ObamaCare Subsidy ‘Workaround’ Could Put Small Insurers Out of Business

For subsidized plans to go into effect under ObamaCare, the government needs to hold up its end of the bargain – by paying its portion of premiums and cost-sharing payments.

But some experts say a last-minute fix that would enable insurance companies to seek payment from the government for these costs may not be the Hail Mary intended by the Obama administration.

The Centers for Medicare and Medicaid Services (CMS) has not yet completed the back-end technology necessary to automatically transfer payment from the government to insurance providers for subsidized plans. Until this aspect of the website is fixed, the administration has proposed a temporary workaround that will allow insurers to estimate the bill owed by the government, submit that bill and then receive payment from the government.

These new steps, however, place an additional burden on insurance companies – and could actually cause some insurance companies to close up shop.

Problems with the Workaround

CMS spokesperson Alicia Hartinger says the temporary process will ensure that issuers get premium tax credits and cost-sharing subsidy payments on time.

“Providers will bill insurers as they usually do for care delivered starting January 1,” says Hartinger, and consumers will be covered by their plans beginning on January 1 as long as they sign up by December 23, and make their first premium payment.

If the government doesn’t make its payments on time, however, the system could be thrown into further flux. While involved parties agree that trying to put even a temporary system in place to make sure that insurers are paid on time is a positive step, the feasibility of this workaround is being called into question.

“It’s a total trainwreck – they couldn’t get Healthcare.gov to work, and then it’s going to be a struggle to get the next part of the system to work,” says Tom Harte, president of the National Association of Health Underwriters.

The size of the insurance company may be a key factor in whether or not it is able to easily submit the estimate of money owed to the government.

“The big guys – Blue Cross, Aetna, Humana, United Healthcare – they’ll manage this pretty well, I think, because they already have financial management systems in place,” says Yevgeniy Feyman, a fellow at the Center for Medical Progress at the Manhattan Institute for Policy Research. However, Feyman says that smaller insurance companies, co-ops and non-profits may not have the infrastructure in place to handle this new step in the process, in addition to dealing with all the other aspects of the law, in just a few short weeks.

Once the bill has been submitted, the next major question is whether the government will remit payment on time to issuers. Smaller insurers, says Feyman, “don’t have the reserves built up to pay the benefits without the premiums coming in.”

“They will have a really hard time. They have limited budgets … and this might make them insolvent starting in 2014,” says Feyman. In this worst-case scenario, consumers who purchased plans from small insurers on Healthcare.gov would see their providers go out of business early next year – leaving them without coverage at all.

On the bright side, Feyman says data from California suggests that most consumers are purchasing plans from the big players, so many may not be affected by this. But a lack of transparency regarding enrollment through the federal exchange makes it uncertain how many consumers have selected plans from small players in the insurance industry.

Aside from some small insurers not being able to stay afloat if payments aren’t made on time, there’s also the possibility that some insurance providers decide not to provide benefits, if the premiums haven’t been fully paid due to delayed government payment.

“The government would argue that it’s only non-payment if the person doesn’t make the payment,” says Feyman, but he says the insurers may decide their own definition of what constitutes as “non-payment.”

That said, he says insurers are incentivized to play nice with the government regarding the workaround.

“They want subsidized enrollees and they want to sell plans on the exchanges,” says Feyman. So unless companies find themselves in a situation where they fundamentally can’t afford to continue providing benefits, Feyman says it is unlikely that an insurance provider would decide now’s the time to play hardball with the government.

As insurance companies start to figure out how to implement the workaround on their end, it will become more clear whether this temporary fix will work until CMS can build the originally planned system.

“In addition to addressing the issues with processing of enrollment files, it’s also important to ensure that the other back-end issues such as processing of subsidy payments are also working properly,” says Robert Zirkelbach, spokesman for America’s Health Insurance Plans, the trade association representing insurance providers. “We appreciate that the administration is focused on finding a way to ensure that the subsidy payments are made, and we are evaluating how this new process will work operationally.”

Insurance companies including Cigna and Aetna did not return FOXBusiness.com’s request for comment.