I testified on Obamacare yesterday before the House Oversight and Government Reform Committee.
I testified yesterday before the House Oversight and Government Reform Committee on a somewhat technical provision of Obamacare. The provision establishes “risk corridors,” which limit profits and losses of insurers that sell through the exchanges. Plans that make “excess profits” must pay into the risk corridor fund; those that suffer “excess losses” receive money from that fund.
Theoretically, the government would never pay more money out of the fund than was paid in. But HHS announced last year that disbursements from the funds could exceed receipts, meaning that they can use taxpayer money to make payments to insurance companies.
The issue grew contentious in recent weeks, especially once House leaders suggested that they might attach legislation repealing risk corridors to a bill raising the government’s borrowing authority. They dropped that idea yesterday and it likely won’t surface again.
The morning before I testified, the Congressional Budget Office (CBO) released its new budget analysis, which included its estimate that the “risk corridor” provision would save the government money. I’m personally rather skeptical of this estimate and, in any event, it does not prevent HHS from spending more than the risk corridor fund takes in, should the estimate prove wrong.
In my testimony, I called on Congress to amend the law to ensure that risk corridors don’t cost the government money by requiring that they be at least budget neutral. You can read my complete statement here. My opening statement to the committee is below.
Chairman Issa, Ranking Member Cummings and distinguished Members of the Committee:
Thank you for inviting me to appear today to discuss provisions of the health care law that have been characterized as “insurance company bailouts.”
People generally understand that the health care law includes subsidies for individuals who buy insurance. It should not provide subsidies to corporations that sell it.
It has been argued that insurers can’t make a profit without such subsidies. CBO’s most recent estimate on risk corridors suggests that, in the aggregate, issuers in the exchanges will realize premium revenue that substantially exceeds their projected costs. Their expected profitability is attributable in part to powerful tools contained in the law. These provisions help companies that sell through the exchanges prosper without the need for various corporate welfare provisions.
The law has handed such insurers enormous opportunities to increase their revenues and attract more customers, especially healthy ones. It subsidizes the cost of their product. It penalizes people who don’t buy their product. Regulators have required the cancelation of “non-grandfathered” individual and small group policies and will cancel many more later this year, leaving these people with little choice but to obtain insurance through an exchange. It is an enormous government effort that involves driving business to that segment of health insurers that sell through the exchanges.
Collectively, these provisions should be sufficient to induce millions of healthy people into plans sold through the exchanges without the need for additional government intervention.
The law’s “premium stabilization” provisions raise concerns because they create the potential for backdoor assistance from taxpayers to insurance companies and the moral hazard that entails.
The law’s risk corridors are among these provisions. CMS’s decision to permit risk corridor disbursements in excess of receipts is especially troubling. It creates the possibility that government will use public money to mitigate losses incurred by insurers who improperly price their products.
CBO’s estimate that risk corridors will save the government $8 billion over 3 years offers some comfort.
But CBO, as we all know, is often wrong and its new estimate is accompanied by the usual recitation of caveats. There simply is too much uncertainty surrounding the law’s implementation for Congress to rely exclusively on this latest CBO estimate, which is subject to change without notice.
Instead, it should amend the Act either to repeal risk corridors or, in the alternative, to stipulate that aggregate risk corridor disbursements cannot exceed receipts. If CBO is correct, then the government will still get its $8 billion in deficit reduction. If it is wrong, taxpayers would be protected against unexpected spending.
Some might argue against even a small but prudent step like a budget neutrality requirement because insurers weren’t expecting one when they established their 2014 premiums last spring. That is not a line of argument that the government has found terribly persuasive when applied to individuals and small firms.
Millions of individuals and small business owners expected to renew their coverage; they didn’t expect to have it canceled, but that didn’t stop the government from ordering the cancelations.
More cancelation notices will come later this year, according to CBO; losing their coverage isn’t what those people chose, but it is their fate.
My mother-in-law expected to continue to receive care from the area’s largest health system; she didn’t expect her Medicare Advantage plan to drop the system from its network, but that is one consequence of Medicare cuts in the health care law.
Millions of Americans have been asked to adjust, adapt and evolve, to endure adverse consequences without complaint and without relief. They are dealing with the unexpected. Congress should ask no less of insurance companies.
Insurers should be able to make a profit in government marketplaces even if Congress repeals risk corridors or prohibits expenditures to exceed receipts. The law’s combination of mandates, subsidies, cancelations and tax penalties can be expected to induce or compel millions of people in relatively good health to buy their product.
Individual competitors will suffer losses if their costs exceed their revenues. That is not the taxpayers’ problem.
The government has established its marketplaces. Let the insurers compete.
Doug, Subsidizing health plans will create more job freedom if I follow the CBO’s logic. Don’t we want less people working to pay for the increase in the number of individuals who will no longer have to work to pay for health care, groceries, etc?
That CBO report did produce a curious response from the White House: that Obamacare is liberating people from their jobs. But in this case, I think the corporate welfare provisions probably end up benefiting the 1 percent, so perhaps the Administration might rethink its position.
I like your blog but I cannot agree with you on this issue, Doug.
Every other country that uses private insurers to provide universal coverage has some kind of risk adjustment program paid from general reverues. This includes Germany, Switzerland, Holland, and probably several more. In fact Medicare Advantage has such a fund.
