If United is losing money, what about big insurers who charge less?

Earlier this week, United Healthcare, the nation’s largest health insurers, told its shareholders that it would be pulling back on efforts to market its Obamacare plans for 2016 and might pull out of the market in 2017.   Eternal optimists about Obamacare have been quick to note that United, although a large insurer generally, “only” covers about 540,000 people on the Exchange.  This is about 6% of those who enrolled in 2015.  In fact, however, United’s announcement should be a cause for great concern, not just for the half million plus,  but for a large number of people purchasing coverage from other insurers who likewise may become intolerant of continued financial losses.  To quote Katherine Hempstead,who heads the insurance coverage team at the Robert Wood Johnson Foundation,  “If [United] can’t make money on the exchanges, it seems it would be hard for anyone.”

This entry is about a little experiment.  Although United may not be one of the biggest players on the Exchanges, the various Blue Cross insurers most definitely are.  And so, what does United’s situation suggest about the vulnerability of Blue Cross insurers?

It turns out that there are 38 markets for which we have data on which Blue Cross and United compete for Silver plans, the most common metal level purchased.  By market, I mean they both sell the same kind of plan type (HMO, EPO, POS, PPO) in the same rating area of a state.  (This looks only at states that use healthcare.gov and thus have their data made available at data.healthcare.gov). So, if Blue Cross sells at least one HMO plan in Georgia Rating Area 7, and a United company likewise sells at least one HMO product in Georgia Rating Area 7, I treat the two insurers as competing against each other.  And, if Blue Cross’s premiums tend to be lower than United’s in the competing markets and United is losing money, that might be some evidence that Blue Cross is vulnerable.

The chart below shows the result of the experiment.  I calculated the median silver premium for Blue Cross companies in the 38 competing markets and the median silver premium for United companies.  I then divided the Blue Cross median by the United median.  I used a 40 year old adult individual as the basis for the computation, although prior research shows that little turns on the choice of age. The chart shows a histogram of the results.


What we can see is that the histogram is skewed to the left: on balance, Blue Cross tends to charge less than United.  Sometimes, as in three rating areas in Kansas and two ratings areas in South Carolina, it charges less than 3/4 of what United charges.

Does this prove that many Blue Cross insurers place themselves in financial jeopardy by continuing to sell?  Hardly.  There is a lot more to profitability than premiums even when metal tiers and plan types are the same.  Blue Cross may have struck better deals with medical providers.  Blue Cross may run a more efficient operation.  Blue Cross may be able to attract a healthier risk pool.  Blue Cross is raising its rates.  Claims experience in 2016 may be different than experience in 2015.  And, in some markets, Blue Cross charges more.  In Virginia Rating Area 10,  Blue Cross’s median is 1.27 times that of United’s. I get it.

But still.

I’d feel a lot better about other insurers’s prospects if they tended to charge more than one that was encountering financial difficulties.  And, yes, perhaps the ACA can shrug off the possible departure of United.  We can trot out the words “blip” and “outlier.”  But I am not ready to join some academics and advocates in the eternal Obamacare sunshine with a chorus of “nothing to see here.”  Maybe there’s not much difference between United’s situation and that of other large insurers. Maybe, it’s just that United’s directors and officers found the courage to sound the warning sooner.

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Bombshell: United Healthcare thinking of exiting Obamacare

Today’s news that United Healthcare is “evaluating the viability of the insurance exchange product segment and will determine during the first half of 2016 to what extent it can continue to serve the public exchange markets in 2017” is a very big deal.  United would not be disclosing to shareholders that it might fully or significantly exit Obamacare in 2017 if this was not a significant possibility.

United is a major player in the Exchange markets.  It sells policies in about 47% of the 395 rating areas serviced by the federal exchange. Moreover, the loss of United could be very harmful to any remaining competition of the exchange markets.  A quick study of data from healthcare.gov shows that if one looks at Silver plans in rating areas in which United sells a policy and one looks at all plan types (HMO, EPO, POS,PPO), there are 204 combinations.  In 73 of those (about 36%), United is the only insurer, meaning that if no one else steps in to the United vacuum, there will no longer be a seller of that plan type.  HMO plans in Alabama rating area 13 is an example of such a market. If United exits, it would appear that there will be no HMOs in that area.

In another 59 of those 204  (about 29%) rating area/plan type markets in which United participates, United is one of only two players.  An example of such a market is the POS market in  Arkansas, rating area 1. There, UnitedHealthcare of Arkansas, Inc. and QCA HealthPlan are the only sellers. This means that if no one else steps in, there will be  another large chunk of markets in which there will be an Obamacare monopoly.

Moreover, the problems United is evidently facing do not appear to be the result of particularly low prices.  The graphic below shows for each of the 204 market-plan type combinations in which United is present,  the ratio of United’s  its median price for policies to the median of all prices. It shows United prices tend to be fairly close to the median and, if anything, tend to be a bit higher.  Thus it will be a challenge to ascribe United’s failures to any sort of extreme pricing — a fact suggesting that either United had problems on the cost side or simply that it is now facing up to a fact that some other large insurers may wish to deny: Obamacare is in trouble.


The ACA simply does not work without voluntary insurer participation.  There is no public option and their closest cousin, the coops are mostly dead or in financial distress.  It surely should work better if there is at least some competition.  But insurers don’t voluntarily participate where they think they can’t make money.  So, unless United, one of the biggest health insurance carriers, is doing something particularly wrong or has unduly gloomy management, one has to worry about its warning being an oracle of things to come for other insurers.


In contrast to my usual practice, I have revised this entry fairly heavily during the course of the day.  I think it is important to get the information out there and I hope readers excuse some instability in the entry.

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Prices rising, choice declining for 2016 Obamacare

Data released yesterday at healthcare.gov shows the beginnings of an adverse selection death spiral that threatens the stability of the system of insurance created by the Affordable Care Act.  The data shows that, on plans using the “federally facilitated marketplace” created under the ACA, PPO plans that continued from 2015 to 2016 increased gross premiums an average of 16% and Gold and Platinum plans increased 15% and 21% respectively.  HMO plans, by contrast, increased a lesser 8% and Bronze and Silver Plans increased a lesser 12% and 9% respectively.  We should thus expect to see in 2016 relatively fewer people purchasing plans that give them a greater choice in physicians or that provide greater protection against medical expenses.

