Rubio on his anti-bailout bill: The insurance industry under ObamaCare is headed for a death spiral
posted at 8:01 pm on November 20, 2013 by Allahpundit
I was tempted to subhead this as “comedy gold” because … Rubio’s new O-Care bill would increase the risk of a death spiral. Right? Remember, the “risk corridor” (a.k.a. bailout) provisions of the law say that if a plan on the exchange comes in slightly under budget, the insurer has to cut a check for the difference to HHS. If it comes in slightly over budget, HHS cuts a check for the difference to them. Without those provisions, an insurer who came in way over budget would need to charge higher premiums next year to cover its loss, and higher premiums are the first baby step towards a “death spiral” — premiums increase, healthy people decide the new premiums are too expensive and drop the plan, the remaining risk pool is thus older and sicker, then the insurer has no choice but to increase premiums again, and on and on. Eventually premiums become so expensive that there’s not enough healthy people left in the risk pool to keep it afloat and the plan goes belly up. The “risk corridor” reduces the odds of that by essentially sharing profits, up to a certain point, among plans that participate in the exchange. If a particular plan comes in slightly over budget, no need to raise premiums next year to make up the shortfall. HHS will cover it by paying you out of the extra revenue it received from insurers who came in under budget.
In other words, if you want to raise the odds of a death spiral, the first thing you should do is get rid of the “risk corridor” so that insurers have no alternative to covering their losses except raising premiums. So here comes Rubio, saying: Let’s get rid of the risk corridor.
If Rubio were truly motivated by concern that taxpayers might end up footing a “bailout,” there’s an easy solution: Write a bill stipulating that risk corridors must be budget-neutral. Presto, problem solved. But Rubio’s bill is far more sweeping than that—it eliminates risk corridors altogether by striking Section 1342 from the law. This is a clue that his real motivation isn’t to eliminate the possibility of a payout but to eliminate the Affordable Care Act altogether.
“The insurers who signed up for the exchange did so with the understanding that their risk was limited,” says Professor Timothy Jost, a health-care expert at the Washington and Lee University School of Law. “So repealing those risk corridors is basically breaking a contract with the insurers that if they would come into this program, there’d be some limit to their risk exposure.”
Eliminating risk corridors could set off a chain reaction that undermines the law. Some insurers would drop out or decline to participate in the exchanges. Others would run into solvency issues or start charging a risk premium. The actuaries who set rates would jack up premiums for 2015. This could lead to the death spiral of rising costs and declining participation that the law’s supporters worry about. “Basically, it’s a way of killing the exchanges,” says Jost.
Exactly. It’s an attempt to force repeal by making the exchange plans potentially so risky for insurers to offer that they’ll flee the exchanges instead. If enough insurers run screaming, Democrats will have to revisit the law in its entirety. What you could do as an alternative, as Joshua Green notes in the excerpt, is stop short of getting rid of the risk corridors altogether and rather provide that they need to be “budget neutral” — in other words, that HHS can’t pay out to over-budget plans any more than it takes in from under-budget ones. As the law stands now, there’s no requirement like that; in theory, HHS could pay billions and billions of dollars to reimburse insurers for cost overruns, which is actually more likely today than it was a week ago thanks to Obama’s administrative “fix.” (Letting healthy people re-enroll in less expensive un-canceled plans will mean less revenue for insurers this year than they were counting on and hence a lot of busted budgets.) I assume that, in the unlikely event that Rubio’s bill gets traction with some red-state Democrats, that’s how it’ll be re-written as a bipartisan compromise. HHS will be capped on how much it can pay out to insurers, but the provision won’t be repealed in its entirety. That’s a bit too close to “death spiral” territory than Democrats probably want to go.
Reihan Salam, flagging Green’s “budget neutral” idea, says Rubio’s bill is bad policy insofar as it would undo the obligations of the federal government to insurers after the industry had reorganized itself to accommodate the new federal ObamaCare regime. True, but even Green’s “budget neutral” bill does that, albeit to a lesser extent. Given the likelihood of cost overruns for many plans (not only because of O’s administrative fix for cancellations but because “young healthies” have been thwarted by the website from enrolling so far), it seems like a safe bet that there’ll be fewer companies paying in to HHS next year than there are waiting for HHS to pay out. Some insurers are going to get stiffed, albeit not as badly as they would if Rubio’s bill passed. Plus, we’re already past the point of worrying about insurers having to adjust expectations on the fly; Obama himself has pulled the rug out from the industry twice already, first with the employer mandate delay and second with his cancellation “fix.” If worse came to worst and Rubio’s bill was enacted, I assume insurers could/would arrange privately among themselves to re-create the “risk corridor,” at least temporarily while they’re all adjusting to the new ObamaCare regime, by sharing profits on exchange plans to indemnify each other from massive loss. But we don’t need to game it out too thoroughly. Rubio’s bill won’t pass. It’s great politics, though, even if it’s not great legislation.