Monday, December 8, 2014

How the Healthcare Reform 'Bailouts' Work and How Some Insurers are Farming Them | With Audio from Armstrong & Getty

Three mechanisms were built into the Patient Protection and Affordable Care Act ("PPACA" or "Obamacare") to entice insurers to participate in the PPACA Exchanges and to ensure them that their losses are partially covered by other profitable insurers, policyholders and taxpayers, for a transitional three-year period.  This system of transfers to insurers is referred to as the "Three Rs" program or simply as "bailouts."  

The Three Rs were designed to assuage insurer fears that too few people might sign up for Obamacare or that those who do sign up will be sicker and older than the general population. In that case, insurers would be stuck with more bills from health care providers than they had premiums with which to pay.  To socialize the risk of loss between our government and insurance companies a system of reinsurance, risk adjustment and risk corridors was born.

The Three Rs

Reinsurance: The PPACA reinsurance program is paid for by a $63 tax on all health plans. That money is paid to any health insurer spending more than $45,000 on any one Obamacare patient in any single year.  That was a change occurring just prior to Thanksgiving. $60,000 to $70,000 had been the planned attachment point.  The tax applies to all health care plans, but the benefits only go to PPACA plans.  Hence the reinsurance program is skillfully crafted to transfer taxpayer dollars primarily from those who buy insurance to those who have their insurance purchased for them. (In California's Exchange, for example, 90% of purchasers are subsidized with taxpayer dollars.) The whole scheme sounds very Grubesque doesn't it?

Risk Adjustment: The risk adjustment program intends to dissuade insurers from marketing or pricing their plans in such a way that they disproportionately attract healthy, and therefore lower-cost, patients.  It seeks to achieve this by assessing the patient population of each insurer and then determining which insurers are covering healthier people and which are covering sicker people. The plans covering the better-risk population are then compelled to pay money to the plans covering sicker people. All transfers between insurance companies are then supposed to even out.

Risk Corridors: The risk corridor program is intended to encourage insurers to price their premiums accurately by protecting them from losses if their patients turn out to require more care than anticipated or taking money from them if the opposite occurs. The program uses a formula to take money from those insurers that do not spend a lot of money paying for patient health care, and then gives that money to other insurers that do spend a lot of money on patient care.  You can think of this as the "Robin Hood 'R'" of PPACA's bailouts.

The big difference between the Three Rs is that the first two Rs (the reinsurance and risk adjustment programs) either have a delineated flow of revenue support (the $63 tax on all health plans) or the payouts are to be limited to what the program takes in (all transfers are slated to balance out in the risk adjustment program - at least for now).

The risk corridor program, however, has no set source of revenue. This means that if more insurers underprice their Obamacare plans in an effort to gain market share than plans who over-price, there will be a PPACA shortfall on this third R.  Where would that money come from?

When the Congressional Budget Office originally scored PPACA, they assumed that all Three Rs would even out and cost the taxpayers no more than the $63 fee per policy holder.  In a subsequent 2014 reevaluation, the CBO myopically concluded that the risk corridor program would actually save taxpayers $8 billion over the next 10 years.  Sound too good to be true?

It was. In June it began to look like we would not save $8 billion, in fact, the opposite started to look like reality. And insurers, once again, needed reassurance.  CMS then told us that the government would go ahead and levy a new fee to cover any shortfall.  This is from Scott Gottlieb, writing at Forbes on June 20, 2014:
Mandy Cohen, the Acting Administrator of the Centers for Medicare and Medicare Service’s Center for Consumer Information and Insurance Oversight, delivered that message yesterday. Cohen was testifying before the House Subcommittee on Economic Growth, Job Creation and Regulatory Affairs. 
She said that if funding for the risk corridors can’t be financed off the money that gets clawed away from profitable insurers (therefore allowing the entire scheme to remain budget neutral) then CMS has the authority, if not the intention to impose additional “user fees” on all health insurers to cover the higher losses experienced by the Obamacare plans. 
See the entire video here – the specific discussion on the user fees starts at 19:40 (and runs for about 8 minutes).  

"It is important to remember that government interference always means either violent action or the threat of such action. The funds that a government spends for whatever purposes are levied by taxation. And taxes are paid because the taxpayers are afraid of offering resistance to the tax gatherers. They know that any disobedience or resistance is hopeless. As long as this is the state of affairs, the government is able to collect the money that it wants to spend. Government is in the last resort the employment of armed men, of policemen, gendarmes, soldiers, prison guards, and hangmen. The essential feature of government is the enforcement of its decrees by beating, killing, and imprisoning. Those who are asking for more government interference are asking ultimately for more compulsion and less freedom." Ludwig Von Mises

Insurer Cherry Picking Begins

Like every business, insurers simply respond to the profit motive and regulatory environment in front of them.  Insurers are making use of the heavy taxpayer subsidies for premium along with the above described Three Rs Program to generate as many paying customers as physically possible over the Three Rs planned 3-year duration.  Now that we know the government plans to bail out all insurers under the risk-corridor program, even if every single one underbids its premium, the sky is the limit for insurers to gobble up as much market share as possible with virtually no downside.

