Thursday, Jul 25, 2024

Obamacare Threatened By Insurance Company Losses

For the past five years, Republicans politicians have made the undoing of Obamacare one of their chief Washington priorities. Since gaining control of the House, they voted more than 50 times to repeal Obamacare, all in vain.

Republicans also put their faith in two separate challenges to the constitutionality of the law. The first challenged the legality of the individual mandate which requires everyone to have health insurance on pain of a fine imposed by the Internal Revenue Service. It was shot down by an unexpected ruling by John Roberts, the Justice of the Supreme Court.A second legal challenge was based upon language in the Obamacare law saying that premium subsidies could only be granted for policies bought on state-run exchanges, not the federal Obamacare web site. It too was struck down by a Supreme Court ruling this past June.

At that point, most Republicans assumed that the only way they could get rid of Obamacare would be to elect one of their own as president next November.

Now it appears that Obamacare is at risk of collapse due to its failure to attract a lage enough enrollment from lower income people who are eligible for its premium subsidies, but still consider its health coverage to be too expensive. Because their Obamacare policies have not attracted the right mix of buyers, many insurance companies lost money on the Obamacare market in 2014.

Last month, United Healthcare, one of the country’s largest insurers, announced at a shareholder meeting that it had lost $700 million during the first year of its participation in the Obamacare exchanges and that it expects to withdraw from the exchanges next year. In the meantime, United Healthcare is halting advertising for its Obamacare policies as well as payment of their brokerage commissions.


Blue Cross Blue Shield of Texas announced almost $400 million in losses. Premera Blue Cross Bluse Shield of Alaska lost $9 million covering less than 8,000 Obamacare customers, while Rocky Mountain HMO in Colorado paid out 36 percent more in coverage than the premiums it collected. For 2016, Blue Cross Blue Shield of Tennessee is raising its Obamacare rates by 38% after having lost $128 million on those policies in 2014.

Other insurers which reported Obamacare losses in their earnings reports included Aetna, Hamana and Cigna, although they are not yet ready to abandon the market. To cover their 2014 losses, many of the companies announced sharp increases in premiums to put them in line with the cost of providing the health care their policies guaranteed. The companies insist that the 2016 rate hikes are intended to allow them to break even or make a small profit on future operations, and not to make up for previous losses, which were covered by their reserves.


The losses were aggravated by a little-noticed provision by Florida senator and GOP presidential candidate Marco Rubio. inserted into last year’s omnibus government funding bill. It has prevented the administration from using any taxpayer money to compensate the insurance companies for the losses they have suffered, violating a promise that was used to entice the companies to sell their federally subsidized policies on the Obamacare exchanges.

When Obamacare was launched, the health insurance companies were understandably reluctant to offer policies on its new exchanges because they had no way of predicting the health needs of the new customers who would be signing up for their policies. As a result, the companies had to take an educated guess in setting the premiums for their policies.


To reduce the risk to the insurance companies, a reserve fund called a risk corridor was established to compensate them for losses on their policies during Obamacare’s first three years of operations. It was funded by a tax on any profits realized by other insurance companies on their Obamacare policies. The risk corridor concept was first introduced by the George W. Bush administration when it invited private insurance companies to provide the expanded Medicare coverage for prescription drugs.

It was hoped that the risk corridors would collect enough money from the profitable Obamacare policies to cover the losses of the unprofitable ones, so that the system would operate at no additional cost to taxpayers. But Obamacare’s designers assumed that if the losses were too large, the difference would be made up from taxpayer funds.


The system struck Senator Rubio as corporate welfare for private insurance companies built into Obamacare. He particularly objected to the taxpayers assuming the financial risk for private insurance companies. In 2013 Rubio began speaking out against the risk corridor payments as taxpayer bailouts and a form of corporate welfare. He testified against them at a House Oversight Committee hearing.

In a Senate floor speech, in early 2014, Rubio said, “There is a problem with the way [ObamaCare] exchanges are now designed that have not yet received the attention they deserve, but I promise you’re going to be hearing a lot about it in the days to come.”

Rubio called for the risk corridor program to be scrapped. He wasn’t able to kill it, but he did the next best thing. At the end of 2014, both houses of Congress were required to pass a 1,600 page spending program to fund government operations for the next year. Rubio added a provision to the bill which prevents the Department of Health and Human Services (HHS) from using any of its other funding accounts, such as its overall appropriations or its Medicare funding, to make payments under the risk corridor program. As a result, the only risk corridor money available to reimburse the insurance companies which lost money on their Obamacare coverage during 2014 was from contributions by the few which made profits.


