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.

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.

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