This year could mean big changes for Obamacare, given the latest challenge accepted by the Supreme Court, King vs. Burwell. The Court is slated to rule on the legality of Obamacare’s insurance exchange subsidies—a controversy that has increased public scrutiny of how the law subsidizes the insurance industry.
Increasingly, Obamacare skeptics—and even some supporters—are examining the degree to which Obamacare funnels taxpayer funds through the major insurance carriers, ostensibly to allow them to deliver more affordable coverage to consumers. But even if some of that money were to reach consumers as subsidies or lower premiums, much of it simply improves insurers’ bottom lines, rather than help those whom the law was supposed to benefit—consumers who need health insurance coverage but can’t afford it.
If there’s one unquestioned category of winners under Obamacare at this point, it’s the insurance carriers, for whom the law has been a boon in both revenues and profit margins.
Let’s start with the macro picture. Five major publicly traded insurance carriers are Obamacare players: WellPoint, United, Aetna, CIGNA and Humana. All have taken somewhat different approaches to the opportunities created by the law, but they all share similar financial and stock market performance trends since Obamacare’s passage and implementation—steadily upward. Since mid-2013, these “managed care” companies have been some of the brightest shining stars of Wall Street—and Obamacare is a major reason. Here’s why.
Exchange premiums for young and healthy are much higher than before Obamacare
First, the law’s subsidies and individual mandates deliver highly profitable new enrollees. As I’ve noted previously, it’s widely known that real—unsubsidized—exchange premiums for the young and healthy under Obamacare are much higher than they were before the law. Yet, the subsidized premiums for this same group are the same as or lower than they were pre-Obamacare—thanks entirely to government subsidies, which are paid directly to the carriers. This allows the insurers to collect $300 a month for a plan that, prior to the law, would have been priced at $100, as the government pays down the bloated premium to get the young and healthy to enroll.
The theory was that this federally funded generosity to insurance companies was needed to compensate them for the costs of below-market premiums for older and unhealthy enrollees. But those costs are already largely covered by Obamacare’s reinsurance, risk adjustment, and risk corridors programs.
The carriers have shown their support for the subsidies in several ways. They have supported the Administration’s defense of the subsidies in court, and demanded the right to re-price their 2015 exchange plans if the Supreme Court were to invalidate the Administration’s subsidies-for-all approach. And they have warned that premiums will need to rise and policies issued during the exchange open enrollment have to be rescinded—immediately—if the Administration were to lose the Supreme Court case.
Risks are borne by taxpayers
Second, Obamacare also “insures the insurers” against the pricing risks posed by unhealthy new enrollees. These risks are now borne by taxpayers, because the carriers are reimbursed by the government under the reinsurance program when claims by an unhealthy enrollee exceed what is known as the attachment point—the level of annual claims for an individual when the government steps in and the insurer stops paying most of the claims.
The Department of Health and Human Services (HHS) sets attachment points relatively low. For individuals, they were originally set at $60,000 for 2014, but later moved down to $45,000. And the risk corridors and risk adjustment programs allow carriers to take a lot of incremental underwriting risk in their pricing, because other carriers (or the government, prior to last week’s budget deal) pay the difference if they attract a higher risk population in using lower pricing to grow market share.
The value of these backstops to carriers is enormous. Some companies that were previously minor players in the individual market have doubled or tripled their business. Federal reinsurance receivables sometimes account for the bulk of their individual market profitability. Other large carriers that were reluctant to jump into the exchanges in 2014, citing the “temporary” nature of the reinsurance backstop, are fully onboard for 2015.
Moreover, the recent debate over the provisions in the budget agreement requiring that “risk corridors” be revenue neutral, including carrier assertions that they would need to raise premiums if that requirement were imposed, leaves little doubt that they expected as a group to net winners under that program—even though it was sold to the public as being largely funded by payments from carriers with favorable claims histories to those with less favorable ones.
Carriers are deciding to compete on the exchanges despite uncertainty surrounding Supreme Court ruling
With their newfound willingness to take advantage of the opportunities presented by federal backstops, carriers are making the decision to compete on the exchanges despite the uncertainty of how the Supreme Court will rule and despite the HHS revelation that both actual 2014 signups and projected enrollment are much lower than previously estimated.
Finally, the exchange risk pool appears to be more favorable than carriers and experts projected. Obamacare’s stated goal of helping those for whom coverage was either unavailable or exorbitantly expensive was expected lead to a pool of unhealthy enrollees who would no longer have to pay more than healthy enrollees, likely creating a highly risky exchange pool. The carriers had the political clout to assure that solving that problem did not come at their net expense in the form of higher overall loss ratios. And they used that clout to push through individual mandates and the risk corridors, reinsurance, and risk adjustment backstops.
Not a stretch to call this crony capitalism at work
So Obamacare was sold as a solution that would drive price competition, reduce carriers’ margins, and save money on insurance costs apart from the subsidies. The expectation was that the exchange pool would carry an above-average loss ratio, which would only be partially offset by the effects of the subsidies and individual mandate in boosting enrollment by the low-risk uninsured. But in fact, reported overall loss ratios by the two largest public carriers, Wellpoint and United, are actually down in 2014. It’s true that these reported improvements cover more than just enrollments through the exchanges, but those exchange enrollments are driving the carriers’ increased volume while not making the health insurance business any less profitable.
In short, Obamacare has been a boon for the insurance industry. Even prominent supporters, like Sens. Tom Harkin (D-Iowa) and Chuck Schumer (D-N.Y.), have noticed that reality and now question their own handiwork. The “market” created by the Obamacare is so replete with private subsidies and public expenditures on backstops that it is not a stretch to call this crony capitalism at work. And that should trouble people on all sides of the political spectrum who are sincere about health care reform.