Reinsurance, Risk Corridors, and Bailouts: Oh My!
Over the past few weeks, many in Washington have discovered a "new" wrinkle in the Affordable Care Act: They have labeled two of the law's provisions, reinsurance and risk corridors, as a "bailout" of the insurance industry. Legislation has been introduced, talking points written, and cable-news segments booked. But what if the bailout isn't a bailout at all?
As American Action Forum president Doug Holtz-Eakin recently commented, "a bailout is when you screw up and the government makes you whole." It's something entirely different when the government fundamentally restructures an entire industry, creates large new risks in the process, offers to mitigate some of the risks, and simultaneously imposes a draconian new tax on any resultant profits.
Take reinsurance, which is directed at risk presented by costly beneficiaries. Insurers pay a fee for each enrollee, and in return the program uses those funds to cover 80 percent of the tab for any costs the plan incurs for that enrollee beyond $45,000. This provision functions as a sort of insurance policy for insurers; the vast majority of beneficiaries won’t hit the cap, and when they do the per enrollee fee should cover most of the additional cost.
Meanwhile, risk corridors are intended to compensate for the uncertainty regarding the health status of a plan’s entire pool of enrollees in the first few years. If a plan's cost is within 3 percent of the premiums collected to fund it, nothing happens. However, if costs drop below 97 percent of premiums collected, the plan must pay some of the "excess" profit to the government. Conversely, the government will cover a portion of plan costs if they rise above 103 percent of premiums collected, leaving the plan on the hook for rest.
Notice that the greatest risks for high costs stem from the design of the ACA (which raises premiums for the young and healthy) and the poor execution of the website (which has also deterred that group from enrolling). The bottom line is that even with these provisions in place; the insurance industry still has to absorb a share of the cost of the flawed policy and enrollment design.
Similar risk-mitigating programs were included as part of the Medicare Part D drug-benefit rollout, and both ACA provisions are temporary, expiring after 2016. The policy underlying the provisions is sound. When disrupting the insurance market on a mass scale, the government must make an attempt to mitigate the risk to insurers in order to get them to participate.
As these provisions are brought into action, there is a reasonable fear that taxpayer dollars will be needed. The administration's January enrollment report for the ACA confirmed that exchange enrollees are older than supporters had projected they would be -- likely meaning sicker and more expensive. It's another example of a bad legislative process begetting a bad law that has been badly implemented, all leading to bad outcomes. But that is beyond the control of the participating insurers who entered the exchange markets and priced their products on the basis of known risks and ACA provisions.
Opponents of the risk-corridor and reinsurance provisions have a motive beyond protecting the taxpayer. They understand that these provisions are key to ensuring market stability and preventing premium spiral in the exchanges during the early years of the program. If these provisions are eliminated, they reason, insurers will have to drop out of the exchanges or ratchet up premiums, leading to collapse of the exchanges. Killing the "bailout" is a disguised way to undermine the ACA.
At what cost, though? If opponents succeed in driving private insurers out of the exchanges, insurers will still have to abide by the rest of Obamacare -- including guaranteed issue and community rating -- on the non-exchange market, and thus they will have the same pricing difficulties, uncertainty, and likelihood of adverse selection. These add up to failing insurance companies, premium spikes, or both. Rather than ending Obamacare, opponents could cripple the private insurance market, pave a path to greater government involvement in health insurance, and harm consumers. Supporters of a single-payer insurance system will say it's time for the government to step in and do what it should have done in the first place, and without a robust private insurance market those arguments will be stronger.
The risk-corridor and reinsurance provisions in the ACA made policy sense at the time the law was drafted, make policy sense today, and protect consumers. They do not constitute a bailout. The ACA is worthy of opposition; make no mistake, it is bad economic and health policy. But in working to dismantle Obamacare, opponents should be cautious not to create more policy problems than they solve.
Christopher Holt is director of health-care policy for the American Action Forum.