(Bloomberg) -- As seems to be customary for a Friday, we have a lot of news out on the Patient Protection and Affordable Care Act. The Barack Obama administration is firing CGI Group Inc., the company with one of the largest contracts for work on the troubled health care exchanges. This was probably inevitable, but coming at this point, it suggests one of two things: that the exchanges are now stable enough that the administration can afford to claim a scalp, or that CGI’s work is so bad that it's better off being fired even if the exchanges are none too stable. The first option seems more likely to me, but the second is certainly not out of the question.
More interesting is what’s going on with the insurers. They are simultaneously asking the administration for more money and trying to stave off Republican efforts to curtail the backdoor bailouts they’re already getting. This has an understandable business logic, and even a hint of fairness: The administration changed the rules on them midstream, in a way that seems likely to impose heavy losses. It’s understandable that they would like the administration to make them whole. I take this post by insurance industry consultant Bob Laszewski to reflect the insurer perspective on what should happen -- and what they think will:
"The reinsurance program has done and will continue to do what it was intended to do; help attract and keep more carriers in Obamacare than might have otherwise come. No matter who did health insurance reform, Democrats or Republicans, there was always going to be a transitionary period when those currently sick and unable to get coverage before would come flooding through the doors.
"Does this mean that health plans would be happy to see their plans underpriced in the first year, as well as the second and third year? No, they will not have any incentive to see their products dramatically underpriced the first three years only to see their prices zoom in the fourth year and create havoc.
"But, my sense is that health plans, because they are so insulated from big losses, will generally stand pat with their 2014 rate structures for 2015no matter how bad the early claims experience looks. I expect that the health insurance industry will be content to give the Obama administration one more chance to reboot Obamacare in the fall of 2014, when the 2015 open enrollment takes place."
This is the plan that Republicans hope to cleverly foil by framing the risk-adjustment provisions as aninsurer bailout and repealing them. As designed, the risk-adjustment mechanism was supposed to be revenue-neutral, and that is how the Congressional Budget Office scored it in their last estimate. But unless the demographics of the exchanges improve pretty quickly, the three temporary risk-adjustment programs are probably set to transfer a large hunk of cash to the insurance companies. That’s what the administration, and the insurers, want to happen; it’s how they are going to keep the insurers on board for 2015. Phil Klein at the Washington Examiner points out that Humana Inc.’s latest filing with the Securities and Exchange Commission warns of a “more adverse than previously expected” mix of customers enrolling through the exchange -- but it doesn’t change its earnings forecast for 2014. So either it thinks its losses will be trivial relative to overall earnings or Humana thinks the chances of a bailout from the administration are basically 100 percent.
But while the business logic is obvious, the political logic is considerably more dubious. I was initially skeptical that a repeal of the risk corridors had any chance of getting through a Democratic-controlled Senate, but I’ve heard a persuasive argument that this is just so politically toxic that Senate Democrats, and even the White House, may well go along. The optics of funneling money to the insurers through these programs is absolutely terrible. And now they are asking the administration for more money -- the insurers want the extra expenses that the exchange debacle has imposed excluded from calculating their “medical loss ratio” requirements, which mandate that at least 80 percent of their expenses go toward treatment, not administrative overhead. I think the requirements are pretty silly, as a policy, but they are extremely popular. Asking the administration for a break on this is almost begging members of both parties to beat the snot out of them. White House attempts to explain that it isn't a bailout will be complicated by the fact that it obviously kind of is.
Don’t get me wrong: I think the insurers are in a tough place. Unless the administration bails them out — or enrollment starts going even better than it did in December — they look set to lose quite a bit of money next year. But unless they really do have the administration in their pocket, this is probably the wrong time to be asking for yet another special administrative fix to funnel more cash to insurers.
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