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Extension of cancelled health plans may hit insurers' profitability

President Barack Obama's bid to throw a life preserver to stranded consumers who received cancellation notices from their health plans may lead to financial losses and uncertainty for payers and increase bad debt for hospitals.

Last week, Obama offered state insurance commissioners the option of letting insurers extend for one year recently cancelled plans but encouraged insurers to still direct customers to the health insurance exchanges.

For insurers, the unexpected administration action throws a wrench into carefully crafted plans, said Adam Powell, president, Payer+Provider Syndicate (pictured above). "It's hard to plan for the future when the future can change with the stroke of a pen," he said.

Insurers have priced the products that are currently on the market under the assumption that the discontinued plans would not be available. Unexpectedly keeping the plans available for those that still have them will distort the set of customers which ultimately buy the new plans, he said.

Reviving these plans changes the actuarial calculations that go into properly pricing the new plans, as the new plans may have fewer healthy people than anticipated, causing financial losses.

"While the plan cancellations are a bit of a mess, efforts to partially reverse the cancellations only will make things worse," Powell said.

Fitch Ratings also weighed in, saying that the extension of these policies is a net credit negative for health insurers. The likely deterioration of the risk pool as a result could lead to lower than expected profitability.

It is also uncertain if health plans will have the flexibility to base premiums for the extended policies on current medical benefit cost trends. If not, "a mismatch could result between premium rates and out-of-date cost trends on those policies," and also put pressure on profitability, said Mark Rouck, senior director of corporate finance at Fitch Ratings, in a news release.

The systems and back-office costs associated with complying with the change "will be significant," he added.

Because the numbers of individuals involved is comparatively small, the impact on hospitals will likely be small, said Colin McCulloch, associate in healthcare law at Epstein Becker Green and a former hospital CFO.

Whether patients have insufficient coverage from pre-reform plans or comprehensive coverage in post-reform healthcare with higher out-of-pocket costs, hospitals will still have to deal with patients who can't pay all their costs either through charity care or amassing more bad debt.

"How this rolls out from the hospital perspective depends on how much uninsured do they now get paid for versus how much bad debt from deductibles and coinsurance will they incur," he said. "But you wouldn't see a big swing either way."

Since a fair portion of those with cancelled plans are small businesses owners who are not likely to be able to qualify for charity care programs, the care that they can't pay for ends up as bad debt for hospitals.

"That could be a significant difference," McCulloch said. "Hospitals are not good at managing bad debt vs. charity."

For those patients who had junk policies that left most of the hospital costs on the policyholder who could not afford them, continuing those policies is the status quo from the hospital perspective. 

The hospital contract with the payer will not likely change, but at the same time, the payer may have many new members also using the hospital services who were previously uninsured and are unhealthy with coverage through the exchanges, including possibly high deductibles and coinsurance. "My bad debt may increase a lot more than I expected," he said.

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