The tables below summarize the big picture.  The first table shows the mean change in gross premiums between 2015 and 2016 for plans that persisted over that timespan when grouped by metal level.  As one can see the more generous Gold and Platinum plans increased at rates considerably higher than the less generous Catastrophic, Bronze and Silver plans.

MetalLevel percent change
1 Bronze 12.1
2 Catastrophic 8.1
3 Gold 15.2
4 Silver 9.4
5 Platinum 20.9
mean change in premiums between 2015 and 2016 for 6,699 persistent plans

The second table shows the mean change in premiums between 2015 and 2016 for plans that persisted over that timespan when grouped by plan type.  As one can see the PPO plan, which offers the greatest choice of doctor, increased at a higher rate than other types of plans.  EPOs, which are similar to HMOs but restrict visits to specialists less, increased in gross premiums at a rate far higher than HMOs.

PlanType percent change
1 POS 12.3
2 HMO 8.3
3 EPO 12.2
4 PPO 16.5
mean change in premiums between 2015 and 2016 for 6,699 persistent plans

The third table combines the first two and shows, for each combination of metal level and plan type, the mean percentage increase in gross premiums between 2015 and 2016.

1 Catastrophic 1.9 5.8 6.9 14.8
2 Bronze 11.2 10.9 12.0 16.2
3 Silver 5.8 8.8 12.5 14.5
4 Gold 9.4 16.6 17.1 19.7
5 Platinum 12.2 25.6 7.5 25.9
mean change in premiums between 2015 and 2016 for 6,699 persistent plans

Premium increases are only part of the story, however.  Some types of plans are not available at any price any longer.  The table below shows the percentage of rating areas in 2015 and 2016 containing each type of plan.  Notice that the percent of rating areas containing any PPO has dropped significantly between 2015 and 2016; HMOs and POS plans have dropped as well, though EPO plans have become more prevalent.

PlanType AVG2015 AVG2016
1 HMO 92.6 88.6
2 EPO 78.3 82.5
3 POS 83.7 75.4
4 PPO 92.5 76.7
percent of rating areas having at least one of these plan types

We can also consider the prevalence of competition. The table below shows the percentage of rating areas in 2015 and 2016 containing at least two of each type of plan. Notice that with PPOs, the percentage of rating areas with competition has declined, although it has increased somewhat for HMOs, EPOs and POS plans.

PlanType AVG2015 AVG2016
1 HMO 71.3 72.5
2 EPO 66.5 74.0
3 POS 48.2 50.6
4 PPO 76.0 61.0
percent of rating areas having at least two of these plan types

The same analysis can be done on the metal levels of the plans available.  The table immediately below shows for 2015 and 2016  the percentage of rating areas in which there is at least one plan of the specified metal level.  Platinum plans have declined sharply in prevalence since 2015.  Now only just over half of the rating areas have even a single platinum plan available even if one were willing and able to pay the higher premiums.

MetalLevel AVG2015 AVG2016
1 Catastrophic 74.3 72.2
2 Bronze 91.8 88.1
3 Silver 91.1 89.7
4 Gold 90.9 88.5
5 Platinum 92.7 53.2
percent of rating areas having at least one of these metal levels

When it comes to competition, the picture is even worse for platinum plans.  In only about a third of the rating areas can one choose between platinum plans.

MetalLevel AVG2015 AVG2016
1 Catastrophic 33.5 30.3
2 Bronze 82.5 82.4
3 Silver 85.7 84.6
4 Gold 73.0 73.4
5 Platinum 44.9 34.6
percent of rating areas having at least two of these metal levels

Finally, since it seems to be the PPO plans whose prevalence is declining most, we can show the extent of that prevalence according to the metal level of the plan. The table below shows that the Platinum PPOs, the plan probably most helpful to the chronically ill that the ACA was supposed to help greatly, is diminish significantly in prevalence but that Gold and Silver PPOs are diminishing as well

PlanType MetalLevel AVG2015 AVG2016
1 PPO Catastrophic 85.8 71.1
2 PPO Bronze 94.9 81.6
3 PPO Silver 94.9 81.6
4 PPO Gold 94.9 81.6
5 PPO Platinum 89.5 53.5
percent of rating areas having at least one of these Platinum plan types


The data shows that platinum plans and PPO plans are shrinking in prevalence and that the gross premiums for such plans are going up. One might say that this development is not so awful since it leaves in place a market for more basic plans: HMO plans for example or silver and gold plans.  Perhaps the government should not be subsidizing individual’s choice of doctors or fostering plans, such as platinum plans, that fail to deter excess medical consumption.  Such is not, however, the promise of the ACA or, I suspect, the desires of many of its proponents.

Moreover, we are in a dynamic situation.  Think about next year when the insurer subsidies are supposed to disappear and when the chronically ill people who were in platinum and/or PPO plans migrate into the next best thing, a gold plan or, if one is available, a POS or EPO plan.  Suddenly those plans become vulnerable to adverse selection pressures.  And for 2017 we might thus expect to see yet further shrinkage of PPO and platinum plans and greater pressures on everything but the basic Bronze and Silver HMO plans.  When that happens, the adverse selection death spiral will not only start biting wealthier purchases or those with chronic conditions, but mainstream America. Private health insurance is fragile. It generally does not well withstand the sort of underwriting regulation imposed by the ACA.  The conceit of the ACA proponents was that they had engineered a system — the “three legged stool” so strong that it could resist the almost invariable pressures of adverse selection.  If I am right, and regardless what one thinks about the motives of those proponents, we are beginning to see that the engineering was just not good enough.

Caveats and further research

The computations shown above are based on the number of plans and not weighted by the number of enrollees.  This is largely of necessity since the federal government has not been releasing enrollment figure by plan in a clear way (although it may be possible to tease the figures out of rate review submissions filed and collated on healthcare.gov).  Although enrollment weighting will likely decrease the average mean premium (less expensive policies tend to be purchased more), it is not clear that enrollment weighting will have much effect on relative premium increases.