The denial of the additional funding for the risk corridors became a serious problem for participating insurance companies because Obamacare suffered a much higher losses than expected start during its first year. When Obamacare started, the administration came under intense criticism because of millions of old insurance policies which were cancelled because they did not meet Obamacare specifications.

Obama responded by allowing those old policies to be renewed. The insurance companies were shocked. They had counted on many relatively healthy people whose old policies were being cancelled to become highly profitable new customers for their Obamacare policies. Those sales were lost, and many of those who did sign up were sick people eager to take advantage of Obamacare’s guarantee of coverage even for pre-existing conditions.

The shortfall in the number of policies sold and the change in the expected mix of customers in the Obamacare policy risk pools were the major reasons why most companies lost money during the first year of operation of the Obamacare state insurance marketplaces.


There was not nearly enough money from profits paid into the risk corridor fund to cover them all. A total of $362 million was paid in against loss claims of $2.9 billion. Because Rubio’s provision prevented HHS from using federal funds to make up the difference, the risk corridor fund was $2.5 billion short, and was only able to provide less than 13 cents in reimbursements for every dollar the insurance companies lost. Put another way, on average the insurance companies lost $136 a year on each of their Obamacare customers, and only 36% of their Obamacare health policies proved to be profitable.

Even the administration was caught by surprise by the magnitude of the first year losses. In July, Kevin Counihan, the chief executive of the federal Obamare website,, assured state officials that the money collected from insurance companies would be “sufficient to pay for all risk corridor payments.” Then, when it became clear that the expected 2014 risk corridor payments would not be forthcoming, the White House promised the insurers to make up the losses from risk corridor payments from money collected in 2015 and 2016.


Rubio’s funding freeze provision is about to expire. The White House has promised to put up a fight this time against Rubio’s efforts to renew the funding freeze in next year’s federal Omnibus funding bill, which is now being finalized in Washington.

Because of the havoc his freeze has caused to the operations of Obamacare, Rubio has been actively promoting it in his presidential campaign as one of his major accomplishments. Rubio calls the risk corridor payments a thinly disguised “taxpayer-funded bailout for insurance companies.”

He claims that his funding freeze has already saved federal taxpayers $2.5 billion, and promises to continue blocking administration efforts to use taxpayer funds for insurance company bailouts for their 2015 and 2016 losses.

In pressing the issue, Rubio is taking advantage of public dissatisfaction with Obamacare, and frustration with the Obama administration’s fondness for crony capitalism.


Rubio compares risk corridor payments with the notorious federal “bailouts” of the big banks and the Wall Street financial firms during the economic crisis of 2008.

In a recent speech on the Senate floor, Rubio argued in favor of extending the funding freeze by saying, “If you want to be involved in the [Obamacare] exchanges and you lose money, the American taxpayer should not have to bail you out.”

The issue has become a major Washington lobbying battle. The insurance industry has hired Marilyn Tavenner, who was the HHS administrator in charge of the administration’s rollout of Obamacare, to head its trade group, called America’s Health Insurance Plans. According to Rubio, she “now runs the health insurance lobby, working with her White House allies to secure a new bailout by providing more funding for the risk corridor program.”

In a recent letter to the House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell, Rubio wrote, “So far, we’ve succeeded in stopping the Obama administration from bailing out healthcare companies under Obamacare, and it’s critical that Congress once again stand with taxpayers to stop any taxpayer bailout of health insurers from happening. . .

“Taxpayers should not be on the hook for any more of Obamacare’s failures.”

Rubio’s letter was endorsed by conservative groups such as Americans for Tax Reform and Heritage Action for America.


Most of the private insurance companies selling Obamacare policies were large enough to absorb the unexpectedly large losses during the first year, and most of them are staying in the Obamacare market, at least for now.

But the insurers which suffered the most were 23 new non-profit insurance coops which had been set up with federal loans as part of Obamacare in order to guarantee the presence of low cost policy options on the exchanges.

They were launched with limited federal startup funds, and did not have the reserves needed to survive major losses in their first year of operations. For more than a dozen of the coops, the inability to collect the promised risk corridor payments meant that they did not have enough funds to pay their operating expenses. They have been forced to declare bankruptcy and suspend operations, leaving 800,000 of their customers without coverage, and the members of their health care provider networks stuck with huge unpaid bills.

