Consider This A Warning: Obamacare Carries Risk of Another Bailout

Thomas Warns*

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There are a multitude of flaws in the Affordable Care Act which have been laid bare in the last few months. One of those problems that is garnering an increasing amount of media attention is the “risk corridor” provision. Risk corridors, along with reinsurance and risk readjustments, are billed by supporters of the law as a set of “shock absorbers.” Shock absorbers are good in a car or bike, so they must be good for your federally mandated healthcare plan too right? Well let’s take a look at what those three “shock absorbers” actually do.

Businessweek has a helpful table explaining what each of the three “R”s does. In case you don’t like tables, here is a quick summary: risk adjustment is a permanent provision that will send money from insurers with many low risk enrollees to insurers with high risk enrollees in order to reduce the incentives to cherry pick the healthiest enrollees; reinsurance is a three year provision that involves a fund that will pay insurers 80% of any enrollees costs that exceed $50,000, and  which will supposedly be paid for with a $63 tax on all of the insurance plans; and risk corridors, a three year program backed by the government which will hypothetically send money from insurers whose costs fall below 97% of their expected target to insurers whose costs exceed 103% of their expected target. All of these provisions paint a picture of a healthcare law that creates an uneasy public-private profit sharing hybrid, rather than fostering the genuine competition which free markets thrive upon. In fact, with the federal government backing up these programs, it seems tantalizing close to the liberals’ beloved “single-payer” system.

Unlike readin’, ‘ritin, and ‘rithmetic, the three “R”s that form the basis of a solid education, the the three “R”s of Obamacare are nefarious and can only signal more misery for cash-strapped Americans. All three of the “R”s distort the normal incentives that are present in the free market. If insurers are going to be penalized through these transfer payments for enrolling young, healthy individuals into the exchanges, then incentives will exist to make it more profitable to enroll old, sickly patients. The insurance companies then will all be stuck with a high risk pool of enrollees, as young and healthy uninsured people balk at the idea of overpaying for low quality health care plans they can’t afford anyway (for some reason men in their twenties aren’t that excited to pay for insurance plans that legally must require coverage for options they won’t need like pediatric services and maternity/newborn care). Young adults will be best served if they avoid buying insurance, and if they can’t dodge the penalty, then pay the IRS for not buying insurance. If they get sick they can always purchase insurance during the next open enrollment cycle, when they will have to be accepted by insurers under Obamacare.

The much feared death spiral will begin: insurers will have to charge higher premiums each year to avoid losing more money, and fewer young and healthy people will sign up. Young people are ultimately needed to sign up however, since they are expected to pay more in benefits than they consume in healthcare services. If healthy young adults never show up in the exchanges, the insurance companies will all be screaming for a bailout; the three “R”s can’t transfer money from profitable insurance companies to unprofitable ones if they all lose money.

The Obama administration has repeatedly said that they need at least 38.5% of enrollees to be from the relatively healthy 18-34 year old age group in order for the marketplaces to be viable. So far, the administration reports that only 24% of enrollees are from that age group. Of course, part of the reason the numbers are failing to meet the expectation is because of President Obama’s “fix” that allowed people with cancelled health plans to keep them for another year, effectively torpedoing the insurance companies’ cost estimates for the next year.

Administration officials are still optimistic though, as they maintain that Massachusetts similarly had a low percentage of young enrollees at first, since younger buyers are less experienced with insurance and will enroll last. Those more cynical of the numbers counter that many of the young adults who have signed up so far are likely to be the relatively few that are sickly, and the numbers do not actually show who has paid their first premium, which would trigger their insurance coverage. Of course, businesses don’t typically count sales until they are actually paid for (or, if you are an accountant, if payment is virtually certain to occur). The Obama Administration counting as “enrollees” those who have signed up but not yet paid would be the same as Amazon.com reporting sales as the number of people who placed items in their online shopping cart, regardless of whether they paid. If the number of enrollees ultimately does not rebound to what insurers expect across the board, there will be widespread losses in the insurance industry and whispers for a bailout through the risk corridor.

The fact that the reinsurance and risk corridor provisions are only supposed to last for three years is good news, but Americans shouldn’t get too optimistic yet. Recent evidence with the unemployment insurance extensions reveals just how difficult it can be to cut any sort of “temporary” subsidy or benefit. Insurance companies will claim they “need” the money from the three “R”s to stay in business, and put pressure on Congress to extend the program indefinitely. Or President Obama could unilaterally amend the law for the umpteenth time without bothering to follow the Constitutional blueprint for passing, amending, or repealing laws.

Fortunately, Americans seem united in their opposition to an insurance bailout. A recent survey found that about 65% of Americans are against any sort of insurance company bailout. It is easy to understand why: Obamacare is already projected to cost over $1 trillion over the next decade due to all of the subsidies for the poor and sick that are being handed out, and tax-payers don’t feel particularly excited about paying even more for health care on top of that. 

In the end, the next few months and years will lay bare whether these problems are survivable or not; either way though, all the upheaval from the new laws has left the individual insurance market in disarray and Americans in a state of confusion. Oh, and did I mention that the employer mandate (if it isn’t delayed again) will take effect in less than a year?

*Thomas Warns is a J.D. Candidate, class of 2015, at NYU School of law, Staff Editor on the NYU Journal of Law & Liberty , and author of the weekly column "Consider This a Warning."