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GOP Prepares To Take Economy Hostage Unless Democrats Vote To Raise Obamacare Premiums

By Sy Mukherjee  

"GOP Prepares To Take Economy Hostage Unless Democrats Vote To Raise Obamacare Premiums"

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Fiscal Cliff

CREDIT: AP Photo/J. Scott Applewhite

On Friday, the Washington Post’s Robert Costa reported that House Republicans are floating a strategy to raise the nation’s debt ceiling for one year in exchange for a repeal of Obamacare’s so-called “risk corridors” — a temporary financial shock absorber that the GOP is misleadingly castigating as an “insurance company bailout.”

But make no mistake — this is a provision whose ultimate goal is to protect American consumers from potential premium increases, not to give insurers a handout. And the GOP has pushed the exact same “bailouts” on other occasions, including for the Medicare Part D prescription drug program for seniors.

Risk corridors are a system of redistributing insurers’ losses and profits in order to create a more stable insurance pool in Obamacare’s marketplaces. Since these marketplaces represent the first time that the individual insurance industry must operate under federal standards, and ultimately compete against each other without discriminating against sick people or selling a shoddy product, lawmakers anticipated that insurers might have a hard time figuring out exactly where they should set their prices in the law’s nascent years. When deciding monthly premiums, insurance companies had to approximate how many people would enroll, how old or sick they would be, how much the insurers would have to pay out in medical claims, and a host of other factors — essentially a series of educated guesses.

It’s inevitable that some insurers will come closer to hitting the right mark on their rates than others over the next several years. So risk corridors allow the federal government to give insurers who set their premiums too low — i.e., those who mistakenly thought they’d have to pay out less in medical claims — a portion of the profits from other insurers who charged their customers excessive rates. The more an insurer overcharges, the higher the proportion of profits it will have to hand over to the government; the more an insurer undercharges, the more it will be given money by the federal government (money that comes out of other insurance companies’ profits).

Austin Frakt posted a helpful chart of this system’s particulars over at The Incidental Economist:

aca risk corridor

CREDIT: American Academy Of Actuaries/Austin Frakt

To be clear, this transfer of funds is simply a mechanism by which to achieve the real goal of the risk corridor program: to shield consumers from extravagant rate increases stemming from insurance industry uncertainty. And it’s a temporary one at that, set to expire in three years.

Republican lawmakers actually used to support this mechanism before Obama endorsed it — and built a permanent risk corridor program into the Medicare Part D prescription drug benefit that went into effect in 2006. In fact, the original version of the Part D risk corridors actually allowed for a significantly more generous transfer of funds to insurance companies:

Part D risk corridors

CREDIT: Federal Register/Austin Frakt

So by using the current Republican logic on risk corridors, the GOP under President George W. Bush passed into law an even bigger “government bailout” of the insurance industry than Obamacare. But now, they want to shutter a more modest and temporary program that has the potential to keep millions of Americans’ premiums down over the next three years. And they’re threatening to let the country default on its credit for the first time in history, spurring economic calamity, if they don’t get their way.

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