Will we be bailing out the insurance companies?

by on January 12, 2014 at 6:34 pm in Economics, Law, Medicine | Permalink

Megan McArdle has the latest:

This is the plan that Republicans hope to cleverly foil by framing the risk-adjustment provisions [of ACA] as an insurer bailout and repealing them. As designed, the risk-adjustment mechanism was supposed to be revenue-neutral, and that is how the Congressional Budget Office scored it in their last estimate. But unless the demographics of the exchanges improve pretty quickly, the three temporary risk-adjustment programs are probably set to transfer a large hunk of cash to the insurance companies. That’s what the administration, and the insurers, want to happen; it’s how they are going to keep the insurers on board for 2015. Phil Klein at the Washington Examiner points out that Humana Inc.’s latest filing with the Securities and Exchange Commission warns of a “more adverse than previously expected” mix of customers enrolling through the exchange — but it doesn’t change its earnings forecast for 2014. So either it thinks its losses will be trivial relative to overall earnings or Humana thinks the chances of a bailout from the administration are basically 100 percent.

There is more here, including background context if you are not up to speed on this issue.

So Much For Subtlety January 12, 2014 at 7:18 pm

Questions to which the answer is Yes.

Obamacare has been such a massive cock up, and Obama’s response to it has been so over-the-top (and I assume illegal) that the only way out of it for the White House is to offer the insurance companies massive amounts of money to shut them up. It is also likely that if they are forced to sign people up on cancelled plans, with a radically different set of demographics, they cannot calculate costs and will mainly get people with pre-existing conditions, and so they will go bust anyway if they are not bailed out.

Perhaps the aim is to make the system so flawed a single payer is the only way to go? The Dems seem to have said it.

Either way, I am munching my popcorn and enjoying the greatest show in town right now.

mulp January 12, 2014 at 8:59 pm

Well, Obamacare was designed by Republicans in 1993 to prevent the Clinton plan that would force everyone to buy individual policies subsidized by a 7.9% tax on wages, replacing the group insurance provided for “free” by most employers.

McCain proposed something like the Clinton plan in 2008, without the taxes, but supposedly funding a tax credit by taxing on employee benefits.

Other than everything being socialism, the only system Republicans don’t condemn is what lots of people call single payer: Medicare. The do attack Medicaid which is single payer, but that attack seems to be based on it not being private insurance, but private insurers want risk adjusted premiums for any Medicaid individual they take on.

But hey, you have someone else provide you with health care, so you can sit back, because Obamacare didn’t change the insurance you like as McCain and other have wanted to do.

mike January 12, 2014 at 9:15 pm

no

Alan Gunn January 13, 2014 at 8:15 am

No is right. I’m not a McCain fan, but his health plan was a step in the right direction because it moved away from reliance on employer provided insurance. Obama campaigned against it quite successfully by telling people that McCain wanted to tax their health insurance, which was technically sort of true but misleading.

What many of us seem to have forgotten is that Obama the candidate (running against Clinton) opposed a mandate. He said it was like trying to end homelessness by passing a law that said everybody had to buy a house.

JWatts January 13, 2014 at 11:36 am

Obama:

“OBAMA: Let’s break down what she really means by a mandate. What’s meant by a mandate is that the government is forcing people to buy health insurance and so she’s suggesting a parent is not going to buy health insurance for themselves if they can afford it. Now, my belief is that most parents will choose to get health care for themselves and we make it affordable.

Here’s the concern. If you haven’t made it affordable, how are you going to enforce a mandate. I mean, if a mandate was the solution, we can try that to solve homelessness by mandating everybody to buy a house. The reason they don’t buy a house is they don’t have the money. And so, our focus has been on reducing costs, making it available. I am confident if people have a chance to buy high-quality health care that is affordable, they will do so. That’s what our plan does and nobody disputes that.”

Rich Berger January 13, 2014 at 12:51 pm

As far as your claim about Medicare being a single payer program, here’s a note from Avik Roy:

Very interesting news on Medicare Advantage

In its 8-K filing with the Securities and Exchange Commission, Humana also bore some good news. Despite Obamacare’s substantial cuts to the Medicare Advantage program, seniors are continuing to choose that program over the traditional single-payer version of Medicare. “Based upon the results of the Medicare Annual Election Period, the Company expects gross sales and terminations for individual Medicare Advantage plans for 2014 to be meaningfully better than previously projected resulting in higher anticipated net Medicare Advantage membership gains for 2014,” Humana said.

