On Monday, Sen. Marco Rubio (R-FL) wrote a FoxNews.com op-ed tantalizingly titled, “Sebelius, Congress should take ObamaCare bailout off the table.” The piece’s central premise is that Obamacare could force taxpayers to pay for an “insurance company bailout” in case the health law’s open enrollment period goes horribly awry, and that Congress should pass a one-page bill proposed by Rubio making sure that Americans won’t be subjected to this kind of government overreach.
But that belies the actual purpose and structure of the Obamacare mechanisms that Rubio is casting as bogeymen. They’re not “bailouts” at all. In fact, they’re mostly temporary measures and consumer protections that were crafted as important backstops for the health law’s potentially rickety first three years, and they already exist for other government programs (including the Republican-proposed Medicare Part D prescription drug benefit). And if Rubio succeeds in repealing them, insurance companies won’t be the only ones that suffer — potentially millions of Americans could see their monthly insurance premiums skyrocket.
Insurance companies were sort of shooting in the dark when they set premiums for Obamacare’s first year. They had to approximate how many people would enroll, how old the customers would be, how sick they would be, how much insurers would have to pay out in claims — but the whole enterprise was, ultimately, a series of educated guesses.
That’s not surprising considering that Obamacare’s marketplaces represent the first time the American insurance industry has to compete in unified, regulated markets without discriminating against sick people or offering a junk product. But it does mean that there will be a fair amount of uncertainty in the health law’s early years.
Enter reinsurance, risk-adjustment, and risk corridors — a trio of financial shock absorbers sometimes referred to collectively as “The Three Rs.” Two out of the three Rs — reinsurance and risk corridors — are temporary programs, while risk-adjustment is a permanent Obamacare provision that will stabilize insurance pools from year-to-year. So what do they actually do?
Reinsurance is basically insurance for insurance companies. In 2014, the ACA sets aside about $10 billion that will be used to help insurers pay out claims for particularly expensive patients enrolled in marketplace plans, thereby also keeping down these policies’ premiums. This reinsurance money is funded through a nominal $63 tax on almost all American insurance plans. It will also be phased out over the next three years, providing $6 billion for insurers in 2015, $4 billion in 2016, and nothing afterwards.
Risk-adjustment is what Bloomberg BusinessWeek’s John Tozzi aptly described as “Robin Hood-style redistribution” from health insurers who had to pay out less in medical claims in a given year to those who had to pay out more. The entirety of this transfer occurs between the insurance companies themselves and is a clever way of discouraging insurers from cherry-picking young, healthy, and cheaper-to-cover customers. For instance, if a marketplace plan enrolls a disproportionate number of young people and therefore has to pay out less in claims, they’ll end up losing money to insurers that tried to attract a more diverse risk pool.
Finally, risk corridors are another temporary program meant to prevent premiums from skyrocketing during Obamacare’s nascent years. Under this provision, the federal government will give insurers who set their premiums too low — i.e., those who low-balled how much they’d have to pay out in claims — a portion of the profits from insurers who set their premiums too high. The level of the cut that the federal government will take from plans with excessive rates, and the level it will pay out to those that lost money, both depend on how off-base the insurers’ set premiums were.
Like risk-adjustment, risk corridor adjustments take place entirely between insurers in marketplaces and the federal government. The only involvement that the taxpayer has is as a beneficiary to a consumer protection. For instance, the Kaiser Family Foundation (KFF) estimates that these various backstop measures will limit premium increases to below 2.4 percent even if young, healthy enrollment in the marketplaces is 50 percent lower than expected.
Rubio’s loaded language portending an “insurance company bailout” may be good politics. But in reality, repealing these measures would only hurt the very people he’s claiming to protect from government overreach.