Health insurance premiums have risen rapidly in the three years since the launch of ObamaCare’s exchanges, despite the law’s multibillion-dollar efforts to keep a lid on them.
ObamaCare created three mechanisms for bailing out insurers if they lost too much money through the exchanges — the so-called risk corridor, risk adjustment and reinsurance programs. The hope was that the prospect of federal cash to cover potential losses would yield lower premiums.
Cash has indeed been flowing from the federal Treasury — but it hasn’t done much good. According to a new report from the Mercatus Center at George Mason University, the Obama administration has given health insurers 40% more in bailout funds under the reinsurance program than originally planned. Yet premiums still rose by as much as 50% in some parts of the country.
Things will only grow worse. Next year, the reinsurance program will end. Insurers will likely respond by hiking premiums even more or withdrawing from the exchanges. Many have already opted for the latter course because of significant losses.
Any way you slice it, patients lose.
ObamaCare’s architects recognized that premiums could skyrocket in the exchanges’ opening years. After all, the law prohibits insurers from denying anyone coverage or charging anyone more than three times what they charge anyone else.
Those protections encourage older, sicker individuals who are costlier to insure to enroll in the exchanges. These folks are more likely to saddle insurers with catastrophically high claims. So selling coverage through the exchanges could expose insurers to substantial financial risk.
To entice insurers to participate in the exchanges, ObamaCare established three subsidy programs. Two are self-financed — insurance companies effectively share profits and risk according to the mix of their enrollees, or their “risk pools.”
In broad terms, insurers that make money on the exchanges subsidize those that lose money.
The “reinsurance program,” on the other hand, is just a federal handout. If an enrollee’s medical bills cost an insurer between $60,000 and $250,000, the government picks up part of the tab.
Originally, the feds planned to pay 80% percent of the cost within that window. But in 2014, they made the program more generous — by paying 100% of costs between $45,000 and $250,000 per enrollee. They gave out almost $7 billion that year.
As the Mercatus Center study concluded, ObamaCare has depended on these subsidies to keep the exchanges from collapsing. Without the reinsurance program, premiums in ObamaCare’s first year would have been 26% higher than they were.
Despite the subsidies, the industry still lost about $2.2 billion in 2014. That’s because far too few young and healthy people enrolled in exchange plans. So the insurance pool was much sicker and more expensive, on average, than insurers had expected.
Nothing suggests the situation has improved. Thirteen of ObamaCare’s nonprofit insurance co-ops failed last year after sustaining huge losses. The nation’s largest insurer, UnitedHealthcare, has withdrawn from 31 of ObamaCare’s exchanges after losing almost $1 billion in two years. Three states are down to just one insurer.
So what will happen when the reinsurance subsidies end next year?
The Congressional Budget Office has predicted an 8% increase in premiums. But that’s likely an underestimate. Just a few weeks ago, Marilyn Tavenner, the former head of the Centers for Medicare and Medicaid Services, and the current chief of the health insurers’ lobby group AHIP, predicted that premiums would jump because “reinsurance is going away.”
The evidence suggests she’s right. Virginia insurers have put in for an average rate hike of 18% for 2017 — on top of an 8.4% increase this year. Insurers in New York have requested an average increase of 17.3%. Iowa, Maryland and Oregon have each seen insurers ask for rate hikes of 30% or more.
These premium hikes will cause more young, healthy people to abandon coverage. That will leave the risk pools within ObamaCare’s exchanges even sicker and more expensive than they are now. Only next year, there won’t be any subsidies around to bail insurers out.
ObamaCare was never a sustainable way to reform our health-care system. Its reinsurance subsidies only temporarily hid that fact.