The figures are also not computed yet on a state-by-state basis, something that I hope to present in a later post.  They also contain only data for states whose plans are described in material available at healthcare.gov.  Data for states such as California and New York, which have their own exchanges, is not included here and might alter the numbers somewhat.

Finally, I present gross premiums here; as I have discussed at length elsewhere, net premium increases may well be higher, particularly where the purchaser wishes to retain a gold or platinum plan or a PPO plan whose premiums are rising even faster than those of the silver plans and the second lowest silver plan. The situation is worst where, due to some willingness on the part of a new entrant to take risk,  the second lowest silver plan drops in price, thereby decreasing subsidy levels, but other silver, gold and platinum plans increase in price.


Programming for this work was done in R using data from data.healthcare.gov and is available on request from the author. Packages used include data.table, tidyR, htmlTable and dplyr. There is a lot more work to be done mining these databases.

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Choose your doctor? Not anymore in Obamacare’s Houston

The data is not fully out yet, but, if my home area of Houston, Texas (Harris County) is representative, PPO plans that offer the greatest choice of doctors and that provide low cost sharing are extinct, as are POS plans that also offer more choice of medical practitioners. Platinum plans of any sort are on their way to its extinction.

In 2015, there were 19 PPOs available in Harris County, 12 from Blue Cross Blue Shield and 7 from Cigna Healthcare.  In 2016, according to the preliminary data available on healthcare.gov and released Sunday, there are none.   Nor does the matter improve my considering POS plans, which also offer a greater degree of choice of doctor than does an HMO.  In 2015 there were17 such plans in Harris County, 10 from Aetna and 7 from Humana.   Those are gone too in 2016.  So, basically, it is no longer true in Harris County that you have a choice of doctor if you purchase an Obamacare plan.  You get what the HMO or EPO gives you.

Platinum plans are now almost extinct. In 2015, there were three platinum plans available in Harris County, an HMO and POS offered by Humana and and EPO offered by United Healthcare.  According to the preliminary information released Sunday, only the Humana HMO survives. Thus, you can get a plan that has minimal cost sharing, but no longer one that offers great choice of medical practitioners. The Humana POS and the United EPO are gone.

Notice what's missing from the list of plan types?
Notice what’s missing from the list of plan types?

And it’s going to cost you a lot to put yourself in a pool in which cost sharing is low.  In 2015, the gross premium for the Humana Platinum HMO (32673TX0640030) was $448 for an individual age 40 (non-smoker). In 2016, the gross premium for the same Humana plan was $551, an increase in gross premiums of 23%.

Net premium increases — the thing the insured actually pays — are likely to rise a similar amount for the one remaining platinum plan.  The second lowest silver plan — the baseline for computation of subsidies — has increased in price by $34, from $222 in 2015 to $256 in 2016.  Consider an individual eligible for a $150 subsidy in 2015.  If they purchased the Humana Platinum HMO in 2015, their net price would be $298.  If they purchased the same policy in 2016, yes, their subsidy might grow by $34 but their net price would still be $367, an increase of 23%.

All of this is the very predictable consequence of a design flaw in the ACA.  It heralds an unraveling of the Obamacare market. Who is willing to pay the extra cost of a PPO: generally people who value a long term relationship with their physician.  And those people are disproportionately less healthy than others.  Hence, the PPO pool tends to be populated by people who are expensive to treat.  Although insurers could, in theory, compensate for this by raising premiums to very high levels, in fact that does not work for long because, with premiums yet higher, only the least healthy of the least healthy persist, and the pressure on premium grows. Insurers, seeing the handwriting on the wall, thus kill off these plans before they technically implode.

It is the same problem with platinum plans.  The people who most want low cost sharing tend to be the people who most have high costs.  These plans are thus difficult to sustain where plans with lower cost sharing are available.  The complex ecology of health insurance does not permit them to survive.

When the Obama administration releases its data in a form that is more susceptible to in depth analysis, we’ll be able to see if Harris County is representative or an anomaly.  Although the trend may  be stronger or weaker in other areas, I predict it will not show there is much special about the Houston, Texas area in its vulnerability to a death spiral.

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Winter is coming?

For the past year or so, ACA proponents have gloated over the fact that markets have not yet collapsed in a death spiral and that enrollment in Exchange plans has grown to 9 million.  There are at least four recent developments, however, that suggest the ACA is in greater trouble than many realize.

Enrollments Way Lower Than Projected

The first piece of troubling news comes from CMS itself: Notwithstanding the full implementation of the individual mandate, CMS is projecting anywhere from 9.4 million to 11.4 million people enrolled in the Exchanges, an increase of 3-25% over its figure for 2015.  And, while ordinarily growth rates of this nature might please insurers, the projections on the basis of which Obamacare was enacted asserted that 21 million would be in the Exchanges by 2016.  Thus, while the Exchanges were running at 70% of original projections in 2015, they are now projected to run at just 45 – 52% of projections for 2016.  Moreover, between 0.9 million and 1.5 million of the enrollees for 2016 are projected to come  not from the uninsured but from those already holding off-Exchange individual market policies.

The new projection
The new projection
The premise on which the ACA was enacted
The premise on which the ACA was enacted

The reduced enrollment in the Exchanges has several ramifications. First, it likely means the pool in the Exchanges is less healthy on average than expected. Second it means the significant overhead expended in establishing the Exchanges and running them is spread over a lot fewer people. And third it means that Obamacare was essentially passed on greatly exaggerated assertions of its benefits.  Does the extraordinarily elaborate and expensive apparatus is establishes make sense when the a far lower than projected number of people gain health insurance of quality? One also must wonder how the dilution of the individual mandate through various “hardship exemptions” may have lowered the number of people enrolled on the Exchanges.

[[Added 10/20/2015]] For an excellent analysis of this issue, look also at Brian Blase’s recent article in Forbes. (http://www.forbes.com/sites/theapothecary/2015/10/19/examining-plummeting-obamacare-enrollment-part-i/)

Footnote 1: CMS is now “unable” to make projections for the SHOP Exchanges.  Are we now prepared to call them a bust?

