WASHINGTON — Obamacare alters and disrupts health insurance markets in numerous ways. Exactly how individuals and employers will respond to all these changes remains highly uncertain.
This uncertainty makes it difficult for insurers to predict claims costs, much less set premiums. Naturally, insurers wish to make a reasonable profit and remain competitive in the marketplace. But finding that “sweet spot” in pricing premiums will remain elusive until they have data from several years under the new system.
The congressional Democrats who designed and enacted Obamacare knew this would happen. That’s why they included in the law three provisions that make it less risky for insurers to participate in the Obamacare insurance market.
The first is a three-year “transitional reinsurance” program that imposes $20 billion in taxes on existing employer plans and health insurance policies and transfers those funds to the Obamacare exchanges plans. While it is a fixed amount for a limited time, it is still a tax on existing policies to subsidize those insurers offering exchange coverage.
Under the second provision — a “risk adjustment” program — insurers will transfer money among themselves to adjust for the possibility that some get more or less than their proportionate share of high-risk, high-cost enrollees. While this program is permanent, it doesn’t increase total subsidies to insurers; it merely reallocates money already in the system.
The third provision — a “risk corridor” program — is the most problematic. This program essentially establishes a range or “corridor” for profits or losses by insurers selling exchange coverage.
If an insurer has higher-than-expected profits, the government will “claw back” some of the money. Conversely, if an insurer has higher than expected losses, the government will pay the insurer additional subsidies to offset those losses.
Like the reinsurance program, the risk corridor program is limited to the first three years. But the risk corridor program’s funding is not balanced — and that’s a problem.
If many, or even all, of the insurers have excess profits, then the government would collect a big windfall. But if many — even all — of the insurers suffer large losses, then the government is on the hook for huge subsidy payments.
Given the uncertainty insurers face in pricing the new coverage, combined with pressure from the Obama administration to keep premiums low, the more likely scenario is that there will be more big losses than big profits, resulting in a government bailout through the risk corridor program.
Earlier this year, in response to congressional concerns that the risk corridor program could turn into an insurer bailout, the Obama administration said it would run the program on a “budget neutral” basis — meaning that it wouldn’t pay out more than it took in. However, the administration has now reversed that position. It is promising to pay insurers whatever it takes to cover any big losses they incur and, if necessary, to fund the program by diverting money from other accounts.
For several years the administration has been raiding other programs — such as the prevention and public health fund sponsored by Sen. Tom Harkin, D-Iowa — to fund Obamacare. Congress thought it stopped that with provisions in January’s omnibus appropriations bill limiting the administration’s ability to transfer funds among programs. These latest efforts by the administration should be stopped.
The best response would be to simply repeal the risk corridor program. As public policy, the program is redundant. Its two sister programs — reinsurance and risk adjustment — are more than sufficient to adjust for any uncertainty faced by insurers.
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The White House has re-embraced the program, not because it’s sound policy, but because it offers a convenient way to hide from the public the adverse effects and true costs of Obamacare. Institutionally, it represents another attempt by the Obama administration to circumvent Congress’ authority.
Edmund F. Haislmaier is a senior research fellow in The Heritage Foundation’s Center for Health Policy Studies. Readers may write to the author in care of The Heritage Foundation, 214 Massachusetts Avenue NE, Washington, D.C. 20002