For example, the Health Republic of Oregon coop announced in October that it was closing its doors after it was informed by HHS that it would receive only $995,000 in risk corridor reimbursement for its 2014 losses totaling $7.9 million. In announcing its closure, Health Republic’s president, Dawn Bonder said, “We were stable, had a growing membership and could have been successful if we had received those payments. We relied on the payments in pricing our plans, but the government reneged on its promise. I am disgusted.”


The Health Republic Insurance coop of New York went out of business leaving behind $165 million in unpaid bills to 64% of its provider network. Had it been a private insurer, those debts would have eventually been paid by an industry trade association reserve fund, but since the coop was not a member of that association, those bills may never be paid.

But even large private insurers with adequate reserves will not stay in the Obamacare markets unless they have some prospect of halting their losses and eventually earning money, and prospects for that are not good.


The underlying problem is that, according to insurance industry experts, the Obamacare policies are too expensive for much of their target market, the 24 million Americans whose income bracket qualifies them for federally subsidized premium subsidies.

The unsubsidized premiums are so high because the insurance companies are required by Obamacare regulations to include a basket of 10 types of health care coverage in every policy they sell, whether the customer wants them or not. In addition, the rates are structured to deliberately overcharge younger, healthier policy buyers to further subsidize the costs of caring for older, sicker customers. The result is that younger people are being charged a lot more for the same level of health care coverage they had before Obamacare was instituted.

Many of them would rather risk the individual mandate fine for going without health insurance than be overcharged for an Obamacare policy. This is especially true if they earn significantly more than the federal poverty level, because the amount of Obamacare premium subsidies they receive drops sharply as their income rises.


According to a recent report by the Robert Wood Johnson Foundation and the Urban Institute, if the administration meets its target for the current Obamacare enrollment period of 10 million, it will have sold Obamacare policies to only 38% of those who are eligible for the subsidies. Experience in other insurance markets reveals that a disproportionately high percentage of those enrollees are sick and expensive to care for, and will cause continued losses for the insurance companies. Raising premiums higher will only drive away more customers, even with the federal premium subsidies.

According to a Goldman Sachs analysis of Blue Cross and Blue Shield insurers, Obamacare losses are expected to continue, despite big rate increases anticipated next year. According to another industry source, the expectation of continued losses has resulted in “all of the plans re-evaluating their participation in Obamacare.” Few of the insurance companies hold out much hope that the administration will be able to get the Republican-dominated Congress to lift Rubio’s freeze and authorize any taxpayer payments to make good on their losses.


The insurance companies are not alone in feeling short-changed by administration promises for Obamacare. Many consumers who were persuaded by the subsidized low monthly premiums to buy the insurance now feel that they are victims of a government sponsored bait-and-switch scheme.

One man from Texas who decided to drop his Obamacare coverage told a New York Times reporter that because of the high deductible, “basically I was paying for insurance I could not afford to use.” That situation is getting worse instead of better. For 2016, the deductible for the cheapest Bronze level plans will increase by an average of 11 percent to $5,700, before the coverage comes into effect. For the most popular Silver level plans, the deductible is increasing by 6 percent to over $3,100.

Before the advent of Obamacare, consumers without coverage who were willing to take a chance on their continued health had the option of buying relatively cheap catastrophic care policies that protected them only against major health problems. That left them to pay for routine health care out of pocket, or a tax advantage health savings account. But those policies are no longer being offered. Instead, those who do not qualify for large premium subsidies are stuck with expensive Obamacare policies. After taking their high deductibles into account, the coverage they provide is not much better than they used to get from the much cheaper catastrophic care policies.


That is why the latest polls show that Obamacare is as unpopular as ever with most Americans, except for those at the low end of the income spectrum who qualify for the largest subsidies, and get their health care coverage virtually for free. Even the uninsured are unhappy with Obamacare. Many would rather pay the individual mandate fines rather than be forced to pay $1,000 a year and another $5,000 out of pocket before seeing the first benefits from their insurance.

Even on its own terms, Obamacare has failed to achieve its basic goal of decreasing the number of Americans without adequate health coverage. According to Avik Roy, writing in Forbes magazine, Obamacare has reduced the number of Americans without health insurance by only 6.7 million, or about 2.7 percent.

Similarly, Obamacare has failed to result in a significant slowing in the rate at which health care costs are rising, and the taxes it has imposed have been a drag on economic growth.

So the verdict is in. By almost every measure, Obamacare simply doesn’t work, and the American people are losing their patience with those who still seek to excuse or deny its many failings.



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