Government policies designed to offset the financial losses that the health insurance companies will incur in Obamacare are being labeled a bailout. But these schemes are really a planned subsidy. The cost anomalies that they're designed to mitigate weren’t a consequence of a bumpy rollout but a deliberate feature of the law.
At issue is what’s being referred to as the “three R’s.” These are Obamacare policy constructs that are designed to offset losses that insurers will take as a result of the mostly older, and less healthy mix of patients that are enrolling in the exchanges. These three R’s include: 1) A reinsurance fund of about $25 billion (financed off a fee on commercial insurance plans) that compensate health plans that enroll a costlier pool of patients; 2) “Risk corridors” that substantially limit insurance company losses by shifting these costs to taxpayers; and 3) Risk adjustment that balances health plans that enroll a disproportionate share of costlier patients.
The consulting firm Milliman published a good analysis of how these policy mechanisms are designed to work. As Adrianna McIntyre, a health policy analyst and blogger at The Incidental Economist, explained, “Insurers wouldn’t recoup all losses, but the risk corridor program provides their bottom line with a substantial buffer.” Jonathan Cohn, who has been a vocal advocate for Obamacare, provided a similar analysis in another smart article that lays out how these policy schemes will work.
These mechanisms for risk adjustment are standard fare in other government health insurance schemes. They’ve been used as a tool to blunt the impact of unforeseen problems with insurance markets. But in Obamacare these mechanisms amount to a subsidy, because the effects they’ll counteract are the result of an intentional feature of the law, and not just the consequence of the program’s faulty launch.
Obamacare’s regulations prevent the health plans from being priced to reflect the insurers’ best guess as to what their risk (and true costs) is going to be. National Affairs editor Yuval Levin first made a similar point in arguing for legislation that would repeal elements of the three R’s. For example, insurance companies are barred from fully adjusting prices based on age and health status. Subsidies aren’t adjusted for these risk factors, either, just for income (in an approach that biases the enrollment toward lower income beneficiaries who get a proportionally greater amount of financial assistance relative to their income). Political jawboning over the initial premiums that health plans floated guaranteed that the insurers ended up pricing the resulting health plans even less rationally than the dogmatic law allows.
As a result, the insurance products are deliberately priced too low relative to their expected costs, and too high to attract the healthy beneficiaries that the plans need in order to cross subsidize their inevitably costly pool. The plans are also too expensive to attract the middle class families that the government needs to bring into the exchanges in order to get the total Obamacare enrollment to a number that would create a sustainable pool (estimated at about 20 million). In short, the insurance pool that Obamacare needs to attract is out of reach from the outset. The three R’s is the policy construct that's designed to counteract this deliberate imbalance.
The need for these offsets will increase as Obamacare unfolds. Health plans are unlikely to expand their offerings in 2015, and premiums will surely rise. The health plans available in the exchanges will become even more unappealing. Provider networks and drug formularies will be narrowed further to adjust for the higher risk. The only new entrants are mostly low cost Medicaid plans. This means that the costly skewing will also get worse, as those who enroll are people most in need of the coverage. Under these conditions, the risk adjustment isn’t a tool to blunt the financial impact of unforeseen "glitches," but an implicit subsidy designed to offset the losses that stem from planned mispricing.
Comparisons have been made between Obamacare and the launch of Medicare Part D, where risk corridors were incorporated as a way to smooth the drug program’s launch. But Obamacare is not a normal insurance product -- one where market participants (the insurers) are allowed to price their products to reflect their anticipated costs, and where excess risk (if it materializes) is a result of a slow or rocky launch. Obamacare health plans are consciously priced to attract older, and lower income beneficiaries who benefit most from the subsidies (and on the whole, are more likely to have costly comorbidities that raise anticipated costs to insurers).
At the same time, the legislation actively discriminates against younger, middle class families by exposing them to a higher percentage of health plan costs relative to their income. This is a consequence of two concurrent policy demands. First, a subsidy structure that’s designed to re-distribute income, mostly from those whose annual household income is above about 250% of the federal poverty level to those whose income falls below that threshold. Below this 250% level is where the subsidies are generally rich enough to offset the higher cost of the Obamacare plans relative to comparable policies people could buy outside the exchanges. At the same time, Obamacare actively discriminates against those under 40 by forcing the insurance products to be priced higher than their younger age should permit.
As a consequence of all these factors, the risk pool needed to make Obamacare work (without the aid of additional subsidies) was unrealistic from the outset. It was dependent on consumers either being coerced into deliberately making bad economic choices, or being too befuddled by the law’s complexity to notice that they were doing it. Since health plans were prevented from pricing products to reflect true risk, they were always going to have atypically high costs. Under this outcome, the risk adjustment amounts to an embedded financing scheme intended to offset these structural features of the legislation.
Do the three R’s amount to an insurance industry bailout that should be repealed by Congress? In a normal insurance market, risk adjustment should be cost neutral. In Obamacare, these schemes are an unlimited taxpayer lifeline, designed to reimburse complicit insurers for the many laws of economics and common sense that Obamacare deliberately violates. The three R’s aren’t a bailout. They’re an inevitable form of financial aid.
You can follow Dr. Scott Gottlieb on Twitter @ScottGottliebMD
