The Magazine

Unwinding Obamacare

Jan 27, 2014, Vol. 19, No. 19 • By JAMES C. CAPRETTA and YUVAL LEVIN
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An all-out assault on this aspect of Obamacare is well justified on both policy and political grounds​—​indeed, very few issues have the potential to unite voters politically like this one. It is hard to imagine that many Americans, regardless of their political leanings, want taxpayers to be on the hook for covering the losses of shareholder-owned insurance companies. The promise of such a bailout effectively amounts to collusion between these companies and the Obama administration at the expense of the public: Insurers avoid pricing coverage in ways that take account of the distorted risk profiles of the exchanges so as to give the law a better chance of surviving a little longer, and in return the administration cushions their losses with taxpayer dollars.

There is certainly room for risk-sharing and reinsurance in a rational insurance system, should insurers desire it, but such mechanisms must be symmetrical: The losses of some insurers should be cushioned by funds drawn from the profits of other insurers. That is how the Congressional Budget Office assumed these provisions would function in Obamacare, and they projected them to be budget neutral. But risk corridors would only work this way in a market that was properly structured and allowed insurers to price for risk​—​so that while the risk might be unevenly divided among insurers, it would be accounted for by the market as a whole. Obamacare’s exchanges are not rational insurance markets, and its risk-corridor provision now looks to be very far from budget neutral. This year it could easily cost taxpayers hundreds of millions and perhaps billions of dollars.

Republicans should therefore propose either to eliminate entirely the program’s risk-corridor provisions (as a bill introduced by Florida senator Marco Rubio and Rep. Tim Griffin of Arkansas would do) or to make them explicitly budget neutral, requiring that payments to insurers suffering losses be reduced proportionally so they total an amount no larger than the payments from insurers reaping profits. That way, insurers who chose to participate in the exchanges would together bear the consequences of a failure to price their products appropriately, rather than making the taxpayer pay for their mistakes and allowing them again to lowball premiums next year to keep this broken new system on life-support.

It is important to understand how crucial the prospect of a taxpayer bailout of insurers is to the future of Obamacare. Insurers facing the prospect of participating in the exchanges in 2015 without the backstop of a taxpayer bailout would be forced either to price their products properly (and therefore likely well above their 2014 premiums) or withdraw from the exchanges altogether. Either way, the law will become even less attractive to middle-income and moderate-wage households who get little or nothing in subsidies. Insisting on budget neutrality or repealing these provisions would, like the elimination of the individual mandate, not only make good political sense but also help to speed the unwinding of Obamacare, which is essential to the ultimate repeal of the law and its replacement with a real reform of American health care.

For that very reason, the insurers and the Democrats are certain to mightily resist a repeal of the bailout provisions. But the more intense their resistance, the more it will reinforce the case against the law. A program that cannot survive without a massive taxpayer bailout of private insurers is not a program that is working. It is a program that is failing, and needs to be replaced.

Finally, Republicans should continue their efforts to minimize the harm to people with pre-Obamacare insurance coverage that they would like to keep. Their efforts to enable those whose policies were canceled to retain them late last year yielded a chaotic and lawless administration move to empower insurers in some states to continue offering those policies. That has helped some people, but a legislative reprieve would be more stable and effective, and should also be extended to small businesses​—​many of which obtained early renewals of 2013 policies and so will be facing cancellations in the course of 2014. These look likely to affect millions of families, and Republicans should help those who like their coverage to keep it.

Each of these measures would be both politically popular and substantively helpful to the cause of unwinding Obama-care and moving toward the law’s replacement. Obamacare has already encountered enormous difficulties in its early months, and more are in the offing. But Republicans cannot stand aside and assume the law will collapse of its own weight. The administration and its supporters in Congress will do all they can to mask the faults of this monstrosity and enable its survival, and they will further assert that bare survival is the new definition of success. Republicans should respond with measures that help voters see that Obamacare is neither inescapable nor irreversible​—​by saying no to the mandates, the bailouts, and the forced coverage cancellations that Obamacare requires to stay alive.

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