Insurance companies are rarely the objects of sympathy. Most people, especially doctors like me, spend much too much time and money battling with insurance companies to get paid what they owe us. We all know the basic insurance business model is taking our money and then holding onto it as long as possible, even when they are responsible to pay for covered expenses.
Yet some have actually suggested they are losers in the new health care law, ObamaCare, because they must provide expensive benefits and accept patients without actuarially sound risk adjustment. It is true that insurance companies have been forced to change their usual way of doing business in ways that force them to accept higher risks for patients with pre-existing diseases. The usual six levels of insurance premium prices based on risk factors have been reduced to three. The result is high-risk patients pay less than usual while low-risk patients, especially the young, pay more.
For this very reason there has been greater attention paid to the number of new enrollees in ObamaCare and a greater scrutiny of the age and pre-existing medical conditions of the enrollees. The concern is that not enough new enrollees, especially in the young and healthy demographic of 18 – 34 year-olds, will leave the insurance companies with higher costs and less revenue to pay them. This may lead to a so-called “death spiral” for insurance companies that forces them to raise prices to compensate for losses – which will further decrease the number of new enrollees.
But have no fear. You, the taxpayer, is near.
ObamaCare has provisions in the law to protect the insurance companies – not the taxpayers. In order to ensure the cooperation of the insurance companies, the authors of this law (not Congress – they never read it) inserted three methods of bailing out the insurance companies.
Jay Cost and Jeffrey H. Anderson, writing in The Weekly Standard, call these the “Three Rs” – risk adjustment, reinsurance, and risk corridors. These three provisions in the law were sufficient enticements to guarantee the compliance of the insurance industry in this makeover of our healthcare delivery system.
Risk adjustment spreads the wealth around from those insurance companies with relatively healthy enrollees to those with sicker enrollees who cost more to insure. This compensates for the loss of the right to refuse those with pre-existing expensive medical conditions and the unsound actuarial pricing ObamaCare requires.
Reinsurance is actually a tax added to the price of every health insurance policy of $63/person for the next three years. Most Americans will pay this tax except certain unions that have received exemptions from the Obama administration as a political payback for their election support. This provision, described in Section 1341 of the Affordable Care Act, is expected to raise about $25 Billion by the year 2016. This money will flow to the insurance companies to allow them to hold down future premium prices that would otherwise skyrocket under ObamaCare. In reality, what these funds do is subsidize the premiums paid on the ObamaCare exchanges out of higher premium policies paid by those receiving their insurance through employers.
Risk corridors, described in Section 1342 of the ACA, are also designed to prop up the insurance companies in case their expenses exceed their revenues. Insurance industry consultant Robert Laszewski explains that if an insurance company expects its costs in a given year to be X, and those costs end up being more than X plus 2 percent, taxpayers will come to that insurance company’s rescue. Once an insurance company covers that initial 2 percent cost overage, taxpayers will cover at least 80 percent of any additional costs the insurer accrues.
The Three Rs were intended to stabilize the insurance market until there were enough enrollees to guarantee the financial stability of the insurers. This was all predicated on the expectation that people would like ObamaCare and would sign up for it in record numbers; or at least they would enroll because of the tax called The Individual Mandate, which assesses a tax upon any individual who does not have health insurance by 2014. However, the botched rollout of the government web site Healthcare.gov, and the increasing public awareness of the problems with ObamaCare, have contributed to lower than expected enrollment. This will contribute to the need for earlier bailout of the insurance companies than expected.
Also influential are the numerous delays to the ACA unilaterally determined by the White House in response to the rising tide of criticism of the law and the growing reality that it is a political albatross for those Democrats seeking re-election to Congress in November 2014. Obama has grandfathered existing health plans in some cases, delayed the Employer Mandate, and even watered down the requirements for compliance with the Individual Mandate to the point where it is functionally irrelevant. All of these decisions have been made to protect vulnerable Congressional Democrats but all have contributed to the increased necessity of a taxpayer bailout of the insurance industry.
Cost and Anderson write that this spring the administration finalized adjustments to two of the programs – reinsurance and risk corridors – to funnel more money to insurers. They lowered the threshold at which insurers become eligible for reinsurance money, and made more generous the formula by which insurers get paid under the risk corridors.
Seth Chandler, a University of Houston law professor with a background in insurance law, writes, “It’s an extremely sneaky way of sending money to the insurance industry, resting, as it does, on arcane manipulations of mathematical formulae. And I have serious doubts that the changes are authorized by Congress.”
According to the non-partisan Congressional Budget Office (CBO) these changes are estimated to cost taxpayers an additional $8 Billion. The original expectation of the risk corridors was projected to generate $8 Billion in revenue for the government to fund the program. Now they are projected to be budget-neutral. Effectively, this means the insurance industry has just received an $8 Billion tax break – funded by the taxpayers. To put this in perspective, the Fortune 500 showed, in the year before Obama was elected, the nations’ 10 largest health insurers made $8 Billion in combined profits.
The bad news is things could get worse. If enrollment in the ObamaCare exchanges declines as insurance premiums increase, the bailout of the insurance industry will grow. There is nothing in the ACA to require the risk corridors to be budget-neutral. The CBO has specifically addressed this concern with the following statement: “In contrast to the risk adjustment and reinsurance programs, payments and collections under the risk corridor program will not necessarily equal one another: If insurers’ costs exceed their expectations, on average, the risk corridor program will impose costs on the federal budget; if, however, insurers’ costs fall below their expectations, on average, the risk corridor program will generate savings for the federal budget.”
While there is little disagreement that the risk corridor program does not have to be budget-neutral, there is certainly disagreement about whether the administration has the legal authority to pay extra money to insurers (or even to pay insurers at all under the program) in the absence of a congressional appropriation. The non-partisan Congressional Research Service (CRS), in a memo dated 1/23/14, wrote, “federal agencies are prohibited from making payments in the absence of a valid appropriation.” They opined the risk corridor language in ObamaCare “would not appear to constitute an appropriation.”
But HHS disagrees. They assert, “Regardless of the balance of payments and receipts, HHS will remit payments as required under . . . the Affordable Care Act.” In other words, with or without Congress.
It may be reasonably argued that the Three Rs were necessary to ensure the cooperation of the insurance industry in order to provide health insurance under ObamaCare. Notwithstanding other alternatives that are better, this argument may be valid. But what is disturbing is the use of the Three Rs to back up the lawlessness of the Obama administration changes to the ACA – which have clearly been politically motivated.
As Cost and Anderson conclude in their article, the Three Rs have effectively become a slush fund for the president – one that enables him to make changes to the law that suit his political agenda without destroying the insurance industry and losing their support. The only ones adversely affected are the taxpayers.
There are solutions to this problem. Charles Krauthammer, highly respected syndicated columnist of The Washington Post, suggested one in January. He proposed The No Bailout for Insurance Companies Act of 2014. He said it could be a one-line bill. “Sections 1341 and 1342 of The Affordable Care Act are hereby repealed.” He succinctly put it this way, “End of bill. End of bailout. End of story.”
Senator Marco Rubio (R – FL) has put forth a more recent solution. He has introduced in the Senate, and Rep. Leonard Lance (R – N.J.) has introduced in the House, short, simple bills requiring ObamaCare’s risk corridor program to be budget-neutral. This would effectively dry up Obama’s slush fund.
Only if the president intends to continue his unilateral changes in the law to suit his political agenda will he insist upon keeping the risk corridor program flexible enough to bail out the insurance industry whenever he chooses. The American taxpayer deserves better.