September 10, 2014

How Obamacare is subsidizing the insurance industry

Hit & Run - Obamacare continues to struggle in the court of public opinion, but it’s good news for some health insurance industry stockholders, specifically the folks who have invested in WellPoint, which owns multiple insurers, including Blue Cross. Via The Washington Examiner’s Tim Carney, here’s a research note from Seeking Alpha titled: "WellPoint Inc.: Loving Obamacare?"

WellPoint, the note says, has become a "big beneficiary of the Affordable Care Act." It’s doing well overall, and part of the reason is the "company’s Obamacare-derived good fortune." The company was doing fine before the law’s coverage expansion went into effect, but now it’s performing even better, the note says—and the "’special sauce’ that has made the stock soar further could in fact be Obamacare."

As Carney notes, this is not exactly the oppositional law that President Obama and other Democrats promised when the law was being debated. Rep. Nancy Pelosi (D-Ca.) described the insurance industry as "immoral" and "villains." In fact, some big insurers have turned out to be the law’s beneficiaries.

It’s not just that Obamacare includes a mandate to buy their product, and subsidies to help people do so. It’s that the law prevents insurers from taking outsize losses should claims costs within Obamacare plans come in higher than expected. The law includes a "risk corridors" program that pays 50 percent of excess expenses for costs in any plan that exceeds 103 percent of a predetermined target, and 80 percent of the excess for costs above 108 percent, between 2014 and 2017.

In theory, it could all balance out, if enough insurers undershoot their targets, which would require them to pay into the system. In practice, this is unlikely; information gathered from health insurers indicates that the insurance industry will receive about $1 billion in payments this year.

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