Sunday, August 21, 2016

"The Blues Have Deep Reserves and They'll Be Here Long After We're Gone"--Here's How It Really Works

The denials about just how bad the Obmacare exchange situation is keep piling up.

Maybe the most uniformed and naive was this comment in the Dallas Morning News:
"The Blues have deep, deep reserves, and they'll be here long after we're gone,"[Sabrina] Collette [a research professor at Georgetown University], said. "They're probably calculating they can ride out this rocky time and emerge with a dominant position."
In the same article it was reported that local Dallas HMO Scott and While Health Plan is withdrawing from the exchanges. The article also pointed out that Texas Blue Cross has lost more than $1 billion on the exchanges over the last two years and is now seeking a rate increase of 60% for 2017.

These Blue Cross plans, particularly the community-based not-for-profits like Texas, do not have a bottomless bank account.
It's easy to look at the surplus accounts (reserves for outstanding claims are not the same as free capital, or surplus) of these Blue Cross plans and see unlimited bags of money. In fact, the not-for-profit parent company of Texas Blue Cross, Health Care Services Corporation (HCSC), has about $9 billion in surplus.

In May, S&P downgraded parent company HCSC's A+ rating to a still strong AA-. But S&P was clear that their continued confidence in the company was predicated on a return to profitability overall and in the Obamacare business specifically.

Fitch Rating Services was even more direct in their report from last October:
The deterioration in HCSC's risk based capitalization [the free surplus capital with which to offset losses] is material and places downward pressure on ratings...[Risk based capital] has declined significantly from 614% of the CAL [company action level at which point the enterprise is in danger of not having sufficient cushion reserves] at year-end 2013 [just before Obamacare], and Fitch estimates could fall to 400% by year-end 2015 if losses continue at the same rate as the first half of 2015.
Sorry for all of the brackets but this gets complicated. The most confusing part of all of this is that people look at $9 billion in surplus and think we can run the tank down to 1/2 or 1/4 and there is no problem. In October, what Fitch was saying was that, when you consider the point at which this company would be in real trouble, the parent company was in the process of losing about a third of its state regulated cushion (614% to 400% of the risk-based capital threshold) in just the first two years of Obamacare!

Now, read that last line in bold a second time. Ya, it's that bad.

Let's be clear, HCSC is still a well-capitalized and well-run company that operates Blue plans in a number of states. That they are giving 60% rate increases to their losing Texas Obamacare business speaks to their competence in this regard. But they have to see these Obamacare losses end and this business has to stabilize soon for the good of all of their other customers and their solvency. They don't have nine years to lose $9 billion.

This is why the clock really is ticking on Obamacare's exchanges.

With their backs against the wall, Blues plans might exit. They might also just keep raising the rates by large amounts knowing that the subsidized Obamacare subscribers will have these giant excess premiums paid by taxpayers no matter how big they are, while at the same time driving the millions of people that don't get subsidies out of the market with exploding rates. A really bad outcome either way.

Things will not magically improve. To fix this we have to see a big wave of healthy people sign up in the coming 2017 open enrollment.

Today 40% of the eligible exchange population is enrolled and we need closer to 75% to get a healthy risk pool, the health plans have requested 2017 exchange rates that are, according to Charles Gaba who closely tracks Obamacare, a national average of 24% more, the deductibles and co-pays will be bigger in 2017, and the networks will be narrower.

After all of this why should we expect that people will find the Obamacare plans more attractive during the next open enrollment and the risk pool will be better in 2017?

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