Obamacare’s New Blank Check for Insurers

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Nov. 21 (Bloomberg) -- President Barack Obama tried to salvage his health-care law last week, in the face of his broken promise that people who like their health-care plans can keep them. But in so doing, he may have made things worse.

Obama’s executive action allowed insurers to reinstate, for one year, plans that don’t comply with some of the Affordable Care Act’s requirements, including benefits mandated by the law and the maximum cost-sharing permitted under it. Unfortunately for the Obama administration, many Americans still won’t be able to re-enroll in their insurance plans.

Worse yet for the president, his fix may undo the very law he’s defended and fought for since its passage more than three years ago. At the very least, it significantly weakens his and his allies’ defense of that law.

Obama’s edict puts him in the awkward position of endorsing an open-ended, taxpayer-funded bailout of the same insurance companies that he and his congressional allies have been demonizing.

Obamacare includes three mechanisms to help insurers with the costs created by the law’s blanket prohibition on excluding people with pre-existing conditions or charging higher premiums based on health status or gender. Those mechanisms are important, because without them an insurer that takes on a disproportionately high number of costly patients could find itself bankrupt.

Those safeguards are a risk adjustment program, which shifts money among insurance plans based on the relative health of their enrollees; a reinsurance program, which provides additional funds to health plans that enroll individuals with very high medical spending; and a three-year “risk corridor” program designed to compensate insurers that misprice their premiums.

Taxpayers’ Cost

The risk adjustment and reinsurance programs rely on funds from insurers themselves -- the reinsurance program, for example, is financed by assessments collected from pretty much all insurers. So regardless of how well those programs work, taxpayers aren’t on the hook.

That’s not the case for the risk corridors. The health-care law establishes a benchmark amount that each insurer is expected to spend on medical expenses each year. If those costs deviate from this amount by 3 percent or more, the insurer either pays into the risk corridor program (if its expenses fall below the benchmark) or receives a payment (if its expenses are above the benchmark).

In theory, insurer payments to and from the program should cancel each other out, with no need for payments from the federal treasury. That’s what the Congressional Budget Office assumed when it scored the provision as revenue neutral back in 2010. And Obama recently told insurers that the government’s financial support has limits.

But the text of the law is clear, and it places no limits on how much this program may pay insurers. It gives, in essence, a blank check to the secretary of health and human services to make payments to insurers to cover their losses.

Insurers may very well need it. They stand to suffer major financial losses, because Obama’s action incentivizes healthy individuals to stick with “grandfathered” plans that offer fewer benefits and higher out-of-pocket costs, while pushing sick individuals into the mandate-laden health insurance policies being offered on Obamacare’s exchanges. But the Obama administration has already hinted that it will use the risk corridors program to “provide additional assistance” to insurance companies looking for a bailout. Senator Marco Rubio of Florida and Representative Tim Griffin of Arkansas, both Republicans, are out with legislation this week to repeal the risk corridor program -- undoubtedly a populist stroke that will win plaudits in many circles.

Untenable Finances

A bailout of health insurers is also likely because of the enrollment trends we’re seeing in the federal health insurance exchange. Older enrollees are the ones buying coverage, rather than the “young invincibles” Obamacare needs to work. This puts insurance companies in an untenable financial position, which will only be made worse by Obama’s recent gambit.

Obama also undercut the actions states have already taken to implement the law. The reality is that nothing in Obama’s order from last week requires states to do anything. It merely encourages them to follow. But big states such as California have been operating under the assumption that the number of grandfathered plans would fade away over time, not increase. They have engaged in negotiations with insurers, built infrastructure and anticipated the presence of marketplaces under this assumption.

That’s probably why some of the most liberal state insurance regulators have said they’ll ignore the president’s order and move full-speed ahead with the law -- dropped coverage and all. And the National Association of Insurance Commissioners, which represents state-level insurance regulators, complained the day after Obama’s action that “it is unclear how, as a practical matter,” it can be put into effect. The Obama administration has not only managed to offend the millions of Americans who have lost their existing coverage but also miffed the very regulators it needs to do its bidding at the state level.

Perhaps most concerning for the law’s supporters, Obama’s executive action portends further changes to the law. First he delayed enforcement of the law’s employer mandate by a year. Then he delayed the limit on out-of-pocket costs for some plans. Now he’s said that insurers can still offer plans that Obama himself has called substandard.

What might be next? Will Obama delay enforcement of the individual mandate, or extend the open enrollment period under the law, or consider delays of other troublesome parts of the law?

With public support for Obamacare at or near all-time lows, it’s not hard to understand why the White House is grasping for fixes to improve the law’s image -- and its own. But its latest effort to satisfy the oft-repeated promise that “if you like your plan you can keep it” may prove to be the undoing of the very law that Obama and his allies have fought so hard to protect.

(Lanhee Chen is a Bloomberg View columnist and a research fellow at the Hoover Institution at Stanford University. He was the policy director of Mitt Romney’s 2012 presidential campaign.)

To contact the writer of this article: Lanhee Chen at lchen301@bloomberg.net or @lanheechen on Twitter.

To contact the editor responsible for this article: Christopher Flavelle at cflavelle@bloomberg.net.