Footnote 2: It is not clear whether the CMS enrollment projections took into account the very substantial gross and net premium that appear to be coming (see below).

More Coops Closing

The second piece of disturbing news is that at least four more coops insuring a significant number of people on the Exchanges are going out of business.  They are as follows:

Health Republic Insurance of Oregon (10,000 members; $50 million startup “loan”). By the way, Dawn Bonder, CEO of Health Republic, was quoted in The Oregonian just a month ago as follows: “We are strong and we are sticking to our plan, which has always been slow and steady growth. We’re very financially stable,” Bonder said. “We see a long,healthy life in front of us.”

Colorado HealthOP (83,000 members; $72 million in startup “loans”).  According to the Denver Post, this comes after the coop increased its enrollment seven-fold and captured 39% of the market in Colorado by cutting rates in 2015 (notwithstanding losses the year before).

Kentucky Health Cooperative (51,000 members; $146 million in federal loans, with a $65 million “emergency solvency loan” in 2014).  Again, this coop managed to capture 75% of the Kentucky Exchange market by offering insurance at lower prices.  Before shutting down, it had requested a 25% increase in premiums for 2016.  By the way, anyone remember those stories about how Kentucky was the success poster child for the ACA? It looks like its success may have been built primarily by selling insurance at cut-rate prices hoping that most of the losses would be bankrolled by the federal government.

Tennessee Community Health Alliance (27,000 members; $73 million in federal startup loans).  How had this coop captured market share?  Apparently by charging premiums so low that, as reported by The Tennessean, it had to request a 32% increase for 2016 and was granted/directed — get this — to offer premiums at a 45% higher rate.

Many of the coops blame their failure on the Cromnibus law enacted in December of 2015 that prohibited use of non-appropriated funds to pay for the federal Risk Corridors program that, on paper, was supposed to have the federal government backstop up to 80% of losses.  Given the magnitude of insurer losses thus far, the federal government is thus able to pay only 12.6% of the obligations created on paper by this program.  If one assumes, however, that the coops are correct in blaming Risk Corridors rather than mismanagement for their failure, this would confirm the suspicions of many that insurers priced their policies deliberately low in order to bring in business, relying on the federal taxpayer to cover their losses. I would also not be surprised to see some sort of legal action relating to coops who, notwithstanding Cromnibus and the handwriting on the wall persisted in booking Risk Corridor receivables at full value until very recently.

There will surely be lots of finger pointing over the failure of these coops: Democrats pointing to the “evil” Cromnibus bill as the source (although many Democrats voted for the legislation) and Republicans pointing to the inherent flaws in the ACA as the root of the problem. In the meantime, however, in many states, one of the sources of lower-priced insurance has been eliminated, meaning that many will be seeing substantial increases in gross premiums.

The fall of the PPO?

One of the promises of the ACA was that it would continue to offer choice to consumers and that they would be able to keep their doctor.  Not so in many states.  Plans that offer greater degrees of choice in selecting one’s provider appear to be in some trouble, closing in the shadow of an impending adverse selection death spiral. In Florida, for example, zero PPOs will now be available on the Exchanges in 2016.  In Texas, the state’s largest insurer, Blue Cross and Blue Shield, has announced that it lost so much money on individual PPO plans that it will no longer sell any in 2016. This development means 367,000 people will have to find other types of plans. In Illinois, Blue Cross is continuing PPOs for now, but only with narrower networks than had been available under a plan that had served 173,000 individuals.

I suspect this is just the beginning of problems for PPOs sold on the individual market in an era when insurers can not medically underwrite.  Between 2014 and 2015, PPO premiums went up at a far higher rate than other plan types.  We will shortly have the data to see whether this trend continued in 2016.


We don’t have all the information yet, but if ACA proponents like Charles Gaba are correct, we are looking at some substantial gross premium rate hikes in the United States, and extremely high rate hikes in some states.  What Mr. Gaba has done is to go state by state through various filings and do what no one else has tried: correlate premium rates with actual enrollments.  Although I do not always agree with Mr. Gaba, I must praise him for a very worthy and time consuming enterprise. The fact that some insurer is charging an astronomical premium for insurance doesn’t mean as much when few people are buying their product as it does when an insurer is getting a large share of the business.  Unfortunately, the federal government does not publish in any place I can discover insurer-by-insurer breakdowns of enrollment.

The research suggests gross premiums will go up 12.45% nationwide once enrollment weighting is taken into account.  Statewide figures range from a high of 41.4% in Minnesota, 39.0% in Alaska, and 30% in Hawaii to lows of 0.7% in Maine, 0.7% in Indiana and  3.5% in Connecticut.  Among the bigger states, the estimates are 4% for California, 15.8% for Texas, 9.5% in Florida, and 7% in New York. As I have noted on this blog and in testimony before a Congressional committee, net premium increases — which is what really matters to purchasers — can often be considerably greater than these figures, particularly for poorer individuals, but also can be lower.


More to come

We will, of course, see what plays out.  But for those who thought the brilliant engineering of Obamacare had forever slain the adverse selection dragon, beware. Dragon eggs can hatch.

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Is Minnesota the canary in the coal mine?

We will have a fuller picture in a few weeks when the federal government is supposed to release the premiums and plans available on heathcare.gov, which serves about 34 states, but if Minnesota is representative, there are signs that the ACA is entering a dangerous phase. That state has posted its rates for 2016 already. It’s not pretty. Gross premiums for policies sold on its Exchange will go up between 14% and 49%.  Net premiums will go up more than this or less than this depending on the income of the subscriber.

The table below shows the average rate increases for 2016 among the insurance carriers selling on MNSURE, Minnesota’s health insurance exchange. The data is simply copied from its website.


The spreadsheet shown below indicates gross and net premiums for a 40 year old individual residing in Minneapolis, earning $25,000 per year and selecting a silver plan.  The rate increases contained there make the simplifying assumption that each insurer applied its average rate increase to the listed plans.  We don’t have actual plan-by-plan data that would enable us to provide a better estimate.  Here, the net premiums assume that the individual is deemed able under to contribute about $136 per month to the premium.  As one can see the the net premiums go up between 2015 and 2016 by -7% for a few of the Medica plans to up to 36% for the more expensive Blue Cross plans.


