by Katherine Restrepo
Director of Health Care Policy, John Locke Foundation
North Carolina now has a third player entering Obamacare’s game of subsidized health plan distribution. It looks like United Healthcare has left the sidelines to start offering federally approved health coverage for consumers shopping in the individual market. Round two of the federal health law’s exchange enrollment period begins this November 15.
This will offer a bit of a boost to competition and choice, but to what extent? At this juncture it remains unclear how much of the state United will cover. Blue Cross and Blue Shield currently sells non-group health policies in all of North Carolina’s 100 counties, while Coventry offers them in just 39.
Even with more insurer participation, the health law’s 3:1 community rating government price controls will still generate premium increases – mostly for the healthy sign-ups. For more insight on this, you can view the Manhattan Institute’s updated Obamacare interactive map, which details a county-by-county rate comparison of the cheapest plans sold in 2013 with those sold in 2014, the first year in which plans were required to carry a federal stamp of approval. Note that these comparisons depict the underlying cost of premiums, meaning that subsidies have not been factored in for eligible consumers purchasing 2014 policies.
For the time being, high-risk and low-income enrollees benefit the most from Obamacare’s exchange plans at the expense of healthy individuals. These high-risk and low-income individuals will also benefit from the law’s risk-adjustment, reinsurance, and risk corridor provisions. If you avidly keep up with Obamacare, you’ll know that these "Three R’s" have stirred up the health care media.
Who knew such insurance parameters could be so intriguing? Here’s some context on participating insurers’ triple threat protection:
Risk adjustment operates as a give and take among insurers. The pressure on those with higher-risk pools will be alleviated with funds from insurers with lower-risk pools. Meanwhile, reinsurance acts as an insurance company’s own insurance policy, in which a $63 fee is assessed on each person, including dependents, covered by most employer-sponsored health insurance. The Wall Street Journal has dubbed this specific provision the "belly button tax," The reinsurance fund will total over $20 billion up to 2017, and insurers can dip into this fund and be reimbursed 80% of a consumer’s annual claims that exceed $45,000.
Lastly, there are the Risk Corridors, infamously portrayed by Obamacare critics (including myself), as the "taxpayer bailout." Risk corridors were around before Obamacare, and almost every publication that delves into this subject points out that they were also connected with the launch of Medicare Part D in 2003. Risk corridors were built into the law as another mechanism to prevent insurers from suffering losses in the once likely, and now empirically verified, event that their risk pools skew old and sick – especially because individuals can sign up for coverage and no longer be denied based on their pre-existing health statuses. Insurers are pretty much prevented from gauging their pool’s health status until they start receiving claims. This provision, along with the reinsurance component, will sunset by 2017.
Blue Cross and Blue Shield, the dominant force offering individual policies through North Carolina’s federal exchange, reports that their enrollees are indeed using more health care services and prescription medications for more severe and chronic illnesses:
After looking into risk corridors a bit more, it seems as if the "taxpayer bailout" label may be hyperbolic in some cases. But bailout or not, taxpayers are already subsidizing insurers due to Obamacare regulations.
Sarah Kliff of the Washington Post explains in greater detail the way in which risk corridors work.
The risk corridor program kicks in when health insurers show that the claims their subscribers submit outpace premiums they paid in by more than 3 percent. So, if we take the World’s Tiniest Insurance Company and say it received $100 in premiums (it is, after all, very tiny) but paid out $110 in claims, it would get help from other insurance plans paying for that $10 above and beyond the $100 paid in premiums — but the government will not foot the whole bill.
For claim costs that are 3 to 8 percent higher than the amount paid in premiums, the federal government will reimburse half that amount. For costs that exceed 8 percent, insurers will be reimbursed 80 percent. So, if we stick with World’s Tiniest Insurance Company example, this means the government would reimburse it $4.10: $2.50 for 50 percent of the 3 to 8 percent cost above the premium, which in this case was $5, and another $1.60 for 80 percent of remaining 2 percent, $2 in this example, in additional costs.
Moreover, risk corridors limit the amount of money an insurer can make. If the amount of premiums collected outweighs the total cost of claims by at least 3 percent, the insurer will have to make a contribution to the fund.
To reiterate, the ultimate purpose of the Three R’s was to entice insurers to participate on the exchanges. That is understood. But controversy has been sparked because experts have begun to question whether insurers were able to price last year’s premiums artificially low, knowing they would be able to rely on this temporary measure and attract more consumers. And wouldn’t a taxpayer bailout be more likely for insurers that have decided to extend grandmother policies for up to two more years at the request of President Obama? A part of why Blue Cross and Blue Shield’s pool skews higher-risk than anticipated is that many healthy policyholders have opted to keep their old plans for another year.
Harsh Obamacare critics like Senator Marco Rubio have taken the bailout issue to a whole new level, demanding that these risk corridors operate in a budget neutral manner. On April 11, the Department of Health and Human Services issued a statement saying it plans for them to do so — although their explanation is lacking.
Even if receipts were to balance payments, this would most likely cause insurers to issue even higher premiums. Take your pick — either way, taxpayers are forced to be quite generous in upholding major elements of this law.
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