Is This How Obamacare Unravels?

Image source: Fllckr user Meridican.

You might wonder why the risk corridor is even there in the first place. One of the primary ideas behind Obamacare was to create a transparent and competitive marketplace. The easiest way to lure in more competition and insurers new to the individual marketplace is to dangle a carrot promising help if insurers take a few years to get their premium pricing correct. The risk corridor was designed to provide this impetus and get both national insurers and regional-level insurers active in the markets. The more competition, the more pricing options, presumably, for consumers.

Is this how Obamacare unravels?

The reality is that the risk corridor has been a disaster. Insurers have requested $2.87 billion to help cover excessive losses tied to Obamacare plans, but they'll be receiving just 12.6% of this amount, or $362 million -- a nearly $2.5 billion shortfall. This is why more than half of Obamacare's co-ops went belly up, and it could be another reason UnitedHealth Group has threatened to leave the Obamacare marketplace exchanges.

One possible solution to the risk corridor's shortfall is to secure federal funds to make up the difference. However, initiatives led by Senator Marco Rubio (R-FL) in Congress have stopped attempts to earmark any federal funds. Rubio has suggested that allowing the federal government to provide funds to troubled insurers on Obamacare's exchanges would be akin to a bailout, where taxpayers would be on the hook for the cost.

If insurers facing adverse selection (i.e., sicker individuals enrolling) don't get the financial assistance expected under the law, there could be devastating effects on Obamacare, potentially even undermining its goals.

Image source: Flickr user Ryan Ritchie.

For instance, removing the risk corridors would leave next to no incentive for smaller insurers to enter the marketplace. The risk corridor was a nice fail-safe for Molina Healthcare and Centene , established insurers that each had several decades of experience in government-sponsored healthcare but no experience in the individual marketplace prior to Obamacare. Having a financial backstop in place encouraged new players to enter certain markets, and it gave Molina and Centene a few years to perfect their pricing strategies. Remove the risk corridor, and you remove the incentive to enter the exchanges, thus reducing competition and choice for the consumer.

The solution for insurers might be to price their plans substantially above what they believe they'll need to meet an expense ratio around 100%. The consensus, based on the earnings reports from publicly traded insurers that I've perused, seems to be that medical costs for Obamacare enrollees are in line with, or higher than, expectations. The implication is that insurers have been pricing their plans far too aggressively to the downside in order to attract new enrollees. Raising premium prices substantially (but with justification) could raise health-benefit providers' profits, but it may also make health insurance unaffordable for millions of Americans, also undermining the goal of the Affordable Care Act. Remove the risk corridor, and we could see the slow but steady unraveling of Obamacare as premium prices rocket higher.

Only time will tell if this proves to be the case, but as consumers and investors, we'll want to play close attention to any news coming out of Congress concerning Obamacare, as it could have a substantial impact on our personal health and the health of our portfolios.

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool recommends UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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