This is an extremely interesting development, one that comports with what other private insurers are seeing. Richard Foster, the recently-retired chief actuary of the Medicare program, had projected that Obamacare’s cuts to Medicare Advantage would force half of the program’s enrollees back into the 1965-vintage single-payer program. That, so far, does not appear to be happening.

While this is bad news for GOP partisans hoping to capitalize on Obamacare’s problems, it’s actually good news for advocates of market-oriented reform. If private insurers can now offer a more popular and more attractive benefit to seniors, for the same price that the government can, those who have advocated a transition from government-run insurance to private-sector insurance will gain a potent new argument.

We’re not out of the woods yet on this topic. Further cuts to Medicare Advantage in 2015 and beyond may yet discourage seniors from sticking with the program. But this is one of the several areas where good news for Obamacare is good news for pro-market reformers.

Of course, mulp doesn’t debate, he rants. But I thought others might be interested.

ProfNickD January 13, 2014 at 5:33 pm

Wrong. In almost every statement.

Rich Berger January 13, 2014 at 10:04 am

What’s the big deal? This is just an off-label use of the law. We shouldn’t try to stifle innovation in the executive branch.

bob January 13, 2014 at 8:19 pm

I believe that about 70% of seniors are still on 1965 style Medicare. And I believe 1965 still is still cheaper. Is that correct?

Bill January 12, 2014 at 7:41 pm

If you move to community rating, and there are suddenly some unanticipated exempt class (ie, those who could keep, for one year, their old policy which did not conform) of course you, the taxpayer, will be paying for those who wish to keep their old plan. Carriers planned on capturing those folks; if they are not in the pool because they were given an option to get out, you will pay for their option.

What’s new.

BC January 13, 2014 at 5:45 am

The taxpayer will be paying for the move to community rating, i.e., to subsidize those that benefit from community rating. Those who wish to keep their old plan will be paying for themselves.

Bill January 13, 2014 at 8:34 am

BC, community rating is invariably lower than individual rating and is on par with employer based pools.

Individual rating carries with it agent fees, individual medical underwriting, risk of denial, assigned risk plans, coverage lapses from denials, and preexisting conditions.

Cheaper once up, and less expensive.

ProfNickD January 13, 2014 at 5:39 pm

@BC: Yep. Community rating is subsidy of the sick via legislative action. The point of community rating is to forbid insurers from assigning premiums by looking solely at the individual and his health & demographic characteristics but rather to do so by looking broadly at “communities,” such as zip codes or counties.

Total collectivism.

John B. Chilton January 12, 2014 at 7:54 pm

Yep.

On the semantics side, I hesitate to call this a bailout as in bailing out GM or too big to fail. Or people who live in flood-prone areas.

We’re not talking about insurance company mismanagement, noncompetitiveness or moral hazard.

JWatts January 13, 2014 at 11:40 am

Agreed. This is more akin to a contractual obligation to the health insurance companies.

“the risk-adjustment mechanism was supposed to be revenue-neutral, and that is how the Congressional Budget Office scored it in their last estimate.”

This was always an extremely optimistic assumption designed to elicit a revenue-neutral estimate from the CBO. It achieved its purpose.

ProfNickD January 13, 2014 at 5:40 pm

I never signed a contract with insurers to bail them out with my wealth.

Alexei Sadeski January 12, 2014 at 7:56 pm

Glad to see that my ultra high tax rate is being put to good use.

mulp January 12, 2014 at 9:03 pm

What are you, 13?

Tax rates are far from high, much less “ultra high”.

I love how conservative keep invoking JFK who called for cutting the top rate to 70% from 90%. Yeah, let;s go back to the rates JFK was calling for!

The economy was growing robustly and the middle class was expanding. The tax cuts have failed to deliver the promised benefits.

Cliff January 12, 2014 at 9:21 pm

Effective tax rates in the highest brackets are at European levels and higher than during JFK’s presidency

Bill January 12, 2014 at 9:55 pm

Not true.

Must be smokin something you got in Colorado. And, don’t forget, cap gains rates are also lower since the 60s.

Here is the composition of effective tax rates over time from the CBO; go to exhibit 8 and you will see that what you said is false.

http://cbo.gov/sites/default/files/cbofiles/attachments/44604-AverageTaxRates.pdf

Alexei January 13, 2014 at 12:45 am

40% is plenty high for an average. And those are 2010 rates, for 2014 they’ll be 0-4% higher depending on the person.

