Topics: Obamacare

If Obamacare fails, taxpayers get to bail out the insurers

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David Freddoso,Columnists,Obamacare,Health and Human Services,Health Care,Federal Bailouts,Analysis

Obamacare's federal website is a mess, creating massive obstacles to enrollment in the law's health insurance exchange plans. Those taking President Obama's advice to apply by phone or by mail will fare little better, as their information must still be fed through the same glitchy computer system that is holding up everyone else.

The website isn't the only problem, as things are only slightly better in the states that run their own websites. In Kentucky, less than 20 percent of the newly insured (or 4,832) have actually purchased plans – the rest will enter the taxpayer-funded Medicaid program.

In Maryland, exchange enrollment (3,186 as of Oct. 25) is a tiny fraction of new Medicaid enrollment (more than 80,000). Worse, the Free State's exchange lost steam in week three, selling about 33 percent fewer plans than it had in week two.

On Oct. 23, someone discovered a possible reason for Washington State's extraordinary enrollment rate up to that point. A computer error caused applicants to be told (wrongly) that they would pay little or nothing for their new coverage. The state must now go back and give thousands of enrollees the bad news – and convince them to re-enroll.

As of Oct. 25, exchange-plan enrollments across the country were well short of goals, threatening the whole program's viability. The signs of the predicted train-wreck are there – but if the devastating collision occurs, what then?

The answer: In the worst case, insurers get bailed out by taxpayers.

Last week on The Incidental Economist blog, Adrianna McIntyre explained a provision buried in the health care law called the “risk corridor.” It's one of Obamacare's three R's (along with reinsurance and risk adjustment) that are intended to protect insurers, especially in Obamacare's first three years.

Risk adjustment and reinsurance both require profitable health plans to share risk with unprofitable ones. As exchange insurers take on thousands of new patients of unknown risk, the provisions prevent any one plan from collapsing right out of the gate based on dumb luck.

All the money for reinsurance and risk adjustment comes from insurers, but the risk corridor is different. At the corridor's center is the point at which a health insurance plan breaks even after paying for patients' care and allowable administrative costs.

If an exchange plan's performance varies in either direction by more than 3 percent, it either collects a subsidy from federal taxpayers via the Department of Health and Human Services to recoup part (50 to 80 percent) of further losses, or it has to kick back a similar share of the excess profit.

Ideally, the money kicked back by profitable health plans can cover the subsidies for plans that lose. But unlike with the other two R's, there is no legal requirement that the numbers balance or limit on what can be paid.

So imagine that we do enter a “death spiral” situation in which a large number of exchange health plans lose big and very few turn sizable profits. This could result from a delay of the individual mandate (reducing incentive to sign up); or from the current open enrollment period being extended (during which the uninsured can literally sign up for insurance on the way to the hospital); or from lack of interest among the healthy uninsured; or from faulty websites deterring all but the most desperate from enrolling.

In the event of a widespread failure, whatever its cause, taxpayers potentially face a multi-billion dollar bailout of health insurers for losses outside the corridor.

Insurers are therefore safe. Politicians who back Obamacare may not be. If insurers' costs do rise to the level that they require a taxpayer bailout, they will also be announcing massive hikes to their insurance premiums for calendar 2015. That combination may not go over so well in a midterm election year.

DAVID FREDDOSO, a Washington Examiner columnist, is the former Editorial Page Editor for the Examiner and the New York Times-bestselling author of "Spin Masters: How the Media Ignored the Real News and Helped Re-elect Barack Obama." He has also written two other books, "The Case Against Barack Obama" (2008) and "Gangster Government" (2011).
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