Will Insurers Be the Next Obamacare Drop Outs?
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Will Insurers Be the Next Obamacare Drop Outs?

The other death spiral

The ongoing malfunction of HealthCare.gov has led some to wonder whether Obamacare’s exchanges are headed for a “death spiral”—one in which only highly motivated sick people enroll, resulting in higher premiums, which further drive out healthy individuals. But there’s another “death spiral” to be worried about—one in which insurers drop out of the insurance marketplaces altogether.

Insurers may still be able to withdraw from the federally run exchange through this Thursday. The contract between qualified health plan issuers (QHPIs) and the Centers for Medicare and Medicaid Services (CMS) includes this provision:

Termination with Notice by QHPI. At any time prior to midnight on October 31, 2013, QHPI may terminate this Agreement upon sixty (60) Days’ written notice to CMS if CMS materially breaches any term of this Agreement, unless CMS commences curing such breach(es) within such 60-Day period to the reasonable satisfaction of QHPI in the manner hereafter described in this subsection, and thereafter diligently prosecutes such cure to completion.

Other language in the contract could give insurers grounds to declare a “material breach.” Part II of the contract states that “CMS will undertake all reasonable efforts to implement systems and processes that will support QHPI functions.” Getting flawed and incomplete data reports from the CMS database—such that insurance companies are having to hire temporary workers to repair flawed reports by hand—may well qualify as a “material breach.”

The contract does state that, if insurer(s) attempt to terminate their contracts due to a material breach, CMS has “fifteen days from the date of the notice in which to propose a plan and a time frame to cure the material breaches, which…shall be accepted by QHPI unless the same is substantially unreasonable on its face.”

Granted, CMS claims it can get the website fully functioning by November 30. But with independent experts claiming the web infrastructure could require months or years to repair and rebuild—if it even can be fixed—why should CMS’ assertions now be taken with any more credibility than the Administration’s assertions that it was ready to launch the exchanges on October 1? After all, one day after the Administration claimed the exchange “data hub” was working well, the “hub” stopped functioning at all—the latest embarrassment in Obamacare’s comedy of IT errors.

Lurking behind all this is another issue raised last week—the impact of sequestration on Obamacare, and on insurance companies in particular. The Congressional Research Service believes that insurance companies will personally end up footing the bill for the sequester’s cuts to Obamacare cost-sharing subsidies. Those cuts will total $286 million in the first nine months of 2014 alone. Multiplying Congressional Budget Office projections of spending on cost-sharing subsidies by the required sequester reduction percentages yields a total sequester cut of nearly $6.8 billion through 2021.

Despite promising to issue guidance prior to the start of open enrollment, CMS has yet to reveal how the sequester reductions will be applied—and whether individuals, or insurance companies, will be asked to foot the bill. Doubtless it will decline to do so before the October 31 deadline for carriers to terminate participation in the federal exchange. And every passing day makes it more and more likely that insurance companies, and not consumers, will end up footing the bill for the sequestration cuts. After all, will the Administration really force individuals who have endured the HealthCare.gov gauntlet to pay more in cost-sharing than advertised, because CMS failed to publicize the impact of the sequester’s cuts?

Earlier this year, many insurers declined to participate in the exchanges—one reason why, in a majority of U.S. counties, consumers face limited choices of plans. But some insurance companies decided to participate in the new marketplaces, either because they saw a business opportunity or feared the consequences if they did not.

But the HealthCare.gov rollout debacle should have those insurers—particularly those publicly accountable to shareholders—thinking again, this time with a focus on the consequences of continuing to participate in Obamacare. If (more likely when) the sequester’s spending reductions are placed on their head, insurers will have to overcome $6.8 billion in guaranteed losses over the next eight years—this while managing a balky website giving them logistical headaches and a enrollee risk profile that could prove catastrophically unsustainable.

The systemic failure augured by HealthCare.com’s performance to date, coupled with the billions of dollars at risk from sequester, present health insurance actuaries with a dramatically different data set from those considered a year ago. Insurers still have a few days to crunch these new numbers and determine if prudence dictates they should back out of the federal exchange and escape from Obamacare’s web.

Chris Jacobs is a senior policy analyst in The Heritage Foundation’s Center for Health Policy Studies.

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