One might be forgiven for thinking health insurers are cracking under the strain of Obamacares broken insurance exchanges. But dont be fooled: it is the 10 million Obamacare enrollees who are in trouble, not the insurers.
To be sure, new nonprofit cooperative insurers, set up with special subsidies to compete in the exchanges, have had a terrible run. They deliberately underpriced their premiums to gain market share, expecting the federal government to bail out their losses. Once the Republicans took over the House of Representatives, then the Senate, this became unlikely. As a result, the administration announced in November that 12 of 23 nonprofit cooperative insurers were shutting down.
However, these nonprofit cooperative insurers, which did not exist before Obamacare, are not important overall. That is why UnitedHealth Groups November 19 announcement that it is losing $500 million on the Obamacare exchanges and might withdraw from Obamacare in 2017 is a big deal. Just a few weeks earlier, UnitedHealth Group had announced it would expand into 11 new states Obamacare markets.
The insurer is also dialing back advertising and brokers commissions for 2016, even though it is too late to withdraw from the market literally. (We are in the middle of Obamacares third open season.) However, it is the threat of absolute withdrawal in 2017 that has shocked many. By 2017, the fourth year of Obamacare, the market is supposed to have shaken out. Both insurers and Obamacares political sponsors understood that insurers would not know how expensive claims would be from those who signed up during the first three years. That is why insurers were given temporary taxpayer subsidies, called reinsurance and risk corridors, for 2014 through 2016. Reinsurance is a direct handout of $25 billion from taxpayers to insurers. Risk corridors were more complicated and supposed to be budget-neutral. Insurers that made more money than expected would pay money to those that lost more money than expected.
When it became clear that the losers far outnumbered the winners, the administration tried to raid the kitty to make risk-corridor payments from the general fund. By this time a new Congress (in which the majority opposed Obamacare) actually read the bill that its predecessor had passed in 2010 and pointed out that the administration could not pay out that money. As a result, Obamacare insurers will only receive $362 million of $2.9 billion of risk-corridor payments requested.
However, even if Congress did cave in and pay the risk corridors in full, payments would finish in 2016. That is what makes UnitedHealth Groups announcement about dropping out in 2017 so important: it is effectively an admission that three years are not enough to learn how to manage risks in Obamacares exchanges. Indeed, it suggests that risks are unmanageable, that the vicious circle of increasing premiums driving healthy subscribers away and leaving only sick ones on the books cannot be stopped under Obamacare.
The exchanges have fewer victims than initially expected. The economy has been strong enough that employer-based coverage has stood up to Obamacare. As a result, only 10 million people are caught in them, instead of the 21 million forecast when the law was passed. However, this is a mixed blessing. These 10 million are a politically weak constituency of working-class and lower middle-class citizens in middle agethe people whose needs politicians always talk about but seldom address because they are not politically active.
The only group politically powerful enough to renegotiate the exchanges are the insurers, and they show no more creativity than to lobby for their subsidies to be restored, which this Congress has promised not to do. On the other hand, simply quitting the exchanges is not very painful for large health insurers. UnitedHealth Groups stock took a small hit when it admitted its struggles, but Obamacare exchanges are a tiny share of its business. As more insurers make the same decision to quit, 10 million Obamacare subscribers will be left high and dry in short order.