Define "overpaid" - or "underpaid" for that matter

This is an about an old proposal to let consumers buy health insurance directly from insurers and let the insurers estimate the appropriate subsidies. Whether something like this is still on the table, I don’t know but I suspect some variant of it is probably in the mix somewhere, ready to be re-considered if January 1 arrives with millions of formerly insured still left uninsured.

Here’s how the Washington Post described this proposal when it was first floated:

On their own, insurers can help consumers through almost the entire enrollment process, but they need to rely on the federal online system for people to enter their incomes and find out whether the government will pay for part of their health plan. Since the enrollment period began Oct. 1, insurers have not had access to that feature — and, as a result, some have a lineup of potential customers unable to choose a plan and complete their purchase.

Part of the discussions lately between insurers and administration officials has been about what to do if that function is not fixed soon. One idea circulated within the insurance industry would be for HHS to approve a method to estimate subsidies and give preliminary tax credits based on those estimates — with the accurate amount determined later, once the system works better.

According to several people familiar with these conversations, insurance industry leaders have said that they would insist on a guarantee that they would be compensated for any underpayments — and that they have asked to keep any overpayments. Said one health-care consultant who is knowledgeable about insurance exchanges and who has been in touch with administration officials: “The concern is: Who bears the risk?”

Here’s how that plan from the Washington Post story was interpreted by Peter Suderman at Reason:

So the insurers have suggested a temporary measure: Let the insurers estimate the subsidies on their own. Any estimates that are too low would be reimbursable, and any estimates that are too high, the insurers would get to keep. In other words, the federal government, backed by taxpayers, would be on the hook for their bad estimates.

Can this possibly be legal? Can the administration seriously be considering this idea, which is potentially costly and politically disastrous? Imagine how Democrats will feel about turning over the central operations of the health law to insurers. Imagine how Republicans will react to a plan that could cost more, and will serve as an implicit admission that the exchanges simply won’t work without a major overhaul.

This doesn’t make sense to me, not because it seems like an insane idea but because both the Washington Post story and the Suderman take on it imply that somehow the insurance companies are going to end up being overpaid for the health insurance policies they provide. There’s no way that can happen.

Let’s say I want to buy a particular health insurance policy from Acme Insurance. Whether I buy that policy directly from Acme or buy it through the HealthCare.gov website, the premium Acme charges for the policy will cost the same; let’s say $500 per month. Now let’s say the HealthCare.gov website remains difficult and/or untrustworthy so the Obama Administration decides insurance companies can calculate the probable subsidy for someone buying a policy directly from them.

I promptly give up on trying to buy a policy through HealthCare.gov and buy one directly from Acme. I tell them my income information, they run it through their subsidy calculator, and they decide I should get a $250 per month premium subsidy. They bill me for $250 for my first month’s premium; I pay them. They bill the Federal government for the other $250 for that first month’s premium; the Feds pay them. Acme has now received $500 for my first month’s premium so I’m all paid up. The same thing happens for the second month of my health insurance contract, the third month, the fourth month. Then, finally, HealthCare.gov is working correctly. The insurers and the Feds begin the process of running people like me through the website to be sure everything has been calculated correctly.

First scenario: When the Feds check on my subsidy, they discover it has been calculated incorrectly. Rather than being subsidized to the tune of $250 each month, I should have been subsidized $300 each month. I’ve paid $200 more for my insurance than I should have and the Feds have paid $200 less for my insurance than they should have. However, Acme has not been either overpaid or underpaid; they’ve received exactly the $2000 they were due for my four months of insurance coverage. The needed adjustment is between me and the Federal government: the Feds owe me - not Acme - $200.

Second scenario: The incorrect calculation was in the other direction; rather then being subsidized to the tune of $250 each month, I should have been subsidized only $200 each month. I’ve paid $200 less for my insurance than I should have and the Feds have paid $200 more for my insurance than they should have. Once again, however, Acme has not been either overpaid or underpaid; they have still received exactly the $2000 they were due for my four months of insurance coverage. And, once again, the needed adjustment is between me and the Federal government: under this scenario I owe the Feds - not Acme - $200.

What about going forward once the error in the subsidy calculation is discovered, for the fifth, sixth, etc., months of my policy? What should happen under the first scenario is that Acme should start billing me for $200 each month and billing the Federal government for $300 each month; in other words, my monthly bill should go down by $50 each month. Under the second scenario, Acme should start billing me $300 and the Federal government $200 each month; in other words, my monthly bill should go up by $50 each month.

Neither the first or the second scenario results in Acme Insurance being overpaid or underpaid; Acme always gets the $500 monthly premium amount, no more, no less. There are no “underpayments” for it to be “compensated for” and there are no “overpayments” for it to “keep”. So what were the insurance companies asking for?

My guess is that they did not want to be in the middle of any adjustments that should be taking place between a policy holder and the Federal government. In my first scenario, where I’ve overpaid by $200, I imagine the insurers were unwilling to refund that $200 to me and then bill the Feds for it; they probably wanted the Feds to reimburse me directly. While this scenario doesn’t involve a lot of financial risk for the insurers, it does involve what is essentially a cash flow delay: they would have been paid “late” for $200 worth of premiums.

When a policy holder has gotten a larger subsidy than he should have, things can get really ugly. So in the second scenario, where I underpaid by $200, I can’t imagine the insurers would have been willing to give the Feds back the $200 over-subsidy and then try to get that money from me. This involves a huge financial risk for them as well as a huge public relations risk. If the Feds want that money back, the insurers would insist the government go after it directly.

I also wonder if the insurers wanted any over-subsidization to continue even after HealthCare.gov was straightened out and correct subsidies could be calculated. While the insurers would be delighted to tell the me from the first scenario that my monthly premium would drop by $50 a month, I’m sure they would resist strongly telling the me from the second scenario that my monthly premium was going to increase by $50 a month. So I imagine they asked that policy holders who were under-subsidized start receiving the correct (larger) subsidy while those who were over-subsidized continue to receive the incorrect (larger) subsidy.

I don’t think any of this is out of line for the insurance companies to ask for - there’s no reason they should bear the financial and public relations risk for the government’s incompetence - or insane for the government to consider - desperate times call for desperate measures. And, contrary to what the Washington Post article and the Suderman post seem to imply, there is no way an insurance company would end up overpaid for a particular policy. The premium amount is the premium amount, wherever the premium payment comes from.

There is, however, a danger in this that Megan McArdle notes as follows:

The potential abuses are obvious; the insurer with the most erroneous subsidy calculator gets all the business!

Well, yes. If Acme Insurance tells me I qualify for a $250 subsidy and Xenon Insurance tells me I qualify for a $400 subsidy, I’m buying from Xenon - and so is everybody else. Xenon isn’t going to make any more per policy than they would without this kind of plan but they will sell a lot more policies. Of course, there is a simple fix for this danger: whatever method HHS approves for quick and dirty subsidy calculations must be the same for all insurance companies in a State. Just one more little task for the State’s insurance commissioners.

As I said, this is an old proposal and appears to be dead in the water. I wanted to walk through it, however, because that’s how I clarify my thinking about topics and especially about the tangle that is ObamaCare. In particular, I believe it’s important to think carefully about the relationships among the Federal government, the insurers, and the policy holders. Despite the appearance that there are two bilateral relationships - Federal government with insurers and insurers with policy holders - the fact is that the relationship between the Federal government and policy holders is quite real and quite important. When the Federal government subsidizes a policy holder’s purchase of a health insurance policy, the government is not giving money to the insurer; the government is giving money to the policy holder.