Obamacare Won’t Defeat Itself

by Reihan Salam

Though Patrick has discussed the Obamacare enrollment deadline in detail, I’d like to briefly weigh in by seconding Ramesh Ponnuru’s latest Bloomberg View column, which argues, correctly, that Obamacare won’t simply “implode.” Though the fact that 7 million people have enrolled on the exchanges doesn’t demonstrate that Obamacare is a success in any meaningful sense, particularly if it exacerbates rather than mitigates cost growth and stymies consumer-friendly innovation, it does make repeal and replace a more difficult proposition. Conservatives are boxed in. The goalposts have shifted, and Republicans now need to offer a health-care reform that will cover at least as many people as Obamacare, and that will create attractive and affordable insurance options for Obamacare enrollees. The Coburn bill is a good place to start. But most GOP lawmakers have yet to reconcile themselves to the reality that they need to rally around a meaningful alternative.

And finally, now seems like a good time for Republicans to address the Obamacare risk corridors, which are designed to shield insurers participating in the Obamacare exchanges from cost overruns associated with an imbalanced risk pool. Ramesh has made the case that while there is a case for shielding insurers from some risk, the Obamacare risk corridors go too far — if insurers pay more in claims than 108 percent of the value of the premiums they collect from Obamacare enrollees, the federal government will cover three-quarters of the excess cost. It would be one thing if payments to insurers that exceed 108 percent were covered by fees paid by those that did not exceed 108 percent, thus making the program revenue-neutral. But as Yuval Levin has observed, this is not the case. The risk corridors as currently designed are open-ended, and this has significant political economy implications:

If outgoing payments exceed incoming ones then federal taxpayers, not insurance companies, pay the difference. The risk-corridor provision of the law commits taxpayers to cover insurance-company losses beyond a certain level and places no limit on the taxpayers’ exposure to the risk of such losses. If the balance of risk in the exchange system as a whole ends up being badly out of whack, taxpayers could easily end up turning over billions to cover insurer losses. 

The debate about this in recent weeks has focused on the term “bailout.” Some people argue that putting the taxpayer on the hook to cover major insurer losses isn’t technically a bailout because most insurers wouldn’t be at risk of an actual bankruptcy, or because the injection of taxpayer dollars isn’t ad hoc or after the fact. But I don’t think anyone has denied the basic fact that the risk-corridor provision means that large insurer losses in the Obamacare exchanges would be heavily mitigated by the taxpayer, which means that the insurers don’t bear the full risk and so don’t have to price their products accordingly or withdraw from the exchanges. Losses resulting from an insurer’s failure to rationally price its products would trigger a public payout—and the scope of the payout would grow with the scope of the losses, however large they end up being. The point is to rescue the insurers from the financial distress they might suffer as a result of their participation in the exchanges.

Would participating insurers have hit the target of 7 million enrollees in the absence of the open-ended risk corridors? We’ll never know. But the fact that Republicans in Congress have so far failed to unite in opposition to the risk corridors represents a lost opportunity.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.