Patterico's Pontifications

2/6/2014

Another Way ObamaCare Will Cost Billions: The “Risk Corridor”

Filed under: General — Patterico @ 7:39 am

Forbes has an article titled Obamacare ‘Bailout’ For One Insurer Will Cost Up To $450 Million In 2014:

There’s been a lot of discussion about whether the risk adjustment tools embedded in ObamaCare amount to a bailout for the insurance companies, or are a reasonable feature of the law. There’s been far less information about how much money the insurers stand to gain from these measures, to offset their expected losses.

Now we have some hard numbers. Humana announced that it expects to tap the three risk adjustment mechanisms in ObamaCare for between $250 and $450 million in 2014. This amounts to about 25 percent of the insurer’s expected exchange revenue. This money is needed to offset losses that the insurer will take as a result of slower enrollment in its ObamaCare plans, and a skewed risk pool that weighs more heavily toward older and less healthy members than it originally budgeted.

More than half of the money will come from the $25 billion reinsurance pool that ObamaCare provides (collected through a tax on employer-sponsored health plans). The other half will come mostly from the risk corridors. Humana is expected to book the money as revenue to offset shortfalls between what it collects in exchange premiums and pays out in medical claims.

That’s interesting, but what does it mean for the market as a whole? I asked the author of the article what Humana’s market share is, and got no response as of yet. When I try to research Humana’s share of the total market I get numbers ranging from 3.14% (.pdf) to 4.56%.

By my calculations, if the share is 4.56%, then the total market would be in for a bailout of just shy of $10 billion. If Humana’s share is 3.14%, the total market would be in for a bailout of, let’s see here, carry the one . . . about $14 billion. In 2014.

It’s not the biggest number ever in terms of the overall federal budget, but it’s just another way that we keep digging ourselves into a hole. If the number remains constant, that’s another $140 billion spent over 10 years. Add this problem to the problem of losing 2.5 million jobs over ten years, all the lost tax revenue that entails, and all the other budget problems that come with a gradual government takeover of health care, and you start to see the problem.

A colleague of mine wondered aloud recently: why would insurance companies have agreed to ObamaCare when there was a chance that not enough healthy people would sign up to make it worthwhile for them to insure people with pre-existing conditions? The answer, of course, is the risk corridors: essentially, if the scheme costs insurance companies money, the feds bail them out with our tax dollars. In this sense, it’s like the bank bailouts: heads they win, tails they win. They get a chance at selling more policies, but if the deal goes sour, they still break even. The only folks who don’t break even are the people filing the 1040s.

So if you thought that the era of bailouts was over, you thought wrong. Now we’re starting to get a small sense of just how bad it will be.


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