Obamacare Subsidies: Effective or $12 Billion Boondoggle?

Early results following the first open enrollment season the Affordable Care Act's online marketplace for health insurance plans that Obamacare is cheap for subscribers, but pricey for government.

According to data released last week by the Health and Human Services Department, 87% of the more than 5 million people who signed up for health insurance through the Federal marketplace received a subsidy. Those subsidies are key to getting low and middle-income earners to sign up for revenue-boosting plans offered by insurers such as WellPoint (NYSE: WLP  ) and Aetna (NYSE: AET  ) .

Source: White House Flickr.

The cost of savings
Those shopping for plans offered by health insurers enter in a slate of information such as income projections (which will be verified in the next tax season). Based on that information, those shoppers may receive hefty subsidies to help pay for their health-insurance plan.

The average subscriber received a monthly subsidy of $284, reducing his or her share of the monthly payment to just $82. For those picking low-priced silver plans, which have lower monthly premiums than gold and platinum plans, but require members to pay more toward the care they receive, the average after-subsidy price is just $69 per month.

In total, the Congressional Budget Office projects the total cost of providing those subsidies to enrollees may hit $12 billion this year.

Source: Aetna.

Who's getting these subsidies?
During the open enrollment period that stretched from last fall through this spring, subsidies were offered to applicants earning up to 400% of the federal poverty level.  That means that a family of four qualifies for government help in paying premiums as long as their total earnings remain below $94,000 this year. Qualifying for insurance subsidies is based on household size and income.

Exactly how large a subsidy each person receives varies based on prices for plans offered in each state. A sliding percentage scale based on the second-lowest-priced silver plan and the applicant's income means that -- all other things being equal -- those earning less get a bigger hand in making their monthly premium.

For example, a single woman earning a shade more than $17,000 this year would have her payment capped at $57 a month. If she earned about $40,000 per year, her payment would cost about $318 after subsidies.

Although the subsidy amount is determined based on the cost of the second-lowest-priced silver plan, she wouldn't have to pick that plan. She could choose instead to apply that subsidy to more expensive or cheaper plans.

So far, those signing up are picking the most inexpensive plans. According to HHS, about 46% of those eligible for subsidies are paying less than $50 per month and roughly 70% are paying less than $100 per month. 

Source: Department of Health and Human Services.

How do subsidies impact insurers?
If you're wondering if this means insurers are being short-changed by subsidies, they're not. The federal government makes up the difference between what the consumer pays and the plan's price.

That means that insurers such as WellPoint, which offered Obamacare plans in 14 states, can price their plans aggressively enough to capture market share and maximize profit, regardless of whether a subsidy is being offered.

HHS/Facebook

However, that doesn't mean that insurers have free rein. According to HHS, the more insurers participating in each state, the cheaper the coverage. That's because insurers have to compete with one another in new ways. In analyzing all the plans offered by insurers, HHS discovered that for each additional insurer participating in a market, prices for the second-lowest-cost silver plan dropped by 4%. That's great news for consumers in heavily populated states that are coveted by insurers, but not so great for those living in small states where few insurers compete, such as New Hampshire.

Insurers are also potentially on the hook for a back-door subsidy of sorts in the form of mandatory spending on care. The Affordable Care Act requires that 80% of premium dollars collected by insurers be spent on providing care for members; otherwise, refunds must be issued to subscribers. In 2012, for example, the insurance industry refunded nearly a half billion dollars to their members because of the mandate.

Despite those hurdles, WellPoint and Aetna appear comfortable with pricing. During WellPoint's first quarter conference call, CEO Joe Swedish said that "the general characteristics of applicants, including average age, are tracking well versus our expectations." Since he didn't appear surprised in the first quarter, that may suggest that profitability will come in as originally modeled.

Those sentiments were echoed by Aetna's CFO Shawn Guertin at a Merrill Lynch conference in May. During that conference, Guertin said that more lower cost younger people were signing up for plans into the end of the open enrollment and suggested that Aetna had "manageable" exposure to the public exchanges.

Fool-worthy final thoughts
While there's little question that subsidies are making insurance more affordable for millions, it remains to be seen whether these plans are profit-friendly for WellPoint, Aetna, and their health-insurance peers.

Both companies reported substantial membership growth in the first quarter, suggesting that second quarter-results will offer a clearer picture of the plan's profitability. As a result, I'll be reviewing those earnings reports very carefully.

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