Without risk adjustment funds, any insurer who attracted an unhealthy risk pool would leave the marketplace. In fact, that is exactly what happened in every US state in the last 20 years where underwriting was banned. The analogy is not perfect, but also look what has happened in the long-term care insurance market. Carrier after carrier has dropped out of the market and the public is not better off.
I think that your use of the term ‘corporate welfare’ is on the inflammatory side. You imply and in fact you more or less state that free enterprise insurers should be able to create a vigorous market without assistance. Without underwriting that is just not true.
Thanks for your thoughtful comment, Bob.
I want to distinguish three things here: 1) risk adjustment; 2) reinsurance; and 3) risk corridors.
Risk adjustment is unobjectionable, so far as I am concerned. As you note, Medicare Advantage uses risk adjustment. Once premium has been de-linked from risk and insurers are required to issue policies to any willing buyer, some adjustment must be made for the fact that some insurers will attract a less healthy population than others. Government should — must — devise a means of redistributing premium from insurers with healthy risk pools to insurers with less healthy risk pools.
Reinsurance in Obamacare is not really reinsurance at all. It is simply a transfer of funds from group health plans to insurers that sell through the exchanges, something that I am quite comfortable calling corporate welfare. The law told the IRS to retrofit a tax on employer and union-sponsored plans that would raise $10 billion; it told CMS to set an attachment point that would result in the distribution of $10 billion to plans selling through the exchange. That attachment point has varied wildly through several regulatory iterations, showing that it is highly arbitrary. The provision deserves repeal.
I have no objection to risk corridors, so long as they work the way that risk adjustment does — a government redistribution of funds from insurers that realize “excess profits” to those that suffer “excess losses.” It should be budget neutral or, as in Medicare Part D, actually reduce the deficit. [CBO believes that it will, although its estimate is, in my view, wildly erroneous; OMB says that it will be budget neutral.] I am happy either with repeal of the provision or a stipulation that risk corridor disbursements cannot exceed revenues.
I’m not familiar enough with the European systems you cite to offer intelligent comment. But to the extent that they use general revenue to compensate insurers for revenue shortfalls, I have a problem. The idea behind Obamacare is that insurers are supposed to go at full risk for financing the care of their enrollees. The law includes all sorts of inducements to healthy people to buy: there are subsidies for people who purchase coverage through the exchanges and penalties on those who don’t; millions of policies have been canceled, forcing people to obtain insurance through the exchanges; the government is spending tens of billions of dollars on sales and marketing, including door-to-door solicitations by government-funded groups, a free sales force that any insurer would envy.
These should be sufficient for insurers to make a go of it. They are under no obligation to sell through exchanges. If they do, taxpayers should not be at risk for their losses.
Doug
Thanks Doug.
I was not really aware of the differences between risk adjustment, reinsurance, and corridors.
I thought it was all risk adjustment frankly.
You are correct that vast amounts are being spent to attract healthy persons to the exchanges.
Also that the individual market was gutted, cynically and cruelly, to force relatively healthy persons onto the exchanges.
Here is another aspect to consider:
- A major goal of health reform was to help unhealthy persons who did not have employer coverage find affordable insurance.
That is a good goal.
The direct approach would have been to bring those persons into Medicare or some form of Medicaid, and raise taxes on everyone to do so.
But Republicans and some Democrats would have rejected any new taxes.
So we have this vast indirect murky world of quiet subsidies and targeted taxes, spending just as much but accomplishing much less.
Check out an article called “Kludgeocracy” that describes this very well.
“Kludgeocracy” is an apt term, Bob.
All health expenditures, including premiums, are paid out of wages. I think it’s fair to say that the pre-Obamacare regime functioned to disguise this fact and create a distorted sense of the value of medical care. Obamacare essentially furthers that distortion and adds new layers of complexity in the process.
People would object to having their payroll taxes raised to 25 percent or more (from the current 15.4 percent) to cover the full cost of Medicare (the current payroll tax only covers Part A outlays and it has been in deficit since 2010), Medicaid and the cost of covering uninsured people under the age of 65. That would face bipartisan opposition. Indeed, few would bother to propose it.
Alternatively, we could provide more progressive tax treatment of health expenditures (for premiums, out-of-pocket spending and HSAs) and let people buy it with their own wages. That, too, is something voters wouldn’t tolerate.
So we’re left in this very strange world, where we create highly regulatory bodies that we ironically call marketplaces, subsidize people who buy coverage there, strip coverage from people who have bought it elsewhere, and tax people who refuse to buy it at all.
Hardly an ideal solution, but it is one we will learn to live with.
The single payer advocates are always telling us that taxes would just substitute for premiums.
Unfortunately the premium load is wildly uneven.
Let’s say that we did come up with an underfunded single payer system for 10% of payroll.
General Motors would say thank you very much. But Dunkin Donuts would be in big trouble.
This is roughly what has happened with the ACA on a smaller scale. There have been too many losers (who are very vocal) and not enough winners.
Most of the nations which do have even taxes for health care started their programs just after World War II, when almost every resident was broke.
America as you say is a much different place.
Very true. Any change to the existing system, including a repeal of Obamacare, creates winners and losers.