2014 through December 31, 2016.
Simply stated, every state creates a reinsurance pool for insurance companies. Every company pays in and, in return, they are somewhat protected against inordinate claim losses from individual policyholders. It’s sort of a donut hole for insurance companies. Here’s the way it works. If a policyholder incurs up to $45,000 in costs, the insurance company pays. Then, eighty percent of all individual costs between $45,000 and $250,000 are to be reimbursed by the reinsurance program. Outlays above $250,000 fall back to the insurance companies to cover.
This, too, can become a slippery slope with the potential for the program to be extended and/or for the donut hole to be widened, if premiums are about to spike.
So, what to do?
Given the uncharted pricing territory into which the nation’s health insurers have been led, some type of risk protection was necessary. We have two concerns. The first is that these temporary risk mitigation programs will become permanent. We are also concerned that these government risk mitigation programs will blur the true cost of covering these risks.
We believe the insurers who are recipients of any Risk-Corridor funds (or reinsurance funds in excess of what the insurer has paid into the reinsurance program) should publically release to the press (and to their policyholders) the amount of subsidy they have received each year, which would approximate the gross shortfall in premiums that would otherwise be required to cover their benefit costs.
Given the very strong, but very false, assurances that were made to the public in order to secure passage of the Affordable Care Act, members of Congress and the people who elected them should demand full transparency with respect to the true costs of ObamaCare.