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Thursday, February 6, 2014

A tale of two Obamacare 'bailouts' -- By David Drucker, The Washington Examiner

Republican critics of Obamacare have lately trained their fire on a program within the health care law that would provide a federal bailout to companies that lose money on insurance plans they sell on the Affordable Care Act exchanges.

But the “risk corridor” program, jointly funded by the government and the insurance industry, is not the only Obamacare program that would offset insurance companies against excessive financial losses. The “risk adjustment” program also provides money to insurers that lose money on the Obamacare exchanges. However, where “risk corridors” subsidize insurers’ losses on a plan, “risk adjustment” subsidizes losses suffered on an individual consumer.

Here’s how the “risk adjustment” program works:

Every health insurance policy issued in the U.S., whether sold on an Affordable Care Act exchange or through other avenues, is charged a $63 fee. The fee, ostensibly passed on to the consumer, is then set aside by the federal government, which uses it to subsidize any policy that costs an insurer more than $60,000 annually. This would presumably occur because the holder of the policy is very sick, elderly or both.

The program is intended to serve as a financial backstop for the insurance companies as they adjust to a regulatory regime that makes it harder to raise premiums or deny coverage. In the meantime, the subsidy will cover 80 percent of whatever an abnormally expensive policy costs the insurer once it surpasses the $60,000 threshold.

By contrast, “risk corridors” aim to protect insurance companies against losses they incurred on insurance plans they sell on the Obamacare exchanges. The money used to subsidize these losses are financed partly by Washington, and partly by the insurance industry. Under the program, insurers must pay 80 percent of the profits they earn on any plan after their profits on that plan surpass 8 percent.

Meanwhile, Washington also collects 50 percent of their profits on any plan where its profits run between 3 percent and 8 percent.

With that money, the program directs the federal government to offset 80 percent of an insurer’s losses on a particular plan offered on an exchange, when those losses surpass 8 percent. When those losses fall between 3 percent and 8 percent, Washington subsidizes 50 percent. Among the goals is to prevent insurers from drastically increasing premiums or dropping out of the Obamacare marketplaces altogether because they’re not profitable.

This program is due to end in 2017. But given Obamacare’s rocky implementation, Republicans are skeptical that the financing mechanism will work, arguing that the program is unlikely to break even between what it collects and what it pays out to subsidize unprofitable plans. The result, they argue, will be a taxpayer bailout of the health insurance industry.

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