If we reduce the income of the purchaser, the net premium increases can grow.  Here, we take our same 40 year old but cut his income down to $18,000.  The individual is (somehow) supposed to be able to contribute about $62 a month for a policy. Now the net premiums for the silver plans swing more dramatically, going from -15% for one of the Medica plans to 61% for one of the Blue Cross plans.


Is Minnesota representative?  Not entirely.  It is probably at the high end of premium increases in part because its premiums were unusually low in 2015.  But if other states experience rate hikes anything like Minnesota, we will see healthier individuals search out alternatives or start to be more creative about hardship exemptions in the event they decide that insurance under the ACA is just too expensive. Either way, there is beginning to be a significant risk of the exchange markets unraveling.






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Bad news for Obamacare: Insurers lost a lot of money in 2014

In testimony before Congress last June,  I think I may have shocked some Representatives by estimating that insurers selling policies on the individual exchanges as part of the Affordable Care Act would be sufficiently unprofitable that they would get only 37% of what they would have received under the Risk Corridors program had the federal government not required that the budget for that program be balanced.  It turns out, however, that my gloomy estimate was, in fact, wrong — but only because it was far too cheery.  In fact, according to data released yesterday, insurers will receive only 12.5% of what they thought at one time they would receive.  There is a $2.5 billion shortfall between the money taken in under that program from profitable insurers and the money now owed to those who lost money, at least as the government measures it.

The shortfall spells trouble for Obamacare in a number of ways.  And it is difficult to overestimate how troubling this development should be for supporters of that program.

Some Exchange insurers are likely in serious trouble

First, it likely means that some of the smaller insurers who, at least  before passage of section 227 of the Cromnibus bill last December,  had anticipated receiving full payment for the money the government owes under the Risk Corridors program, are going to find themselves with a serious cash flow problem. Some may even find  themselves with solvency problems given the improbability that the full amount of the Risk Corridor obligation will ever be paid.  Companies that had booked Risk Corridor payments as receivables valued at 100% of the face amount, may have to start writing off at least part of them off as uncollectable.  Thus, when CMS says that the government’s inability to pay 87.5% of what it owes may create “some isolated solvency and liquidity challenges,” that is likely an understatement. Fortunately, as the Wall Street Journal reports, some insurers apparently saw the handwriting on the wall and accounted for the Cromnibus limitation properly so as not to deceive shareholders or state regulators.

Bad news for Exchange premiums

Second, it augurs severe pressure on insurance pricing in the healthcare exchanges.  The reason that there is a $2.5 billion shortfall is that a lot of insurers lost a lot of money selling policies on the Exchanges during 2014.  Insurers, like other businesses, have this habit of trying to make up for past losses by charging more in the future.  So we will see later this month some of the effect when the Obama administration releases data on premiums for 2016, but the massive losses in 2014 shown by the Risk Corridors results is likely to add to pricing pressures.

The Obama plan to rescue insurers has failed

Third, it shows that broken promises have consequences.  Let’s go through some history here.  Remember the infamous promise, “if you like your healthcare plan, you can keep it.  Period.”?  That was, of course, not exactly true in light of what the statute actually said.  And, when Americans saw their policies cancelled as a result, the Obama administration decided it would delay and relax enforcement of the various provisions of the ACA that would have killed enough many non-Exchange insurance plans.

But this refusal to salvage the political rhetoric by sacrificing the language of the statute got many insurers angry. The insurershad priced their policies on the assumption that of course the Obama promise was the usual political moonshine and that those healthy insureds previously owning now non-compliant policies would migrate their way over to Exchange policies and stabilize that market.  In true Cat in the Hat Comes Back style, the Obama administration “solved” that problem, as I explained twice (here and  here) in December of 2013, by fiddling with the accounting rules in the Risk Corridors program by making it more difficult for insurers to be deemed to have made sufficient money to owe the government and making it easier for insurers to be deemed to have lost money and thus be owed money by the government.  (Although its pronouncements were a bit cryptic, as I noted last April, the CBO may have estimated that the cost of this gimmick was as much as $8 billion).  Now, however, with the Cromnibus bill prohibiting the Obama administration from dipping into unspecified accounts to pay for Risk Corridors,  which I guess is what they planned since no money was ever appropriated for the program, that last bit of  multi-billion tinkering has backfired.   Insurers will not be paid for Risk Corridors for a long time if ever and, thus, they have indeed suffered a significant loss of a chain of make-it-up-as-you-go-along policies designed to salvage the ACA.

Don’t trust government accounting

Fourth, the Risk Corridors deficit exposes as pure bunkum the statements of many in Washington in the post ACA era — and continuing even today — about the state of the insurance market and the Risk Corridors program. Recall that at one point not too long ago the CBO was asserting that the Risk Corridors would actually make the government $8 billion.  This was done, perhaps not coincidentally, after an effort by Senator Marco Rubio gained prominence to defund Risk Corridors as an insurance industry bailout.  Devoted readers may also recall that I found the CBO’s estimate “baffling,” a bit of cynicism whose sagacity may have improved with age.  And even today with the announcement,  officials at CMS repeated the technically correct and yet practically dubious notion that, yes, there were shortfalls today, but Risk Corridor payments made by insurers in 2015 and 2016 might be enough not just to overcome the 2014 deficit now valued at $2.5 billion but also to make whole insurers who lost money in 2015 and 2016.

And the plea to undo Cromnibus

It is no wonder that former CMS head administrator Marilynn Tavener, now speaking for the America’s Health Insurance Plans, is now saying it is “essential that Congress and CMS act to ensure the program works as designed and consumers are protected.” By “as designed, Ms. Tavenner means  before Cromnibus when Congress, in a spasm of fiscal responsibility, required that Risk Corridors, for which no money was ever appropriated, actually pay for itself just like the Risk Adjustment program.  Translation of Ms. Tavenner: find someone else’s money somewhere to bail out insurers who lost money in the Exchanges.

