Predatory Pricing Denied: HHS may require some companies to RAISE premiums (with good reason)?
I've been debating whether to post about this since frankly, I'm not entirely sure that I have all the details straight about how this works. If anyone more familiar with this process wants to correct or clarify my description in the comments, please feel free to do so.
OK, so there's all sorts of hand wringing over how much premium rates will increase for 2015 based on the 2014 risk pool. The CBO issued a report yesterday which projects that in spite of all the fretting, the overall average increase will only be a few percent, which is good news if true (although this will no doubt vary from state to state).
However, I recently learned a couple of very interesting things about how the ACA works when it comes to pricing oversight and the "risk corridor" program.
Think Progress has a nice explanation of "risk corridors" (which the GOP hypocritically and wrongly refers to as an "insurance company bailout"):
Finally, risk corridors are another temporary program meant to prevent premiums from skyrocketing during Obamacare’s nascent years. Under this provision, the federal government will give insurers who set their premiums too low — i.e., those who low-balled how much they’d have to pay out in claims — a portion of the profits from insurers who set their premiums too high. The level of the cut that the federal government will take from plans with excessive rates, and the level it will pay out to those that lost money, both depend on how off-base the insurers’ set premiums were.
Since the ACA has so many unknown factors for the insurance companies, forcing them to throw their initial premium pricing darts partially blindfolded, this system was put in place to prevent a company which made a bad call (underbidding) from taking a major bath in the first couple of years. The philosophy is that whatever sins the insurance companies have been guilty of, it's still reasonable to give them a temporary safety net for the first couple of years to gain their footing in the new insurance industry structure.
The only problem with this system is the potential for predatory pricing. You know how that works--a huge retailer (let's call them "S-Mart") with money to burn sets up shop in a small town, cuts their pricing to the bone, deliberately losing money in order to force the Mom & Pop Shop they're competing with to either match their pricing or lose their customer base. Since the Mom & Pop Shop can't afford to sustain either of those losses for more than a few weeks or so, they go belly up and shut down, at which point S-Mart is then free to jack their prices back up again, quickly recovering their (relatively) minor losses and then some, with no further competition.
In this case, the potential problem is even worse, because the large insurance player (let's call them "Ecumena") not only has the resources to undercut their smaller competitors (let's call them YoungUpstartCo), but due to the risk corridor system, they could theoretically get reimbursed for their (self-imposed) losses during the process. They lowball their pricing, scoop up 99% of the new policies from their pipsqueak competition, knowing the whole time that they won't lose any profits even temporarily due ot the risk corridor system. Then, with YoungUpstartCo ruined, they presumably would raise their pricing again, with millions of new customers their pocket.
Here's the kicker, though: Apparently the ACA gives the HHS Dept. at least partial authority to approve or deny the premium rate structure for policies sold on the exchanges! I don't know exactly how that works, but if I'm understanding it correctly, it means that if Ecumena tries to pull a fast one by submitting a pricing structure that's way out of wack (on the low side) with their competition, HHS has the authority to require them to raise their rates to some degree to prevent predatory pricing on the exchanges.
I'm assuming that this doesn't apply to the off-exchange market.
Again, if I'm misunderstanding any of the above, feel free to correct me in the comments.