Health Insurers Shift More Costs To Taxpayers In Obamacare ExchangesCommentary by John R. Graham
May 04, 2016
America’s health insurers are undergoing a crisis of consensus with respect to their engagement with Obamacare. Between 2010 (when the Affordable Care Act was signed) and 2014 (the first year of taxpayer-subsidized coverage in the health insurance exchanges), it was widely understood that health insurers had scored a big win. After all, which other industry could get the federal government to pass a law mandating individuals purchase its product or service as a condition of residency in the United States?
This view was reflected in the stock market’s valuation of health insurers, which outperformed the S&P 500 Index. Since then, of course, we have learned that insurers have been losing money on Obamacare’s exchanges. Further, they have lost the sympathetic ear of the Congressional Republican majority, which has prevented insurers extracting as much taxpayer funding as they had expected from the Treasury.
So, insurers are divided about how to respond to this challenge. UnitedHealth Group UNH +0.21% (NYSE: UNH), for example, will bail out of all but a handful of exchanges next year. Anthem ANTM -1.20% (NYSE: ANTM), on the other hand, had pledged to stay committed to Obamacare’s exchanges, although it insists the Administration has to make some changes. Only time will tell which carrier is making the right decision. However, it is worth noting that investors appear to have more confidence in UnitedHealth Group, although both insurers have done well versus the broad market.
Back in March 2011, after the market had digested both the Affordable Care Act and the insurer’s 2010 annual earnings, UnitedHealth Group traded at a trailing price/earnings ratio of 10, Anthem at nine, and the S&P 500 Index at 16. Today, UnitedHealth Group’s P/E has slightly more than doubled to 21, Anthem’s has increased by just two thirds to 16, while the S&P 500’s has increased by half to 24.
We should not expect insurers which continue to participate in exchanges to just keep losing money. In fact, the evidence indicates some insurers have quickly learned how to shift more costs onto taxpayers, despite failing to win an explicit political commitment to do so.
In the latest budget update, published in March, the Congressional Budget Office estimated 10 million people would be enrolled in taxpayer-subsidized Obamacare health plans with a total subsidy (via tax credits) of $32 billion this year. That would amount to an average subsidy per enrollee of $267 per month.
In April, analysts at the government agency running Obamacare reported the average Obamacare subsidy will be $280 – $13 higher than CBO estimated. That may not be a big deal, but what is interesting is how much more of Obamacare’s costs have been shifted onto taxpayers in the program’s third year.
According to the same government agency, the average Obamacare exchange premium increased from $346 in 2014 to $386 this year. That comprises 12% growth over two years. The average tax credit subsidizing coverage increased from $264 to $280, or just 6%. Therefore, the average net premium increased from $82 to $106, or 29%.
However, when we look at each year individually, it is clear insurers have learned how to shift more costs to taxpayers. The change in gross premium from 2014 to 2015 was $10 per month, or 3%. The tax credit actually declined by $10, or 4%. So, the net premium increased by $20, or 24%.
People were unhappy. So, this year, the average gross premium increased by $30, or 8% from 2015. However, the average tax credit increased by $26, or 4%. The net premium, therefore increased only $4, or 4%.
Despite gross premiums growing three times faster in 2016 than 2015, Obamacare beneficiaries will actually see a significantly less painful increase in the net premium they have to pay. Taxpayers are shouldering a higher share of Obamacare’s costs.
Accident? Probably not. Obamacare’s tax credits are based on the lowest-cost Silver plan in a region. The same subsidy will result in a very different net premium if a person chooses Bronze, Silver, Gold or Platinum. The evidence suggests insurers have learned quickly how to design their “metal” plans to drive enrollees towards plans with the highest share of premium borne by taxpayers.
I expect this will continue, and the Congressional Budget Office’s cost estimates continue to be too low.