Obamacare Gives Insurers Money To Cover Unexpected Costs. Is That a Bailout? Does It Matter?

In recent weeks, health
insurers have sounded less than enthusiastic about Obamacare. At a
health industry investor’s conference last week, the head of Cigna
that his company might take a loss on plans sold in Obamacare
exchanges. In an SEC filing, Humana said that the
demographic mix in the company’s exchange plans was “more adverse”
than expected. The CEO
of Aetna told CNBC this week
that so far, the exchange plans
his company has offered in the exchanges have not successfully
attracted the previously uninsured—setting up the possibility that
Aetna might eventually pull out of the exchanges. And on Wednesday,
credit rating agency Moody’s
downgraded health insurers
, projecting that earnings would be
less than expected in 2014 as a result of the “ongoing unstable and
evolving environment” surrounding the rollout of the health

Insurers may be down on the law. But they’re not quite ready to
bail. For one thing, they’ve spent years reorganizing segments of
their businesses around its requirements. And for another, the law
provides a backstop to cushion the blow. If costs are significantly
lower than insurer targets, the federal government will share the
financial pain by reimbursing them for a percentage of their

In other words, taxpayers will be on the hook for unexpected
insurer costs—and the greater those unplanned insurer costs are,
the bigger the taxpayer share of the tab will be.

Insurers will be reimbursed for high expenses through
Obamacare’s risk corridors, one of several provisions in the law
intended to mitigate the risk to health plans participating in the
exchanges. The way that the risk corridors work is that for any
insurer spending between 3 and 8 percent above an insurer’s target
level, the Department of Health and Human Services will reimburse
them for 50 percent of the losses. For any spending that goes over
the 8 percent threshold, the federal government pays 80 percent.
This illustration from the American Academy of Actuaries provides a
helpful way of visualizing how the program, which is active from
2014 to 2016, works:

As the graphic shows, the backstop is symmetrical. Just as
insurers are covered in the case of greater than expected spending,
they are also required to pay out if spending is significantly
below target. But given the gloomy financial outlook for insurers
offering plans on the exchanges, the widespread expectation is that
the federal government will do all the paying out this year—and
insurers will not pay into the system at all.

That’s not what was advertised. As Wake Forest Law professor
Mark Hall noted
in a 2010 Health Affairs paper on Obamacare’s risk
provisions, the law was written under the assumption that payments
to and from the government would balance out. Some insurers would
spend more than expected; others would spend less. The program
would be revenue neutral, or close enough.

At this point, we can be pretty sure that won’t be the case.
What we don’t know, however, is how the government’s share of
insurer costs will be funded. As Hall noted, and as influential
health law professor Timothy Jost also pointed out in a
separate Health Affairs piece
, the law makes no
mention of what to do if the cost to the government is more than
the amount paid in. Given that estimates suggest the payout to
insurers could be worth several billion dollars this year, and that
the potential costs are not capped at all, that’s not a
small matter.

That liability makes for a pretty big political target.

Sen. Marco Rubio (R-Fl.) has already
dubbed the program an insurer bailout
, and proposed legislation
ending the program. This sparked a debate about whether the program
is or is not a bailout, with some vocal
opponents of the law

objecting to the description

Their argument, broadly speaking, is that it’s not really a
bailout because it wasn’t tacked on after the fact to cover
irresponsible corporate behavior. This strikes me as a semantic
quibble, especially since the provision was essentially repurposed
long after it was passed—transformed from the revenue-neutral risk
sharing program that was originally envisioned into a mechanism for
the federal government to pay off insurers who are taking a
financial hit by participating in the administration’s signature
law. And it’s a mechanism that the administration has
proposed expanding
in response to the messy rollout of that
law, potentially putting taxpayers on the hook for even greater

Does it really matter what word is used to describe it? Call it
a bailout, call it corporate welfare, call it a federal insurance
company subsidy made necessary by the administration’s poorly
designed and implemented law—what matters is that it’s a provision
from an unpopular law that puts taxpayers on the hook for the
health insurance industry’s bottom line. No matter what you call
it, it’s an ugly giveaway to insurers that wasn’t initially sold as

It’s also a provision that the administration believes is
necessary for the survival of the law, and the health insurance
industry it regulates. In its
justification for awarding a rapid no-bid contract
Accenture, the tech firm brought in to work on the federal exchange
system after last year’s disastrous launch, the federal government
explained that it needs the financial management system that’s
supposed to make the risk corridor payments to be completed by
mid-March of 2014. Without that system in place, the administration
might end up inaccurately forecasting risk corridor payments,
“potentially putting the entire health insurance industry at risk.”
That risk, the administration said, put the “entire healthcare
reform program” in jeopardy.

Bailout or no, then, at this point it’s almost moot: The
financial backend for making the risk corridor payments, a system
the administration claims to believe is absolutely necessary to the
law’s success, hasn’t even been built yet—and the
administration just switched tech contractors in a panic after the
last one utterly failed to deliver. That’s the level of competence
that’s gone into implementing this law so far. Will the late-game
lineup change put the system on better footing? If not, this
bailout may need a bailout.

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