I pay ~50%. That’s ultra high.

Plus Euros can evade/avoid more easily and legally.

Dan Weber January 13, 2014 at 6:56 am

50% might be your marginal rate — if you are making over $1 million a year in California or over $200,000 a year living in Hawaii.

But that’s not your average (effective) tax rate.

Urso January 13, 2014 at 10:45 am

Figure 8 doesn’t say anything about rates during JFK’s time or in Europe, so it’s irrelevant to Cliff’s statement. It is a very interesting link though. It goes back 30 years, and it shows that during that time effective tax rates, including cap gains, have slightly decreased for the top 20% and significantly decreased for the bottom 80% (a huge group). Rates for the top 1% are highly variable but as of the time of the graph (2010) are at about the midpoint of their average over the past 30 years – of course, for the top 1% you should also take into account figure 9, which is startling.

Alexei Sadeski January 13, 2014 at 12:11 pm

@Dan –

I’m glad that you know more about my taxes than I do.

Dan Weber January 13, 2014 at 12:23 pm

If you think you are paying an effective rate of 50% — meaning that your tax bill (federal and state taxes, including FICA or not at your pleasure) is half of your taxable income (or AGI, again at your pleasure) — then I probably do know more about your own taxes than you do.

JWatts January 13, 2014 at 2:09 pm

If he’s paying self-employed FICA taxes, then he can easily be around the 50% effective range.

And since the employer portion of FICA taxes just gets taken out the employees effective wage, then many of us are (in real terms) paying well over 40% effective rate.

byomtov January 13, 2014 at 5:16 pm

Most of the self-employment tax goes away at a gross income of about $110K. That puts you in the 28% or 25% marginal bracket, depending on deductions.

Jay January 12, 2014 at 9:21 pm

Assume ceteris paribus? When I look around the world is nothing like it was when JFK was president so your assumption is comical.

T. Shaw January 13, 2014 at 8:56 am

Dulce vectigalia inexpertis.

Dave Anthony January 13, 2014 at 9:09 am

Almost no one paid those ridiculous upper tier tax brackets. Probably because, much like today, the wealthy can always use various strategies to reduce their tax liability. So all this juvenile “tax rates use to be so much higher!!!111″ are pointless because nobody paid them.

What is “ultra high” is pretty subjective — frankly I think it is criminal that the federal government takes over a 4th of my income.

The Anti-Gnostic January 13, 2014 at 11:39 am

Yes, I hear that a lot. In fact, nobody pays more than 50% of their income in taxes, and the more realistic ceiling is probably 40%. Above that, people stop producing income, or they bribe legislators. Or they leave the country.

Alexei Sadeski January 13, 2014 at 12:10 pm

If only.

mulp January 12, 2014 at 8:44 pm

Republicans and conservatives are bent on destroying any possibility of “privatizing” Medicare, which with the Republican Medicare Advantage program paid excessive risk adjusted funds to the insurers to get them to privatize Medicare one person at a time.

Obamacare reduced the risk adjusted payments to insurers for Medicare Advantage to be more revenue neutral, and that had Republicans screaming about slashing Medicare benefits.

Jay January 13, 2014 at 1:16 pm

Oh is that what the news stories have been about the last 6 months? Yawn.

Mark Thorson January 12, 2014 at 8:51 pm

Obamacare doesn’t attack the basic problem, which is that medical care as practiced in the U.S. is too darn expensive. This article describes how hospitals gouge their customers, but it’s not just them. It’s insurance and pharmaceutical companies, too.

http://m.motherjones.com/blue-marble/2014/01/hospital-price-skyrocket-medical-care

XVO January 13, 2014 at 10:10 am

Because the supply is restricted by government intervention in the name of “safety”. Low cost medical care is outlawed. Why does everyone ignore this? Is it because the politicians ignore it? The regulatory bodies are all captured.

Jan January 12, 2014 at 8:59 pm

Humana blames this on allowing the option to extend insurance policies that don’t meet ACA standards. “As a result of the December 2013 federal and state regulatory changes allowing certain individuals to remain in their previously existing off-exchange health plans, the Company now expects the risk mix of members enrolling through the health insurance exchanges to be more adverse than previously expected.”

