health insurance bailout
Employee Benefits

Bail Out or Bailout?

Den Bishop
Den Bishop
Senior Advisor

“Bail out” means to jump from an airplane. Lately, we’ve been hearing a lot about it…especially when it comes to health insurance. Does it really mean that Congress intends to throw insurance companies out of an airplane? They might want to, but the current use of the term I’m focusing on is health insurance “bailout,” and it has nothing to do with air travel.

The Affordable Care Act (ACA or Obamacare) created two subsidies for low income people purchasing individual health insurance through the Health Insurance Marketplace (Exchange). Let’s draw up an example to get a better idea of who these subsidies affect:

  • A family of four with an income of $25,000/year — let’s call them the Smith’s (original, I know)
  • A family of four with an income of $62,500/year — let’s call them the Jones’
  • A family of four with an income of $100,000/year — let’s call them the Rockefeller’s

The Rockefeller’s don’t get any subsidy, but both the Smith’s and the Jones’ get a subsidy to lower the cost of health insurance. This subsidy is safe…it’s NOT the bailout being discussed.

The Smith’s, however, get a second subsidy known as a Cost-Sharing Reduction (CSR), as long as they don’t move up to the Jones’ income level. This CSR further reduces deductibles, copays, coinsurance, and related out-of-pocket expenditures in the plan design. The payments for the “enhanced” plan designs are made directly to the insurance companies. The CSR IS the bailout being discussed. It’s estimated to be worth $7 billion in 2017 and grow to $14 billion per year by 2022.

Let’s say the government decided that reliable transportation is a right. Therefore, the government will subsidize all Americans under a certain income level to help them buy a car. The Jones’ can get a subsidized Ford Focus. However, the Smith’s have another subsidy allowing them to get a Cadillac Escalade for the cost of the Ford Focus. The government promises to pay the car dealer for the difference in value of the two cars in addition to the money they gave to the individual to buy the car. This is exactly what has happened in health insurance.

Congress sued the President over this issue because they never approved these payments. So far, courts have ruled in favor of Congress. Therefore, these payments do not have to be made. However, the courts have ruled that Congress can choose to make these payments if they so desire. It has become a monthly game of “mother may I” between insurance companies and Congress. To date, Congress has continued to authorize the monthly payments but has made no on-going commitment or specific appropriation.

The insurance companies rightly argue they cannot afford to offer an enhanced benefit at the price of a lower value plan and that they must either dramatically raise rates or exit the marketplace altogether without some assurance of these payments. Republicans are somewhat stuck. They can move as the courts have ruled and stop making the payments. This would severely damage, if not cripple, the marketplace plans and options for 2018 as many insurers would drop out. Democrats would try to blame Republicans for the collapse. Republicans could continue to make the payments, but they would receive condemnation from deficit hawks within their own party for bailing out the insurance companies, propping up Obamacare, and increasing the federal deficit.

It all makes you want to jump out of a plane, doesn’t it?! So maybe we should be using the spelling “bail out!”

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