Are New Obamacare Tax Credits Incoming?

Insurers got together this week to talk strategy at the America's Health Insurance Plans annual conference, and came away asking for the government to start subsidizing payments via tax credits for catastrophic health-care plans offered through Obamacare.

Those catastrophic plans are high deductible options that expose people to significant out-of-pocket costs for medical care, but provide coverage for worst-case-scenarios. As a result they're not right for everyone. Only 2% of the roughly 8 million people who signed up for health-care coverage through the federal and state exchanges through March selected catastrophic plans offered by insurers like WellPoint (NYSE: WLP  ) and Aetna (NYSE: AET  ) .

Those companies are allowed to offer such high-deductible plans on the exchanges to people under 30 years old who qualify for a hardship exemption; however, the Government currently doesn't help pay for them. The AHIP believes that if the Government were to offer subsidies, it could attract millions of twenty-somethings who remain uninsured. If so, it may accomplish three important goals that benefit WellPoint's and Aetna's bottom line.

Source: White House Flickr

It may boost the total number of premium paying members.
So far, Obamacare has helped increase insurers' top line, particularly at insurers that administer Medicaid plans in states that adopted the Affordable Care Act's Medicaid expansion.

WellPoint is one insurer that is seeing its sales climb thanks to reform. The company's Blue Cross and Blue Shield plans captured nearly 50% market share in the 14 states in which they were offered on exchanges.

In WellPoint's first quarter earnings conference call, the company said that it expected 600,000 people to have signed up for its private health-care insurance plans through the end of open enrollment in March. WellPoint also added 120,000 new Medicaid members, resulting in WellPoint's Government business sales climbing 5% year over year in the first quarter. Overall, WellPoint's membership growth helped lift its total revenue by more than $200 million in the first quarter, giving the company enough confidence that it increased its full-year revenue guidance to more than $73 billion, up from $70 billion in 2013.

If insurers are able to convince regulators to expand subsidies to catastrophic plans, it will likely mean more premium paying members juicing top line growth at insurers like WellPoint.

It could help skew the total membership population toward younger, healthier people, lowering insurer's medical cost ratio.

Source: Aetna

The impact of providing subsidies to catastrophic plans could be even more valuable to an insurer's bottom line than it is to the top line.

Aetna offers insurance plans through Federal or state exchanges in Washington, D.C. and seven states, including Florida and Texas. 

Aetna spent nearly 85% of each premium dollar collected from its government plans on patient care during the first quarter; but spending on care for members enrolled in commercial plans totaled just 77% of collected premiums.

That difference in cost of care is in part because government plan members are typically older patients who require more services, medications, and procedures. If offering subsidies increases the percentage of younger, healthier members, it could help keep insurers' overall health-care costs in check, something that is becoming especially important given that costs associated with treating hepatitis C and cancer are soaring in the wake of new treatments coming to market.

It may boost the percentage of people signing up for coverage who actually follow through and make their premium payment.
Providing subsidies for catastrophic plans could also ensure that insurers collect payments from more people who are signing up for coverage.

WellPoint reported in its first-quarter earnings conference call that roughly 90% of those signing up for exchange plans followed through in making their scheduled payments. That's a solid percentage, but I'm sure WellPoint would welcome changes that could help it capture the remaining 10%, too. Aetna may be even more eager to see more people follow through with paying, given that it reported about 80% of members made their payment. Think about it this way: if an already cheap plan gets even cheaper because of tax subsidies, it'll make it much easier for people to make the monthly premium payment, hopefully bumping up the percentage of people who sign up and follow through to keep paying. 

Fool-worthy final thoughts
It's not clear whether insurers' recommendations will be embraced by lawmakers or, if embraced, whether they would apply to plans offered when enrollment opens again in November. President Obama has been a vocal critic of catastrophic plans, arguing that they don't do enough to help lower medical expenses for covered patients. In December, the President eased restrictions that only allowed catastrophic plans to be offered to people under 30 when news broke reporting that millions of older people enrolled in such plans were losing coverage as part of insurer's compliance with minimum coverage mandates. In order to allow people to maintain their coverage, the President expanded the hardship exemption to allow for people to qualify for catastrophic plans if they couldn't afford higher cost plans available on exchanges. Whether the President's willingness to ease those restrictions will stretch to include subsidizing them is a big question insurers hope will be answered soon.

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