Jackson Jambalaya

What happens if health insurance companies lose money under Obamacare? Simple. We bail them out. Leading health care policy expert Bob Laszewski writes on his blog:

Given the early signs––far fewer people signing up than expected, enormous negative publicity about website problems, rate shock, big average deductibles, narrow provider networks, and a general growing dissatisfaction over the new health law––it is clear to me that this program is in very serious trouble.

But that trouble would not necessarily transfer to the health insurance plans participating on the state and federal health insurance exchanges.

Obamacare contains a $25 billion federal risk fund set up to benefit health insurance companies selling coverage on the state and federal health insurance exchanges as well as in the small group (less than 50 workers) market. The fund lasts only three years: 2014, 2015, and 2016....

First, the Reinsurance Program caps big individual claim costs for insurers––in 2014, 80% of individual costs between $45,000 and $250,000 are paid by the government, for example.

Then comes the Risk Corridor program. Participating health plans will receive payments from the federal government in any of the following circumstances:

*The plan's costs for any benefit year are more than 103% but not more than 108% of the health plan's targeted amount. The feds will reimburse 50% of all costs in excess of 103% of the medical cost target.

*If the plan's costs are more than 108% of the annual target, the feds will first pay the health plan a flat 2.5% of the target and then reimburse the plan for 80% of their claim costs above the targeted amount––with no upside limit.

Target cost is simply defined in the new law as a health plan's "total premiums (including any subsidies) reduced by the administrative costs of the plan." It is whatever the health plan projected its premium needed to be to pay medical costs.

So, a plan is on the hook for all claim costs up to 102% (2% more) than the target cost.

But, if the health plan has costs at 110% of the medical cost target, it will be responsible for only 102.4% of the target (a 2.4% shortfall)––only about a quarter of its losses.

If the health plan's medical costs come in at 120% of the expected claim cost target level, the health plan will only be responsible for 104.4% of the target (a 4.4% shortfall)––again only about a quarter of its losses.

While health plans won't be losing anywhere near as much money as they would have if the medical loss ratio were a disaster, because of the claim Reinsurance Program and the Risk Corridor Program, they will be losing money. Rest of post