The insurers should have known that opting to let patients keep these policies would mess up the pool. Maybe AHIP member companies should have come together and decided to move ahead with the cancellations.

Jan January 12, 2014 at 9:02 pm

I just saw that Bill made this point above.

BC January 13, 2014 at 6:00 am

Policies that don’t meet ACA standards are cheaper, i.e., have lower expected claims, than plans that are required to meet ACA standards, so it’s the ACA requirements, not the exemption from them, that are causing the problem. We know this because no bailout was required last year, before the ACA requirements became effective and the insurance companies were handling these now-extended policies just fine.

Obamacare proponents should have known that promising everyone a free lunch would eventually catch up to them and lead to the present disaster. Maybe, they should come together and figure out the best way to unwind all the damage.

Jan January 13, 2014 at 6:45 am

Of course there are reasons why the ACA put in places rules about what ought to be included in insurance, just as many states have done for a very long time. The insurance companies had the option to extend those low-value policies or not. Many of them chose to extend them and it is hurting them now. It’s not that the insurers can’t administer the crappy policies–it’s that those people could be in the risk pool paying the same price as everyone else. They’re not.

If you think we can reform health care in this country without some short-term inconveniences during the shake-up, you’re wrong, but one thing is for certain: we’re not going back to the old system. It was inefficient and did not cover people.

Dan Weber January 13, 2014 at 7:03 am

The proximate cause of this bailout was the fact that the individual mandate was exempted for people who had their policies cancelled.

That is, the exact opposite of “The insurance companies had the option to extend those low-value policies or not. Many of them chose to extend them and it is hurting them now.

jan January 13, 2014 at 11:02 am

No. The mandate wasn’t exempted for them. They were allowed, if the insurers went along, to satisfy the individual mandate with lower quality plans. The insurers went along, to their own detriment.

Dan Weber January 13, 2014 at 11:46 am

D: The proximate cause of this bailout was the fact that the individual mandate was exempted for people who had their policies cancelled.

J: No. The mandate wasn’t exempted for them

Ezra Klein: The individual mandate no longer applies to people whose plans were canceled

Jay January 13, 2014 at 1:20 pm

Considering more people have been cancelled than signed up for ACA plans across the country, I would consider the new system much more coverage-challenged. Efficient is also an adjective I have not heard describe the new system in any manner.

leftistconservative January 12, 2014 at 9:01 pm

don’t matter if we do need to bail them out. All we have to do is tax the plutocrats and the greedy yuppies

W.E. Heasley January 12, 2014 at 9:33 pm

If memory serves….it is much better than a simple bail out.

There is a reinsurance treaty between insurers and a re-insurer for losses exceeding X. With the re-insurer, being none other than, the U.S. government. Go figure. Hence losses greater than X, are taxpayer losses.

Sweet!

Dan Lavatan January 12, 2014 at 10:16 pm

The reinsurance program uses dedicated funds from premiums collected on insured individuals, so once the funds are exhausted the insurers (and commercial reinsurers) eat the losses. Also it is only 80% of x.

Lee A. Arnold January 13, 2014 at 12:48 am

I would think that stopping the “risk-adjustment” provisions would backfire on the Republicans, not only the insurance companies. Because it will lead more rapidly to single-payer.

What value-added do the private healthcare insurers give, for being allowed to keep 20% of the money (i.e., after the 80% medical loss ratio)?

mike January 13, 2014 at 10:30 am

If you think insurance companies “keep” everything but the medical expenditures, you’re operating at the level of a 5 year old

Lee A. Arnold January 13, 2014 at 12:11 pm

If you think “keep” the money means anything other than spending it on marketing, billing, administrative overhead, and profit, then you are avoiding the question.

JWatts January 13, 2014 at 11:53 am

“What value-added do the private healthcare insurers give, for being allowed to keep 20% of the money”

Marketing, billing, administration, regulatory compliance, etc. Or do you expect all health insurance company employees to work for free?

Lee A. Arnold January 13, 2014 at 12:01 pm

None of those are value that is added to healthcare, and most could be dispensed with, under a monopsony.

Jay January 13, 2014 at 1:21 pm

You could say that about any industry, how well is Venezuela handling it?

Lee A. Arnold January 13, 2014 at 2:41 pm

Actually, you can say that about very few industries.

