Here’s some bad news for the insurance industry: Unexpectedly generous corporate subsidies didn’t save companies selling Obamacare policies from bleeding red ink.
The worse news: Those subsidies are set to expire in 2017, meaning that insurers will have to make ends meet without billions in handouts.
Those are among the matters discussed in a study, published April 25 by the Mercatus Center, authored by Brian Blase, Edmund Haislmaier, and me. Our study, based on detailed data derived from insurer regulatory filings for the 2014 benefit year, finds that companies that sold Obamacare plans in the individual market lost more than $2.2 billion, despite receiving $6.7 billion (an average of $833 per enrollee) in “reinsurance” subsidies. Those reinsurance payments were 40 percent more generous on a per-enrollee basis than insurers had expected when they set their 2014 premiums.
Companies that sold Obamacare plans in the individual market lost more than $2.2 billion, despite receiving $6.7 billion (an average of $833 per enrollee) in ‘reinsurance’ subsidies.
The reinsurance windfall was not enough to put companies in the black. Our study found that insurers collected an average of $4,433 in premiums per enrollee (much of which came directly from the government in the form of subsidies for low-income individuals), but paid an average of $4,624 per enrollee in medical claims, a prescription for disaster.
The $833 per-enrollee reinsurance subsidy mitigated the disaster but still left many insurers with too little to cover their administrative costs. So they turned for help to another government subsidy known as “risk corridors,” seeking an average of $273 per enrollee to stanch the bleeding. Even if insurers had received all the reinsurance and risk-corridor handouts they sought — an average of $1,106 per enrollee, or nearly 25 percent of premium — they still would have lost money, our study found.
But they didn’t get all they wanted. Congress clamped down on the risk-corridor program, thwarting the administration’s plan to turn it into a corporate entitlement. Instead, Congress stipulated that the program be budget-neutral, authorizing the government to transfer money from insurers that booked “excess” profits to those that suffered “excess” losses, but barring the use of government payments to insurers through the program. Because excess profits — or any profits at all — were scarce, insurers recovered only a fraction of their risk-corridor claims.
Congress has also begun to question whether companies are entitled to all the reinsurance subsidies they are receiving. The Obamacare statute is clear on this point. Under its terms, the government is authorized to collect billions of dollars, most of it from people enrolled in employer-sponsored coverage to finance the reinsurance program. The Centers for Medicare and Medicaid Services (CMS) collected an assessment of $63 per enrollee ($252 for a family of four) from virtually every private insurer in 2014 and $44 per enrollee in 2015. The law required CMS to remit $2 billion of these collections to the Treasury for the 2014 and 2015 benefit years (a total of $4 billion), reserving the rest for reinsurance subsidies. The nonpartisan Congressional Research Service concluded that the obligation to transfer these funds to the Treasury — rather than to insurers — is unambiguous and clear.
But when collections came up $3.5 billion short over the first two years, CMS chose to ignore its legal obligation; instead, CMS diverted that sum from the Treasury to insurance companies in the form of reinsurance subsidies.
CMS’s $3.5 billion heist was the product of an abrupt and mysterious shift in position. In a March 2014 rulemaking, CMS declared that the Treasury would get its share of the funds even if collections fell short. But ten days later, CMS did an about-face, announcing it would stiff the Treasury if there was a shortfall.
Appearing before the House Energy and Commerce Subcommittee on Oversight on April 15 this year, CMS administrator Andy Slavitt was at a loss to explain why the agency he now heads changed its rules so swiftly and dramatically. He repeatedly evaded the question, telling the committee he wasn’t at CMS in 2014 when it made the decision to fleece the Treasury. That’s certainly true. Slavitt was an executive with United Healthcare, the nation’s largest health insurer, when the agency he now heads reversed its position.
Congress may reverse it back. If it required the administration to repay the $3.5 billion it pilfered from the Treasury before doling out more reinsurance money, the industry would surely feel the pinch.
It already is an uncomfortable moment for insurers, as they decide whether to continue to sell Obamacare policies in 2017. Under the law, the reinsurance and risk-corridor programs will expire at the end of this year. That means next year’s premiums will have to cover medical claims and administrative costs without the crutch of government subsidies.
Our study shows that some companies may be better positioned than others to absorb the loss of those subsidies. Most companies with restrictive provider networks fared reasonably well in 2014, as did insurers in a handful of states, including California. Others will choose between pulling out of the exchanges and seeking premium increases, a move that requires regulatory approval and risks driving away healthy customers, already in short supply.
None of this is good news for Obamacare, insurers, or consumers, who wonder what’s so affordable about the Affordable Care Act.