Jay Cost and Jeffery H. Anderson wrote in The Weekly Standard:
May 12, 2014, Vol. 19, No. 33
How Obamacare pays off insurers.
When
the government provides medical care, it normally delegates the task. Under
Medicare, Washington doesn’t employ doctors, nurses, and hospitals to treat the
elderly. It has to coax them to participate. Similarly, Obamacare functions
only if big insurance companies are willing to play ball with big government.
Those driven by the profit motive must be won over by those driven by the power
motive.
Money,
however, is no object, since the bill for securing this alliance is sent to
taxpayers. According to the latest Congressional Budget Office (CBO) estimates,
more than $1 trillion will be funneled over the next decade from everyday
Americans, through the IRS, to insurance companies. Less than 2 percent of that
sum—$17 billion—will be paid out in 2014. But by 2018, taxpayers’ money
will be flowing to health insurers at a rate of more than $100 billion a year
and rising.
Nor
is liberty an object. Once he became president, Barack Obama quickly discarded
his campaign pledge not to impose an individual mandate, and the purchase of
Obamacare-compliant insurance was required. For the first time in history, the
federal government ordered citizens to buy a product from a private company as
a condition of living in the United States.
Even
though citizens were required to buy insurance starting in 2014, Obamacare’s
authors expected it to take a few years for their government-created
“marketplace”—the “exchanges”—to mature. This was partly because the penalty
for noncompliance was low the first year. Insurers would be at risk if
relatively young and healthy enrollees held off buying insurance while older
and sicker enrollees complied right away.
To
mitigate potential losses and thus keep insurers on board, Obamacare’s authors
devised the “Three Rs”—risk adjustment, reinsurance, and risk corridors. These
little-known provisions help entice insurers to sell Obamacare-compliant
insurance by subsidizing and stabilizing the exchanges for the first few years.
Each
of the Three Rs operates a bit differently. The risk-adjustment program
redistributes money among insurers in the exchanges. Those with a relatively
sick pool of enrollees receive money from those with a relatively healthy pool
of enrollees. Risk adjustment is a permanent feature of the Obamacare
apparatus.
Reinsurance
amounts to a tax on most Americans’ health insurance, including
employer-provided insurance, in the amount of $63 a head this year, tapering
off until it disappears in 2017. The money flows to those insurers who spend a
substantial amount on sick exchange customers, thereby allowing them to lower
their premiums. The CBO estimates that “reinsurance payments scheduled for
insurance provided in 2014 are large enough to have reduced exchange premiums
this year by approximately 10 percent.” Most Americans don’t know they are
effectively subsidizing Obamacare exchange plans through taxes on their own
insurance. This is yet another way that Obamacare creates “winners” and
“losers” in society, with many of the losers being middle class.
Risk
corridors are another temporary program designed to protect insurers and entice
their participation. Any insurer that spends too much of its collected premiums
on care or nonadministrative expenses receives money from the fund, while any
that spends too little must pay in. The idea is that losses and gains
are limited in the first three years of Obamacare.
Defenders
of Obamacare rightly point out that Medicare Part D—created in 2003, mostly
through Republican efforts—contained similar provisions. The purpose there,
too, was to stabilize a new government-created market early on, inducing
insurers to participate. But lately, the Obama administration has exploited the
ambiguity inherent in the Three Rs to fund some of its extralegal revisions to
the law, effectively buying off the insurance companies with taxpayer money.
Most
of the administration’s lawless revisions to Obamacare have strained the
crucial government-insurer alliance. For instance, when Obama unilaterally
extended the deadline from February 15 to April 15 for buying
Obamacare-compliant insurance penalty-free, he created uncertainty for
insurers. They have to file their rates for 2015 before they know how costly
the late enrollees will be in 2014. More important, Obama’s extralegal decision
last fall to grandfather existing health plans meant that many healthy people
would not be forced into the exchanges to pay the higher rates insurers counted
on to subsidize coverage for the unhealthy people expected to buy policies.
Enter
the Three Rs. This spring the administration finalized adjustments to two of
the programs—reinsurance and risk corridors—to funnel more money to insurers.
Put simply, the administration lowered the threshold at which insurers become
eligible for reinsurance money, and it made more generous the formula by which
insurers get paid under the risk corridors. Hans Leida, an actuary for the
independent consulting firm Milliman, writes that the administration’s
transitional
policy for canceled plans allowed certain individual and small group plans that
did not comply with the ACA [Obamacare] to be renewed for one additional year.
This change, announced long after health insurers filed their premium rates for
2014, could result in a less healthy population in the ACA-compliant market,
since healthier individuals may be more likely to retain their noncompliant
plans. If this occurs, there is an increased risk that the filed premium rates
could be inadequate to cover the higher claim costs. To mitigate this concern,
the government proposed changes to certain rules for 2014—namely, the federal
reinsurance program, the risk corridor program, and the medical loss ratio
(MLR) requirement.