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Backstop argument shouldn’t rescue Obama administration in House lawsuit

A recap of where we are in House v. Burwell

The hottest issue in the law of Affordable Care Act at the moment is whether the Obama administration had constitutional authority to pay insurers billions of dollars for the “Cost Sharing Reduction” provisions when Congress did not appropriate any money for that program.  Those who believe the Obama administration has acted illegally got a boost  recently from United States District Court Judge Rosemary Collyer, who ruled that the House of Representatives had standing to sue Obama administration officials for these sorts of payments.

But it was not just that Judge Collyer ruled in favor of standing that creates the tempest; it was what she said in her opinion. As I noted in a recent blog entry, in resolving the standing issue, Judge Collyer appeared to reject the Obama administration’s main defense. Instead, she wrote:

An appropriation must be expressly stated; it cannot be inferred or implied. 31 U.S.C. § 1301(d). It is well understood that the “a direction to pay without a designation of the source of funds is not an appropriation.”

And that would seem to be precisely what we have here. It is very clear that there is no clear direction from Congress to pay insurers for the cost sharing reductions.  Indeed, as Judge Collyer notes:

On July 13, 2013, the Senate Appropriations Committee adopted S. 1284, a bill appropriating monies to HHS and other agencies. An accompanying report stated that “[t]he Committee recommendation does not include a mandatory appropriation, requested by the administration, for reduced cost sharing assistance . . . as provided for in sections 1402 and 1412 of the ACA.

To be sure, Committee reports are not the same thing as the law. Nonetheless, to the extent they are relevant, here they are highly unsupportive of the notion that Congress intended to spend money on this program.

Moreover, Judge Collyer rejected the argument that the Obama administration could spend money on cost sharing reductions because, unlike in other areas of the ACA, Congress had not explicitly forbad it. Wrote Judge Collyer,  “The absence of a restriction, however, is not an appropriation. ”

Looking at a fallback argument

And, so, what’s left?  And here is where we get to an argument that is just too perfect ” It was articulated recently by Professor Nicholas Bagley of the University of Michigan on his Incidental Economist blog and has been attributed as well by a big proponent of the ACA to Professor David Super of Georgetown University.  I’m going to quote it here, leaving Professor Bagley’s hyperlinks intact so that you can get a sense of at least some of the authorities on which he relies. (Obviously, his blog post (like mine) is not a brief or a law review article, and I am by no means contending that his links were insufficient).

Even without an appropriation, health plans still have a statutory entitlement to cost-sharing payments. What that means in non-legalese is that Congress has promised to pay them money—whether or not there’s an appropriation. And health plans can sue the government in the Court of Federal Claims to make good on that promise. (Congress has undeniably appropriated the money to pay court judgments.)

Now, before we go further, note that this may not exactly be a legal argument.  That is, Professor Bagley could well be right that the lawsuit is kind of pointless if the insurers get paid in the end, but  the House could still be right that the Obama administration acted unconstitutionally by paying insurers without compelling them to go through those extra hoops. But this ignores, of course, the expressive value of the lawsuit which is that the Obama administration is acting lawlessly in implementing the ACA. (It is consistent, though, with some people’s view that, whatever its merit and whatever the importance of the principles at stake, the lawsuit is, in today’s political environment, misguided because cutting off cost sharing reductions is going to anger a lot of people and Republican fingerprints are all over the lawsuit).

Whether Professor Bagley is making a legal or pragmatic argument,  (or both), however, I think it is just a little too perfect.  It assumes its own conclusion.  If it were true that a beneficiary of a federal program — here, poor little insurance companies — could recover in the Court of Federal Claims when Congress failed to appropriate any money for their welfare program, then there would be far less point, really, in Congress ever making appropriations. It would change the Constitution to say something like, “The Executive may draw money from the Treasury except where prohibited by Congress.”  The presumption would have changed from giving Congress the power of the purse,  which is what I thought the Constitution meant, to giving those powers to the President, which I thought was kind of more like a monarchy.

Moreover, there is a decent reason that  we separate passage of a bill from funding of its programs.  And it is well illustrated by the ACA.  Consider the cost sharing reductions.  They were enacted in March, 2010 when the ACA passed.  But they were not to take effect until January 1, 2014. It could well be that, between passage and effect, budgetary priorities shift.  Perhaps we need more money for relocating refugees than we did at the time the original legislation was enacted, or perhaps we became more concerned about an ever growing multi-trillion dollar national debt. But Congress thought, if we ever do have the money, this cost sharing reduction program is a pretty good idea.  And so, the solution is to say, as we have, and as Judge Collyer did, that passage of a bill, generally speaking, is different than appropriation of funds. Congress can enact laws and then not fund the “promises made therein” at least for some period of time.  I do not think Congress had to formally repeal cost sharing reductions in order to put the program on hold and then reenact the program when money became available.

Now, I can imagine Professor Bagley at this point rejoining, “but Congress did appropriate the money by creating a permanent appropriation for judgments rendered in the Court of Federal Claims. ” But if that were true, Congress would have to, each time it did not wish to appropriate funds for a program it has enacted, create an exception to the permanent appropriation for judgments rendered in the Court of Claims.  In addition to converting one provision of the US Code into a trash compactor for discarded legislative ideas, such a requirement would seem to violate the whole idea, at least of Judge Collyer, that  “the absence of a restriction … is not an appropriation. ”

Does Slattery v. U.S. mean that Bagley is actually right? (No)

I will confess that my own above arguments were more thoroughly persuasive to me until I looked at Slattery v. U.S., 635 F.3d 1298 (Fed. Cir. 2011), which involves the Tucker Act. There, the Federal Circuit abrogated a prior doctrine announced in Kyer v. U. S., 369 F.2d 714 (Ct. Cl. 1966),  under which, if there was an agency of the United States, such as army post exchanges (PX) that operated without use of appropriated funds but on the basis of other revenues, there was a jurisdictional bar against the Court of Federal Claims hearing the case and thus no ability of the plaintiff to recover absent a seldom-obtained explicit consent to suit from the otherwise sovereignly immune United States.

