Saving Taxpayers from Obamacare’s Insurer Bailout

1. A new report shows insurance companies expect to receive at least 10 times more in payments from Obamacare’s risk corridor program than they expect to pay in. The deficit is likely in the billions of dollars for the 2014 plan year.
2. Early last year, the administration intervened to increase the size of Obamacare’s insurance company bailout through the risk corridors.  Republicans blocked the administration from using taxpayer funds for this.

“This report confirms, once again, that ObamaCare is not working the way it was sold and the so-called risk corridor provision must go.”

                                                                     – Senator Marco Rubio, May 1, 2015

On May 1, Standard & Poor’s released a report showing that insurance companies expect to receive at least 10 times more in payments from Obamacare’s risk corridor program than they expect to pay in. The risk corridor program was designed to transfer money from insurers that earned “excess” profits on Obamacare plans to insurers that incurred excess losses on these plans. It turns out that few insurers earned excess profits, and a lot of insurers had excess losses.

According to S&P, many insurers failed to publicly disclose risk corridor receivables. The total deficit for the risk corridor program is in the range of several billion dollars for the 2014 plan year. Two insurers – PreferredOne, based in Minnesota, and Kentucky Health Cooperative – expect risk corridor payments that exceed their total reported capital.

Obamacare’s windfall for insurance companies

During the congressional debate on Obamacare, the president repeatedly decried excessive insurance company profits. He said he would “eliminate wasteful taxpayer subsidies that currently go to insurance and pharmaceutical companies [since] they are getting billions of dollars a year from the government, from taxpayers, when they’re making a big profit.” Then-Speaker of the House of Representatives Nancy Pelosi called insurer profits “immoral.”

After Obamacare, profits are even higher. The increased profits are driven by the law’s massive new spending on subsidies and Medicaid expansion, as well as the unprecedented Washington overreach that required all people purchase mandate-laden insurance. On November 17, 2014, the New York Times reported that “the relationship between the Obama administration and insurers has evolved into a powerful, mutually beneficial partnership that has been a boon to the nation’s largest private health plans and led to a profitable surge in their Medicaid enrollment.”

In addition to the mandates and the new spending, the president’s health care law established a massive back-end subsidy for insurers offering Obamacare plans. Through its reinsurance program, insurers get payments from Washington to cover most of the cost of their enrollees with high annual claims. By offsetting the cost incurred by expensive enrollees, the program allowed insurers to charge lower rates for Obamacare plans. One insurance law expert estimated that the reinsurance program reduced Obamacare plan premiums by about 11 percent on average last year. The $20 billion cost of the three-year reinsurance program is funded by a tax that raises premiums on the 160 million Americans with private health insurance.

Obamacare’s reinsurance and risk corridor programs distorted the market and led some insurers to underprice exchange plans in order to capture a larger market share. They took the risk because they expected potential losses to be heavily subsidized.

White House aggressively intervened to help insurers

In addition to its reinsurance and risk corridor programs, Obamacare contained a risk adjustment program. That program, which is required to be budget neutral, transfers money from plans that have a lot of customers with less expensive health conditions to plans that have a lot of more expensive customers.  

Not content with the additional money coming in through the law’s reinsurance program and the added protection from the risk adjustment program, insurance companies sought White House assistance to increase the benefits they would get through the risk corridor program. White House staff, including Valerie Jarrett, personally intervened to address insurance company concerns.

The administration initially claimed that it would make the risk corridor program budget neutral, with no cost to taxpayers. One insurance company CEO told Jarrett that if the program were to be budget neutral, insurers would need “to increase rates substantially (i.e., as much as 20% or more).” Jarrett wrote back that “the policy team is aggressively pursuing options.” When the administration finalized its plan in April 2014, Jarrett told the CEO that the administration had given insurance companies 80 percent of what they sought.

Republicans protected taxpayers from a bailout of insurers

Last year Republicans protected taxpayers from having to bail out insurance companies through the risk corridor program. In December, Congress blocked the administration from tapping taxpayer funds if insurers generally underpriced Obamacare plans and lost money.

Section 227 of the Consolidated and Further Continuing Appropriations Act of 2015 (the cromnibus) prohibits the administration from transferring funds from other accounts to pay for the risk corridor program. For 2014, payments to insurers with excess losses cannot exceed incoming payments from insurers with excess gains, effectively making the program budget neutral for one year.

Obamacare is projected to cost hard-working American taxpayers $1.7 trillion in new spending over the next decade. Taxpayers should not be on the hook for additional money to prop up the overall profits of insurance companies that offer Obamacare plans. Congress must continue to stop the administration from using taxpayer money to bail out insurance companies through Obamacare’s risk corridor program.