TMC January 13, 2014 at 1:24 pm

Marketing, billing, administration, regulatory compliance
Realistically only marketing could be dispensed with.
And, as for that, you don’t see any commercials out there for Obamacare do you?

Lee A. Arnold January 13, 2014 at 2:39 pm

Marketing is now unnecessary; you figure out your costs and list on an exchange. Billing is being regularized. Regulatory compliance is standardized because everyone must be covered and there are no pre-existing conditions and no recissions. So, again: what value-added do private insurers bring to healthcare that justifies taking 20%, with only an 80% medical loss ratio? It should be closer to 98%. Administrative costs for Medicare are around 2%.

JWatts January 13, 2014 at 3:09 pm

“When administrative costs are compared on a per-person basis, the picture changes. In 2005, Medicare’s administrative costs were $509 per primary beneficiary, compared to private-sector administrative costs of $453.”

Medicare is more expensive than most private plans on a per person basis.

http://www.heritage.org/research/reports/2009/06/medicare-administrative-costs-are-higher-not-lower-than-for-private-insurance#_ftn1

Careless January 13, 2014 at 3:35 pm

And, as for that, you don’t see any commercials out there for Obamacare do you?

Notsureifserious.gif

The weekend’s football games were full of expensive ads for Obamacare here in Illinois.

Lee A. Arnold January 13, 2014 at 7:37 pm

JWatts: “Medicare is more expensive than most private plans on a per person basis”

But the Heritage article states, “Medicare patients are by definition elderly, disabled, or patients with end-stage renal disease, and as such have higher average patient care costs.” Taking Medicare private would not reduce these per-person administrative costs, at an 80% medical loss ratio. Far from it.

JWatts January 13, 2014 at 10:19 pm

“Taking Medicare private would not reduce these per-person administrative costs, at an 80% medical loss ratio. Far from it.”

The point was that the only reason Medicare can quote such low numbers (2%) is by the misleading use of statistics. The 2% number is primarily based upon a group that has a very high medical cost per patient. If you inflate the denominator by a huge amount (the average cost per medicare patient) you end up with a much lower number, but that in of itself doesn’t imply that the actual administrative expenses are fundamentally different.

When you examine the actual cost to administer the health care for each patient, you find that the numbers are far more comparable.

Lee A. Arnold January 13, 2014 at 11:43 pm

Do administrative costs per person increase with the number of medical tests, procedures, pharmaceuticals, etc, per person? If private insurance administrative costs are $453 per person (assuming Heritage is correct) and Medicare’s administrative costs are $509 per person, are we to conclude that the elderly require only 12% more tests, procedures and pharmaceuticals than the rest of healthcare consumers?

byomtov January 14, 2014 at 5:41 pm

I don’t think you can criticize “misleading use of statistics” and then fail to note that administrative costs per insured are heavily driven by the number and complexity of claims, and that Medicare patients, by virtue of their age, will have many more claims than the 64 years-old and younger population.

BC January 13, 2014 at 6:03 am

macro stabilization: Fed offsets fiscal policy
Obamacare: taxpayers offset bad policy

BC January 13, 2014 at 6:11 am

Let’s try that again.

Macro stabilization: Fed offsets fiscal policy to stabilize NGDP.
Obamacare: taxpayers offset bad policy to stabilize insurance company profitability.
MR Commenting: punctuation offsets unpredictable line breaks.

Dave Anthony January 13, 2014 at 9:12 am

I would love to see this provision repealed. The insurance companies were collaborators on the ACA and inserted much of this language to guarantee their profitability. They should go down in flames along with the law.

Bill January 13, 2014 at 9:20 am

Yeah, and that’s why, if you read the article, they are such strong proponents of the 80% medical loss coverage ratio, and want that repealed, or why they want pre-existing coverage and mandatory carriage…ha.

John B. Chilton January 13, 2014 at 10:15 am

And there’s this,

http://www.nationaljournal.com/health-care/obamacare-s-catch-22-20140110

“Problems with HealthCare.gov—and the administration’s work-arounds—saddled insurance companies with unexpected logistical costs. Yet the Affordable Care Act also caps insurers’ administrative spending, forcing them to pay rebates if their overhead is too high. Insurers will ask the White House for some relief from those rules, an industry source said, in light of the unexpected costs they had to shoulder because of HealthCare.gov.”

Ted Yan January 14, 2014 at 12:59 pm

I hope there isn’t another bail out, but that’s the way corporate America is going.

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