Slattery itself involved a claim by the shareholders of a bank against the FDIC which, apparently, did not receive federal funding but which is a federal instrumentality.  Supposedly, in the course of coaxing the bank to have another failing bank merged into it, the FDIC had created contractual assurances that the method of accounting and capitalization standards for the assuming bank would be, for lack of a better term, fairly mellow.  Later, in apparent violation of the contract, the FDIC imposed stricter standards and the bank ran into problems as a result. The court held that the fact that the FDIC did not receive an appropriation did not prevent the Court of Federal Claims from hearing the case.

We conclude that the source of a government agency’s funds, including funds to pay judgments incurred by agency actions, does not control whether there is jurisdiction of a claim within the subject matter assigned to the court by the Tucker Act. The jurisdictional criterion is not how the government entity is funded or its obligations met, but whether the government entity was acting on behalf of the government. … Thus we confirm that Tucker Act jurisdiction does not depend on and is not limited by whether the government entity receives or draws upon appropriated funds.

So, one might be tempted to run with this language and say that, indeed, the insurance companies can sue in the Federal Court of Claims for the money the government “should” have paid them  under the cost sharing reductions (except of course that the Obama administration has paid them.) The fact that no money was appropriated doesn’t matter.  But, I don’t think this is quite right.  For one thing, Slattery is about jurisdiction, not about the merits. All it is really saying is that the fact that the federal entity was not funded by Congressional appropriations does not, in and of itself, create an automatic bar to the court hearing the case.  It does not say that, if the federal agency was acting way outside its authority that the federal government must pay the claim out of the permanent appropriation.  Moreover, in the Slattery case itself, the basic idea was that the FDIC had not honored the deal under which it persuaded one bank to take on a problem bank, not that the FDIC had no authority whatsoever to assist with bank mergers.

Moreover, if you look at the language of Slattery very carefully, the issue is “whether the government entity was acting on behalf of the government.”  Here, I say, it sure looks like the Treasury was not acting lawfully in paying insurers for cost sharing reductions out of money that was supposed to go for tax refunds. And so, it may well be that the Treasury was not acting on behalf of the government but on behalf of the extra-legal objectives, however meritorious or well intentioned they may have been, of the President.  Thus, although as a lawyer for HHS I would certainly be citing Slattery a lot, it does not address the issue in the current case.

And one more thing

Could we also think for a bit about how strong the insurers’ claims in the Court of Federal Claims would really be?  My heart bleeds for insurance companies perhaps more than most, but I have trouble working up a great deal of sympathy here. Insurers surely  became aware at some point before the beginning of 2014 that Congress had not appropriated any money for the cost sharing reduction program.  They would certainly be aware of a problem if the court rules in this case that payments to them are illegal!  And, yet, knowing this, they would seek to sue for making contracts with limited cost sharing available to policyholders at discount prices?  Its not quite the same thing as suing to enforce a contract  where you knew the money to pay you had been embezzled, but it is not that far off either.



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Court creates big problems for stability of Obamacare

Judge Rosemary Collyer of the United States District Court for the District of Columbia ruled this afternoon that the House of Representatives could pursue a legal action — had “standing” to use legal parlance — against a representative of the Obama administration for illegally spending money to fund a key part of the Affordable Care Act: cost sharing reductions. The judge did not decide the merits of the claim brought by the House of Representatives, noting that the Obama administration hotly dispute the allegations made by the House.

The judge’s ruling today is of great significance to the future of the Affordable Care Act.   If the House of Representatives prevails on the merits of its claim — which is that Congress appropriated no money to pay insurance companies billions of dollars to provide about 6 million  Americans with policies with much richer benefits than they otherwise would have been entitled to —  the future of the ACA will be cast in doubt.  It will likewise label members of the Obama administration as having undermined the Constitutional structure  and, as I have discussed elsewhere, conceivably expose those spending  and receiving the money illegally to criminal penalties. Success by the House in this lawsuit will not just threaten policies in states that failed to establish their own Exchanges, but health insurance policies purchased on Exchanges in all 50 states. The kicker is that many individuals had believed that the “standing barrier” was pretty strong but that, if it could ever be pierced, the House had a very strong case on the merits.The language of Judge Collyer in her opinion fortifies the House’s position.

I have written about this issue several times. See here and here.  Let me provide a summary. From all appearances, Congress did not directly appropriate money for a critical part of Obamacare that keeps premiums low: the cost sharing subsidies created by section 1412 of the law and now codified at 42 U.S.C.  § 18071.  The idea of this provision is that poorer purchasers can purchase a policy for “Silver” prices that ordinarily would have 30% cost sharing, but receive a policy that provides anywhere from “Silver plus” (27%) to “Platinum-plus” (6%) levels of cost sharing.  This way, lower-middle-class people can get a policy that they might be able to afford without much of its purpose being undone by hefty deductibles and copays.

It appears clear that Congress at least strongly contemplated that provision of these extra benefits to the poor would come not from higher prices for policies paid by wealthier purchasers on the individual exchange.  Instead, the federal treasury would pay the insurers for the extra costs they incurred in offering these more generous variants of the policy. And it appears that the Obama administration has been making such payments to insurers, even if the amount of the payments — potentially in the billions —  has not been made clear.  The problem, as outlined at some length in Judge Collyer’s opinion, is that Congress never actually made a specific appropriation to fund the cost sharing reductions.

What Judge Collyer says quite clearly in her opinion in United States House of Representatives v. Burwell  is that mere contemplation to fund is not enough.

Appropriation legislation “provides legal authority for federal agencies to incur obligations and to make payments out of the Treasury for specified purposes.” Id. at 13. Appropriations legislation has “the limited and specific purpose of providing funds for authorized programs.” Andrus v. Sierra Club, 442 U.S. 347, 361 (1979) (quoting TVA v. Hill, 437 U.S. 153, 190 (1978)). An appropriation must be expressly stated; it cannot be inferred or implied. 31 U.S.C. § 1301(d). It is well understood that the “a direction to pay without a designation of the source of funds is not an appropriation.” U.S. Government Accounting Office, GAO-04-261SP, Principles of Federal Appropriations Law (Vol. I) 2-17 (3d ed. 2004) (GAO Principles). The inverse is also true: the designation of a source, without a specific direction to pay, is not an appropriation. Id. Both are required. See Nevada, 400 F.3d at 13-14. An appropriation act, “like any other statute, [must be] passed by both Houses of Congress and either signed by the President or enacted over a presidential veto.” GAO Principles at 2-45 (citing Friends of the Earth v. Armstrong, 485 F.2d 1, 9 (10th Cir. 1973); Envirocare of Utah Inc. v. United States, 44 Fed. Cl. 474, 482 (1999))

Judge Collyer also appears clear that Congress never appropriated any money for the Cost Sharing Reductions.