Not all insurers are using the same strategy; they need not worry about being exactly correct in their means because in the end they have the might of the federal government and its power to tax behind them.  Below, I've set forth a smattering of some of the different methods carriers are using or will use to maximize profit and governmental assistance.

Rock Bottom Bronze Pricing: A carrier could subtly manipulate its pricing to encourage consumers to purchase Bronze plans (the lowest premium/highest deductible plans in the Exchanges) and discourage sales at metal levels with richer benefit levels that are less likely to attract healthy, lower cost, consumers.  This would naturally allure more healthy purchasers to your rolls.

Sky High Platinum Pricing: In reviewing carrier pricing proposals in year-two of the exchanges you can clearly see some carriers propose raising health insurance rates well into the double digits for all metals except the Bronzes, for which rates will dramatically decrease.

An insurer might be inclined to manipulate its prices in this manner for a variety of reasons:

(1) it moderates how the average rate increase appears on paper helping in public relations and making their government-partners happy;

(2) it encourages consumers to switch from richer benefit metal levels that are riskier for the insurer to those that are less risky (like the Bronze plans where consumers pay more of their claims via deductibles as high as $13,200 per family);

(3) it attracts healthier customers who prefer lower premiums and high deductibles for themselves.

This pricing strategy benefits the carrier while manipulating consumers and skirting the purported premise of PPACA: that carriers must take consumers as they come and may not underwrite for those who are healthier and less risky.

Let's Put Butts in Seats, They Won't Rush Out: This rate increase for non-Bronze plans may be to correct underpricing issues from 2014, raising another concern: a carrier may have strategically priced their plan low in 2014 to attract customers, knowing that it would have to raise its rates in 2015 to bring itself back up to reasonable prices.  People hate to change health insurers and insurers know that very well.  After attracting consumers to their plan, a carrier knows that most enrollees will opt to stay with their current carrier rather than go through enrollment again. In fact, in Obamacare, insurers can rely on auto-enrollment to secure consumers even after that insurer is no longer the best financial alternative.

This reminds me of a particularly unscrupulous brokerage owner I ran across in my work. His office was staffed with a massive array of sales folks and virtually no service personnel. They cold called, networked, pushed and prodded so hard it made used car salesmen blush. And they always had an abundance of clients.  But they never kept those clients.

He told one of my colleagues one day, after a few cocktails at a social gathering, "you don't need to service them.  Just sell 'em!  Clients hate the broker change process so much that once you get a new one you almost always keep it for 3 years; even when you do the absolute bare minimum for them."

In fact, I've had one carrier tell me the same story.  While the Three Rs are in place they just want headcount.  They'd prefer healthy headcount but they ultimately don't care because they know Three R dollars will be funneled to them if they lose money in these first three years.  "What about at the end of three years?" I asked.

"If, at the end of three years, the Three Rs go away, we'll raise premiums accordingly to cover any possible losses," he told me.  But it was also made clear to me, from this industry insider that they did not think PPACA could survive without the Three R Bailouts. And thus, we have the birth of a socialized government-insurer complex.

My Interview with Armstrong and Getty

The day after I posted this column, I went on the Armstrong and Getty Radio Program to give my thoughts on Tuesday's Jonathan Gruber congressional hearings as well as this article.  The discussion of this post begins at 5:20 in the below audio excerpt.

Sources and Background:
  1. State Health Reform Assistance Network, April 2012 Research Brief.  
  2. Why Obamacare Is Like Three Mile Island, by Megan McArdle at Bloomberg, October 23, 2013.  
  3. Medicare Official: Obamacare "Bailout" Of Insurers To Be Financed By New Tax, by Scott Gottlieb at Forbes, June 20, 2014. 
  4. How The Obama Administration Lied About Insurance Company Bailouts, by  Dan McLaughlin at the Federalist, August 6, 2014. 
  5. Obamacare's Illegal Insurance Company Bailout, by Conn Carroll at Townhall, October 01, 2014. 
  6. Government Watchdogs Agree: Obamacare’s Insurer Bailouts Aren’t Authorized. The Administration Plans to Make Payments Anyway, by Peter Suderman, October 7, 2014.