Two Senators Strike Deal on Health Subsidies That Trump Cut Off By THOMAS KAPLAN and ROBERT PEAR NY Times https://www.nytimes.com/2017/10/17/us/politics/alexander-murray-deal-obamacare-subsidies.html

Two Leading Senators WASHINGTON — Two leading senators, hoping to stabilize teetering health insurance markets under the Affordable Care Act, reached a bipartisan deal on Tuesday to fund critical subsidies to insurers that President Trump moved just days ago to cut off. At the White House, virtually as the deal was being announced, Mr. Trump voiced support for it while insisting that he would try again to repeal President Barack Obama’s signature health law.

Subsidies to insurers The plan by the senators, Lamar Alexander, Republican of Tennessee, and Patty Murray, Democrat of Washington, would fund the subsidies for two years, a step that would provide at least short-term certainty to insurers. The subsidies, known as cost-sharing reduction payments, reimburse insurance companies for lowering deductibles, co-payments and other out- of-pocket costs for low-income customers. Without them, insurance companies said, premiums for many customers purchasing plans under the Affordable Care Act would shoot up, and with profits squeezed, some of the companies would probably leave the market. “In my view, this agreement avoids chaos,” Mr. Alexander said, “and I don’t know a Democrat or a Republican who benefits from chaos.”

The Economics For insurers: Profits = Total Revenue – Total Costs Per Policy Profits = Revenue – (prob. illness x costs if ill) – (prob. No illness x costs if no illness) If there are positive profits, what happens?

Economics (2) Algebraically, the cost per policy in terms of payout is the probability of payout, p, multiplied by the amount of payout, q, plus a processing cost, t, which is unrelated to the size of the policy (assuming it costs no more to administer a $10,000 policy than a $500 policy). So: With perfect competition, profits equal 0, so: Profits = 0 = aq – pq –t a = p + (t/q)

Keys: Pre-existing conditions, low income payers If you can’t keep out people with pre-existing conditions, or people who can’t afford the care, you must charge enough to cover them. If you can’t charge that, then you lose money. Government subsidies will allow insurers to cover them. Determining the right amount is critical.