Raising Up A Standard

The next too-big-to-fail train wreck on the horizon


An American public already reeling from the catastrophic rollout of ObamaCare will more than likely be hearing an unfamiliar term being bandied about in the new year. “Risk corridor” refers to a provision in the law that allows the government to “stabilize” premium costs for insurance companies during the first three years of the healthcare rollout.

If insurance companies’ “target” costs for providing healthcare has been miscalculated, the Department of Health and Human Services (HHS) will intercede on their behalf. Syndicated columnist Charles Krauthammer illuminates the nature of that intercession. “The insurers understand that they’re going to be completely ruined,” Krauthammer explains. “And what’s going to happen as a result of this? There’s only one way out, a huge government bailout of the insurers is waiting at the end of next year.” More accurately, it will be a taxpayer-fundedbailout, similar to the ones given to the banks and the car companies.

Risk corridors were established to protect insurance companies that signed up too many sick people, relative to the number of healthy enrollees. They were part of asystem that also included two other concepts known as “reinsurance” and “risk adjustment.”

The reinsurance part of the equation initially compensated insurance companies for enrollees whose costs exceed $60,000 per year. For 2014, that compensation is funded by a $10 billion fund, fed by a $63 tax that has been levied on all healthcare plans. And while the program collects those taxes even from large employer-sponsored plans, payouts only help to underwrite the costs of individual and small-group plans.

Risk Corridors

Risk adjustment refers to the idea that, after insurance companies have calculated all the payments they have made for 2014, those that paid out less than the average cost of compensation would “redistribute” that largesse to companies that paid out more. This redistribution was designed to dis-incentivize insurers from signing up only low-risk healthy people. This part of the law is permanent, and its zero-sum feature is intended to spread risk across the entire spectrum of carriers.

Which brings us to the risk corridors. Risk corridors only apply to insurance programs being sold on the ObamaCare exchanges. It is similar to the risk adjustment concept in that it is also an attempt to even out insurers’ profits and losses. Those insurers who set their rates too high are required to pay a portion of that excess profit to the government. Those that set their rates too low will have a portion of their losses mitigated by a government payout.

As previously noted, the formula only affects adjustments for the first three years of ObamaCare’s implementation. The Incidental Economist’s Adrianna McIntyre provides a chart showing the payout structure. If insurers’ calculations fall between 97 percent and 103 percent of their actual costs, no action is taken. For those whose costs range from 103-108 percent, a 50 percent bailout applies to the amount in excess of 103 percent. Above 108 percent, HHS pays 2.5 percent of target, plus 80 percent of the costs in excess of 108 percent.

On the other end of the spectrum, costs that range between 92-97 percent require providers to pay HHS 50 percent of the difference between 97 percent and allowable costs. Below 92 percent requires insurers to pay HHS 2.5 percent of the target, plus 80 percent of the difference between 92 percent and the allowable costs.

When the risk corridors were established, the Congressional Budget Office (CBO) scored the program as “budget neutral,” meaning that it was likely there would be just as many insurance companies who overestimated the costs of implementing ObamaCare as those who underestimated them.

14th unilateral change to Obamacare that’s been made without consulting Congress

The critical point is this: these formulas were calculated based on the law as written. As National Review’s John Fund reveals, when the Obama administration moved to allow the hundreds of thousands of Americans who lost their coverage to sign up for bare-bones “catastrophic” plans, it marked “at least the 14th unilateral change to Obamacare that’s been made without consulting Congress.”

In other words, due to the lawlessness of the Obama administration, all of those ostensibly budget-neutral calculations have been kicked to the curb.

Furthermore, the administration is well aware of that reality. On Monday, November 25, the administration lowered the reinsurance threshold from $60,000 to $45,000. This move will likely transfer billions of additional dollars from taxpayers to the insurance companies, even as it adds billions of dollars to the national debt. And as Sen. Marco Rubio (R-FL) explains in aWall Street Journal editorial, “ObamaCare’s risk corridors are designed in such an open-ended manner that the president’s action now exposes taxpayers to a bailout of the health-insurance industry if and when the law fails.”

He further explains that additional regularity rulings “have made clear that the administration views this risk-corridor authority as a blank check, requiring no further consultation or approval by Congress.” He cites section 1342 of the Affordable Care Act, which was implemented last March. To wit: “Regardless of the balance of payments and receipts, HHS will remit payments as required under section 1342 of the Affordable Care Act.”

Thus, for the next three years (at least), insurance companies will be “too big to fail.”

Rubio has introduced a bill to prevent such a bailout, but in a Democratically-controlled Senate headed by Harry Reid (D-NV), such an effort to protect the American public will go nowhere.

Unsurprisingly, an overwhelming majority of Americans are opposed to an insurance company bailout. Overall, 65 percent oppose the idea, but equally importantly, such opposition cuts across several boundaries: 51 percent of Democrats, 71 percent of Republicans and 76 percent of independents give the idea a thumbs down, and that opposition includes every age and demographic group as well.

There is little doubt that much like Congress, the Obama administration considers such public sentiment irrelevant. Yet at some point, when more and more Americans become aware of this sweetheart arrangement, they may also become aware of the bitter irony that engendered it: every unilateral move made by this administration, making an utter mockery of their contentions and those of their allies that ObamaCare was the “law of the land,” has increased the probability of a taxpayer-funded bailout.

On December 18, Jason Furman, chairman of the Council of Economic Advisers, wasasked whether the administration had a “Plan B” if the number of young, healthy Americans needed to make ObamaCare viable refused to sign up for coverage. “There’s a Plan A,” Furman answered. “Which is to enroll as many young healthy people as you possibly can.”

Those would be the very same young, healthy people who were told eight days ago that there will be no tax penalty for those who had their existing health insurance plans canceled because of ObamaCare, and who did not find new coverage as required by law. Two thirds of the same young healthy, Americans polled by Harvard University’s Institute of Politics said they will not sign up for any healthcare plan.

Plan B is a taxpayer bailout of the insurance industry.

By Arnold Ahlert 

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