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Obamacare Insurer Subsidies in Action: The Case of Humana

9:25 AM, May 8, 2014 • By JAY COST
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Humana joined the ranks of insurers warning about the potential for large premium increases on next year's Obamacare exchanges. In a conference call discussing its first quarter earning results, Bruce D. Broussard, CEO of Humana, said: "we can see pricing levels anywhere in the single digits to the double digits."

Obama doctors

This is important news, and the Humana earnings call also emphasized a point Jeffrey Anderson and I made in this week's magazine: federal subsidies are playing an enormous, and often overlooked, role in the Obamacare exchanges. In fact, Humana alone expects to receive between $575 and $750 million from the "Three R" programs—risk adjustment, reinsurance, and risk corridors—that serve as a backstop for the insurers. To put this into perspective, this sum is about half of Humana's 2013 profit.

Changes to the Three R's help explain why premiums are going up. About half of Humana's Three R's money is coming from the reinsurance fund, which is set to decrease across the entire exchanges from $10 billion in 2014 to $6 billion in 2015. Per Broussard, this is a "big part" of the story in the expected increases in premiums. That cash enabled them to keep prices below what they otherwise would have been; remove it, and premiums have to rise.

Three major takeaways from this. First, the talk about premium increases for 2015 usually revolves around discussions about the risk pools. The conventional claim is that, the healthier the pool, the less premiums will have to increase. Sure, but the Humana call suggests that there is much more to the story. Humana is not the first to suggest that the drawdown of federal subsidies is hugely important in 2015 pricing, either. Ken Goulet of Wellpoint created a bit of a firestorm last month when he suggested rates could double—less commented upon was his reason why: the decline of reinsurance. So, while a better than expected risk pool might help keep rates low, ceteris paribus, this year’s premiums were priced artificially low because of temporary subsidies to the insurers. Take that away and you create upward pressure on rates.

Second, the insurers participating on the exchanges are best understood not as private entities but as clients of the state, at least as long as the Three R’s are filling such an enormous hole in their budgets. The funds flowing to them via the Three R's might seem trivial in the context of the trillions spent every year by Uncle Sam. However, from the perspective of the insurers’ balance sheets they are enormous, inoculating them from the vicissitudes of market forces on the exchanges. Indeed, a recent study by Milliman found that, given a balanced risk pool, the Three R's have such an enormous effect on insurer incentives that it would actually be in their interest to get the oldest and sickest customers available. That point bears repeating: The Three R’s offer so much money to insurers that there is no such thing as failure (except, perhaps, success). Little wonder that insurers are warning of dire consequences if Republican measures to limit the potentially limit federal funds they have access to. Clients of the state always scream bloody murder at the faintest suggestion that their benefits will be reduced.

Third, we can debate the policy merits of the Three R’s. However, what we cannot do is call this a "market" in any meaningful sense of the word. A real market, albeit a heavily regulated one, will only appear in 2017 when the insurer subsidies disappear as now planned (if they do). At that point, prices will have to reflect costs, as there will be no more outside reinsurance or risk corridor money to lower rates artificially. Obamacare’s advocates believe that, at that point, the risk pool will be balanced enough to sustain reasonable premiums without the government subsidies. Whether it will remains to be seen.

For now, federal subsidies are so generous that, for insurers, what would otherwise count as a loss now counts as a victory. And for consumers, the price they pay for their policies is well below the actual costs for those policies. That is not a “market,” and thus the claims that this “market” is “working” are meaningless. A working market does not require a $10 billion federal reinsurance guarantee, with a potentially limitless amount of risk corridor cash to follow.

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