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Insurance fix creates uncertainty

Hospitals could increase bad debt and insurers face financial losses

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

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

[See also: Stopping the rise in hospital bad debt]

Because the number of individuals involved is comparatively small, the impact on hospitals will also likely be small, said Colin McCulloch, associate in healthcare law at EpsteinBeckerGreen and a former hospital CFO. Hospitals' payer contracts, for instance, are not likely to change if cancelled policies are continued.

What could be impacted, though, McCullough said, is bad debt.

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 good 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," McCullough said. "Hospitals are not good at managing bad debt versus charity."

For insurers, the unexpected administration action throws a wrench into carefully crafted plans, said Adam Powell, president of consultant Payer+Provider Syndicate. "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 that ultimately buy the new plans, Powell 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," he said.

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