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Insurers Left to Weigh Obamacare Risks

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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In a few weeks, the U.S. Supreme Court will hear arguments in King v. Burwell, and a few months after that it will decide whether the Affordable Care Act authorizes the Barack Obama administration to offer subsidies for health-insurance policies sold via federally operated exchanges. Obviously, if the court rules against the government, this will have far-reaching implications for the insurance markets in the states that have those exchanges. Many people who are currently buying policies will probably decide to drop them if they have to pay full price -- and the people who decide to keep buying that insurance are more likely to be those whose insurance costs exceed the monthly premiums, which is to say older and sicker people.

The problem for insurers is that they have already set their rates for 2015 -- and by the time the Supreme Court issues its ruling, many will also have submitted rates for 2016. If their insurance mix suddenly changes for the worse, they stand to lose a lot of money. So the American Academy of Actuaries has sent a letter to the administration, asking that insurance companies be allowed to resubmit more appropriate rates in the event of an adverse ruling.

Obviously actuaries, who tend to work for insurers, are not exactly neutral parties on this question. Nonetheless, they're right: Insurers should be allowed to submit new rates if the government loses in King. Unless they are, one of two things will happen: The insurers will submit higher rates for 2016 in order to price in the legal risk, or there's a good chance they will lose a bunch of money.  Neither of those is a good outcome for Obamacare.

If insurers charge higher prices to compensate for their legal risk, there's a good chance that if the case goes for the government, those insurers will reap windfall profits. Of course, if the administration allows repricing, premiums may be even higher. But those premiums will reflect real costs, not potential risks. 

But if the case goes against the government, insurers could experience heavy losses, and that's hardly a great scenario, either. Insurers who take big losses may leave the exchanges, or they could charge even higher premiums in 2017 to make up for their losses. That could be a real setback as the exchanges try to build up to a stable customer base. It's not worth the cost simply to delay rate increases by a year. And that's all they can do; no matter what the response to this letter, in 2017, rates will reflect the expected market for providing insurance in the states that now have federally run exchanges.

I suspect, however, that the government will not allow the insurers to submit new prices -- 2016 is, of course, an election year. And while an increase in premiums to cover potential legal costs would be an unpleasant political hit, a huge increase in premiums to cover the known risks of an adverse ruling could be disastrous. So it seems most likely that the administration would deny these requests, then rely on a combination of regulatory strong-arm maneuvers and the promise of risk-sharing payments to try to keep premiums down for 2016, hoping that by 2017, the affected states or Congress will have taken steps to fix the problems with the law. It's not optimal from a policy perspective. But politically, it might well be.

  1. Why only a good chance? Because of the risk-sharing programs contained in Obamacare, which mitigate insurer losses. The administration has been generous with the rules for these subsidies, but it is now locked in a fight with Congress over how much it can pay out. It's not clear to me how this is going to shake out, so I can't say what the likely losses are.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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