Finally on January 17, 2014, the President signed the Consolidated Appropriations Act for 2014, Pub. L. 113-76, 128 Stat. 5 (2014). That law similarly did not appropriate monies for the Section 1402 Cost-Sharing Offset program.8 Indeed, the Secretaries have conceded that “[t]here was no 2014 statute appropriating new money” for the Section 1402 Cost-Sharing Offset program. 5/28/15 Tr. at 27.


And all of this spells big time trouble.  Judge Collyer emphatically rejected the argument that the executive branch could increase its power by spending money Congress had not actually appropriated by using “standing doctrine” to prevent anyone from challenging the increased spending.

Once the nature of the Non-Appropriation Theory is appreciated, it becomes clear that the House has suffered a concrete, particularized injury that gives it standing to sue. The Congress (of which the House and Senate are equal) is the only body empowered by the Constitution to adopt laws directing monies to be spent from the U.S. Treasury. See Dep’t of the Navy v. FLRA, 665 F.3d 1339, 1348 (D.C. Cir. 2012) (“Congress’s control over federal expenditures is ‘absolute.’”) (quoting Rochester Pure Waters Dist. v. EPA, 960 F.2d 180, 185 (D.C. Cir. 1992)); Nevada v. Dep’t of Energy, 400 F.3d at 13 (“[T]he Appropriations Clause of the U.S. Constitution ‘vests Congress with exclusive power over the federal purse’”) (quoting Rochester, 960 F.2d at 185); Hart’s Adm’r v. United States, 16 Ct. Cl. 459, 484 (1880) (“[A]bsolute control of the moneys of the United States is in Congress, and Congress is responsible for its exercise of this great power only to the people.”), aff’d sub nom. Hart v. United States, 118 U.S. 62 (1886). Yet this constitutional structure would collapse, and the role of the House would be meaningless, if the Executive could circumvent the appropriations process and spend funds however it pleases. If such actions are taken, in contravention of the specific proscription in Article I, § 9, cl. 7, the House as an institution has standing to sue.

(emphasis added)

So, we shall see. There is more to the Judge’s ruling and more to the lawsuit.  Today’s ruling, however, revives the specter of the judicial branch reducing the likelihood that the Affordable Care Act can achieve the objectives of its supporters.


Note:  Kudos to Sarah Kliff and Andrew Prokop, who, though I do not think they share my views on the ACA generally, have nonetheless written (really swiftly!) a good article on today’s ruling.

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Obama administration increases insurer subsidies

The Obama administration announced earlier today that it would increase the  rate of subsidy provided insurers under the transitional reinsurance program established by the Affordable Care Act.  This program, in effect for the policies sold in 2014, 2015, and 2016 on one of the individual insurance exchanges fostered by the ACA,  provides free specific stop loss reinsurance to insurers, something insurers would otherwise have to pay a lot of money to obtain.  The Center for Medicare and Medicaid Services  (CMS) announced today that instead of taxpayers giving insurers  80% of the losses on any individual for their claims between $45,000 and $250,000, it would now pay a full 100% of these losses.

The higher rate of reinsurance should not be interpreted as a sign that claims were lower than insurers expected — something that would run contrary to many of the recent insurer rate hike filings or the losses reported by many insurers.  It is not a sign of the success of Obamacare; rather it is an artifact of its problems.  If, for example, there were 14% fewer people enrolled in Obamacare than at the time the reinsurance rates were initially determined (7 million vs. 6 million), reinsurance payments could be, as here, yet more generous to insurers even if claims were 10% higher than originally projected.

There are several implications of today’s announcement.  First, it means that, on a percentage basis, the ACA is subsidizing exchange insurers for 2014 even more than regulations enacted under it had heretofore prescribed.  Since this same money paid to insurers could instead have been used to provide greater subsidies to poorer and middle class individuals trying to purchase health insurance, the candy distributed today to insurers is a bit troubling. Second, because CMS says it will actually have money left over from 2014 even after the increase in reinsurance rates,  and because enrollment in Obamacare remains considerably lower than was estimated at the time of its enactment, there is an increased likelihood of reinsurance payments to insurers being higher than originally authorized in 2015.

We can get some sense of the magnitude of the changes announced today.  To do so, I use data embedded in the Actuarial Value Calculator, a document produced by CMS for the purposes of figuring out whether various insurance plans met the standards for bronze, silver, gold and platinum policies.  For an average silver policy, for example, the reinsurance that would have been provided prior to today would have been expected to save insurers about 11% in expenses, and, quite likely, premiums.  With the new reinsurance parameters, the transitional reinsurance program will save insurers selling the same silver policies about 14%.

We can do the same exercise for platinum, gold and bronze policies.  The results are not much different.  The table below shows the results.

Metal Level Original subsidy New subsidy
Bronze 11% 13%
Silver 11% 14%
Gold 11% 13%
Platinum 10% 12%

Two foootnotes

1. This is actually the second time CMS has made the transitional reinsurance program for 2014 more generous.  Originally, the reinsurance would “attach” at $60,000.  If an individual’s claims were below that amount, no reinsurance would kick in. Leter, CMS changed the attachment point to $45,000.

2.  How could I do this computation so swiftly?  I’ve been preparing for testimony before the House Ways and Means Committee on, among other things, the effect of the transitional reinsurance program on insurer rate changes and I’ve been working on a talk on a similar topic for the R in Insurance Conference later this month.  So, all I had to do was plug the new parameters into my model, and out came the results. Be prepared.

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Exploring the likely implosion of the Affordable Care Act