Health Insurers Banking on Government Funding

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Yesterday, I noted Bruce Japsen's report that Humana Inc.'s chief executive officer was bullish on its health-care exchange policies:

"With a little less than two months left in the open enrollment period, Humana executives said they expect even more younger people to sign up, which 'mitigates adverse' risk. The demographic makeup of those who have signed up so far has made Humana executives confident their exchange plans have been priced appropriately."

But Scott Gottlieb points out that this is not what Bruce Broussard is telling the government:

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.

The company blamed the Obama Administration's decision late last year to extend grandfathering of individual market plans for the overall deterioration in the risk pool. That means that Humana (like other insurers) was counting on people from the individual market being forced to transition into ObamaCare plans. It's widely perceived that the Obama Administration counted on that migration as well. But Humana's statement was a very clear expression of this expectation.

This doesn't sound like a company that is confident it has priced its exchange policies correctly; it sounds like a company that is confident it has priced its exchange policies incorrectly but is going to have most of its losses made up by the U.S. government. And if Humana -- one of the country's largest and most experienced health insurers -- has priced its policies incorrectly, what are the odds that most of the other insurers have done better?

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To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net