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.”
These
changes are estimated to cost taxpayers a princely sum—$8 billion, according to
the CBO. Whereas the risk corridors were once projected to generate $8 billion
in revenue for the government, they are now projected to be budget-neutral. But
money is fungible, and that revenue was being used to help offset the cost of
Obamacare. This means that, effectively, the insurers have received an
$8 billion tax break for which the general taxpayer will now be on
the hook. For comparison, the Fortune 500 showed that, the year before Obama
took office, the nation’s 10 largest health insurers made $8 billion in
combined profits.
Considering
how vehemently the administration has attacked the “greed” of insurers, it is
astonishing that it has made Uncle Sam responsible for their bottom lines.
Moreover, these changes were made for purely political reasons. The people
whose plans were grandfathered received only a temporary reprieve to avert a
short-term public-relations nightmare for the administration. That is a poor
use of $8 billion of the public’s money.
What’s
more, that sum could rise. What happens if insurers try to collect more money
than is available through the risk corridor fund? Last year, the CBO answered
that the American taxpayer would be on the hook:
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.
The
relevant authorities seem to agree that Obamacare contains no statutory
requirement that the risk corridor program be budget-neutral. In a Federal
Register entry dated March 11, 2013, the Department of Health and Human
Services (HHS) stated, “The risk corridors program is not statutorily required
to be budget neutral.” In a letter to HHS in mid-April, Barbara W. Klever of
the American Academy of Actuaries wrote: “Although the parameters of the risk
corridor design are symmetrical, the design does not guarantee budget
neutrality.”
But
there is 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. In a memorandum dated
January 23, 2014, the nonpartisan Congressional Research Service (CRS) wrote
that federal agencies are prohibited “from making payments in the absence of a
valid appropriation,” and it wrote that the risk corridor language in
Obama-care “would not appear to constitute an appropriation.” The CRS added
that federal agencies “may not create a revolving fund absent specific
authorizing legislation,” and “there does not appear to be sufficient statutory
language to create a revolving fund.”
HHS
asserts otherwise: “Regardless of the balance of payments and receipts, HHS
will remit payments as required under . . . the Affordable Care Act”—with or
without Congress.
In
its most recent rule, the administration sidestepped this thorny issue. It
promised to ensure that the program will be budget-neutral but did not say how
this will be achieved. Instead, HHS now plans to prorate risk corridor payments
for 2014 and 2015 if the money coming in turns out to be less than what is
supposed to go out. It further promises that, as the program generates extra
revenue in 2015 or 2016, insurers will be paid back anything they lost under
proration. But what happens if the
program is still in the red in 2016? HHS promises to “establish in future
guidance or rulemaking how we will calculate risk corridors payments.” That is,
they’ll figure it out when they have to, and taxpayers better hold tight to
their wallets.
Again,
the objection here is not so much to the Three Rs in theory. The objection is
to what they have become in practice—a slush fund for the administration. The
president has made a series of legally dubious changes to the law for political
reasons. He has adjusted the Three Rs to pacify and protect his insurance
allies, at a projected cost of $8 billion to taxpayers. What’s to prevent him
from making more changes to the law and using the open-ended nature of the risk
corridor program to funnel even more money to insurers? The only thing that
will stop him is his own calculation about what he can get away with
politically.
In
response to these concerns, Senator Marco Rubio (R-Fla.) 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,
drying up the slush fund. Every Democrat—let alone every Republican—should be
willing to codify a promise the administration has already made.
All
of this is disconcerting. Obama-care, as passed by Congress and signed by the
president, was not only horribly constructed from a policy perspective; it was
badly constructed politically. Yet, smart or dumb, it is the law.
Now
the president has unilaterally rewritten parts of the law, circumventing
Congress. All of his extralegal alterations have followed a pattern: They have
either (a) made it easier for Obamacare’s “winners” to sign up, or (b) delayed
the point at which Obamacare’s “losers” will realize they’ve been hurt. And
when his insurance allies stood to lose through his lawless actions, the
president shuffled an estimated $8 billion their way to ensure their loyalty.
The Three Rs made that possible.
The
American separation of powers was devised to prevent such shenanigans. King
George III had ignored the colonies’ legislatures and done what he
pleased. So the Constitution tethered the president to the laws that Congress
has passed and a president has signed. In his efforts to make Obamacare more
salable, President Obama has undermined that document’s sacred division of
power. His estimated $8 billion payoff to insurance companies is one
sordid chapter in a longer and troubling story.
Jay
Cost is a staff writer at The Weekly Standard. Jeffrey H.
Anderson is executive director of the 2017 Project, which is working to advance
a conservative reform agenda.
