The regulatory atrocity that is Obamacare inspired this race to the courthouse. Despite billions in subsidies — to both low-income individuals and well-capitalized insurance companies — the industry has incurred big losses in the individual market.
In a paper published June 28 by the Mercatus Center, Brian Blase (Mercatus), Ed Haislmaier (Heritage Foundation), Seth Chandler (University of Houston) and I used data derived from insurance-company regulatory filings to determine the extent and source of those losses. The study examined the performance of 174 insurers that sold qualified health plans (QHPs) in 2014 to both individuals and small groups (generally companies with 50 or fewer workers).
“QHP” is the Obamacare seal of approval on a health plan. To obtain this designation, a plan must cover the government-approved benefits package, adhere to strict actuarial requirements, and meet a panoply of other exacting regulatory standards, including restrictions on marketing and pricing. These standards are virtually the same whether the plan is sold to individuals or small firms, so they provide a solid basis for comparing Obamacare’s performance in the two markets.
We found that insurers lost far more money selling QHPs to individuals than to groups. These losses occurred despite subsidies for millions who bought individual QHPs and tax penalties on millions who refused to enroll.
Nor were the losses staved off by the billions more in corporate subsidies that the government lavished on insurers. The so-called reinsurance subsidy, for example, picked up the full cost of some of the largest medical bills incurred by people enrolled in individual QHPs. Our study found that these subsidies averaged $915 per enrollee in 2014, or more than 20 percent of the premium, among the 174 insurers. (The administration has not yet released the amount insurers received in subsidies in 2015.)
Reinsurance subsidies which, like subsidies to individuals were unavailable in the group QHP market, did not prevent issuers from suffering large losses with individual plans. The main reason: Individual Obamacare plans attracted people in poorer health who incurred medical claims that averaged 24 percent more per enrollee than for their group QHPs.
The differences were far more pronounced between individual QHPs and non-QHPs. The non-QHPs are policies that were exempt from most of the law’s requirements; they include “grandfathered” plans that customers originally purchased before the law’s 2010 enactment and were allowed to renew in 2014. Insurers charged individual QHP customers premiums that averaged 45 percent more than for non-QHPs. Medical claims overwhelmed that steep markup. The average QHP enrollee incurred claims that were 93 percent higher than for enrollees in non-QHPs.
Medical claims consumed 110 percent of premiums for individual QHPs, compared with less than 83 percent for group QHPs and non-QHPs in both the individual and group markets. That unsustainably high ratio for individual QHPs produced heavy losses for insurers in 2014 that individual and reinsurance subsidies could not offset. Those losses may have more than doubled in 2015, according to a McKinsey analysis of preliminary data. The big premium hikes insurers are seeking for 2017 (as much as 65 percent by Humana, in Georgia) suggest that they’re not faring especially well in 2016 either.
Insurers were hoping to recoup most of their losses through Obamacare’s risk-corridor program, in which the government confiscates “excess profits” from successful companies and distributes them to insurers that suffered “excess losses.” But profits on individual Obamacare health plans booked by some insurers were not nearly enough to cover the losses of others. To supply the difference, the administration sought to hit up taxpayers for billions of dollars.
Congress said no, prompting insurers to sue for the money.
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According to a report prepared for Senator Marco Rubio by the nonpartisan Congressional Research Service (CRS), these lawsuits will fail. Citing abundant and longstanding legal precedent, CRS concluded that “any payment to satisfy a judgment secured by plaintiffs seeking recovery of amounts owed under the risk-corridors program would need to wait until such funds were made available by Congress.”
Thus, even if a judge were to order HHS to pay insurers, the agency couldn’t do so unless Congress appropriated the money. That hardly seems likely. Or just.
Instead of trying to wring more money out of taxpayers (who are no less victims of Obamacare than insurers are), the industry should come clean with its regulatory overlords and the public. Insurers know that Obamacare is far from the exquisitely crafted clockwork that Washington policy savants imagine it to be. It is a shambles of good intentions, flawed economic models, and theories that crumble on contact with reality. They also know that Obamacare policies hold little appeal for people in reasonably good health. Large premium increases will make them even less appealing.
Obamacare consumers consist mainly of those who buy the policies with other people’s money and those who are reasonably certain that their medical bills will exceed premiums. Such a “market” is incurably dysfunctional.
The law could not have passed without the insurance industry’s backing. It cannot be fixed unless the industry acknowledges it to be a failure.
— Doug Badger, a former White House and U.S. Senate policy adviser, is a senior fellow with the Galen Institute.