Politics & Policy

Insurance-Company Bailouts

Among the many legitimate criticisms of the 2008–09 Wall Street bailout was that it created a situation in which profits are private but losses are public, being borne by taxpayers who extended liberal loans and outright subsidies to various firms in order to head off total paralysis in the credit markets. Critics right and left regarded the combination of private profits and public losses as inherently objectionable — but Barack Obama and congressional Democrats apparently saw in the Wall Street bailout a model for health-insurance reform. And, surprise: Buried deep within the Affordable Care Act are not one but two provisions to provide preemptive bailouts to insurance companies in the event that their finances should be overwhelmed by unanticipated circumstances — for example, a catastrophically incompetent rollout of the program that left them overburdened with high-cost sick and elderly clients. This is one of the many distasteful results of Nancy Pelosi’s pass-it-to-find-out-what’s-in-it style of legislation.

The bailout provisions of Obamacare are found in Sections 1341 and 1342 of the Affordable Care Act, both of which should be repealed. Doing so will be difficult, but it is not impossible. The first provision bails out insurance companies for costs associated with individual patients when they exceed $45,000. Under this so-called reinsurance program, insurers will be able to push off 80 percent of costs between $45,000 and $250,000 onto a fund financed by a fee of $63 per head on customers of insurance companies and workers covered by self-insuring companies. Given that most of the associated costs will almost certainly be passed on to consumers by insurers, that fee is in effect a tax. And in the event that the fund does not generate revenue sufficient to cover its costs — far from an unlikely scenario — then taxpayers will be explicitly on the hook. This preemptive bailout was included in the law as a deal-sweetener to induce more insurance companies to participate in the program. It is a good deal for insurers, for whom any opportunity to reassign risk to somebody else is a welcome profit opportunity, but it is a terrible deal for consumers and taxpayers.

The second and potentially even more troubling bailout provision is the one for so-called risk corridors, which asks the insurance company to project their total costs and then picks up most of the difference if losses should exceed those targets. The potential for gaming the system here is obvious and dire, and the potential costs are enormous. Senator Marco Rubio already has introduced a bill to repeal this provision, though it is unlikely to pass. At the very least, Republicans should ensure that the provision, scheduled for sunsetting in 2016, dies on schedule.

The potential costs and risks associated with these provisions are worrisome, and the fact that they are in effect hidden from the public is troubling in and of itself. The complexity of Obamacare is by design: By obscuring the realities of the program, Obamacare’s architects ensured that it would be easier to peddle such untruths as “If you like your insurance, you can keep it” and promises of substantially lower premiums. The reality of Obamacare has shocked Americans, but it has not shocked them enough: Even as the law sends many Americans’ insurance premiums skyrocketing, those higher premiums do not cover the costs associated with the program — Americans will be paying on the front end and on the back end as well, with premiums on one side of the equation and bailouts on the other.

If Congress had tried to pass a law simply transferring $1 trillion to insurance companies over the next decade, there would have been energetic resistance to its doing so. The Affordable Care Act amounts to the same transfer, even as it places insurers in the enviable position of having a federal law in place that gives Americans a choice between buying their products and being fined by the federal government.

Unlike the Wall Street bailouts, the insurance bailouts are not a one-time expedient instituted in the face of a crisis: They represent an open-ended claim on taxpayers’ resources and a transfer of risk from private, profit-seeking enterprises onto the government. Together, the provisions represent an important part of the Democrats’ agenda for transforming what we know as insurance companies into semi-public utilities managed by central planners in Washington. There are obstacles to seeing these provisions repealed: Harry Reid’s Senate stands in the way, as does President Obama. But every new revelation about the real costs and burdens of this program render it more vulnerable, and it will be difficult and costly for Democrats to defend a permanent bailout regime. It is a fight worth having — and if that fight should continue into November, the American public should be invited to take the opportunity to weigh in on whether it wishes to be permanently committed to future bailouts of large financial firms that use political favoritism to pass off their losses. We suspect that many Americans will find themselves quoting John Boehner, whether they realize it or not: Hell, no.


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