The Magazine

The Slush Fund

How Obamacare pays off insurers.

May 12, 2014, Vol. 19, No. 33 • By JAY COST and JEFFREY H. ANDERSON
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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.

Gary Locke

Gary Locke

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.

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