The Trump administration has a $10 billion decision to make. It’s debating whether to continue Obamacare’s “risk-adjustment” program, which redistributes revenue from insurers with healthier-than-average customers to those with disproportionately sick enrollees.
In early July, the administration halted the program after a court ruled it legally dubious. Later that month, it reversed course and reinstated the program. In early August, officials solicited comments on a proposed rule that would largely keep the program in place for the coming year. Now, it’s reviewing those comments before issuing a final decree.
It’d be a mistake to continue the program. Risk-adjustment is antithetical to market competition, since it effectively punishes insurers who keep costs low and out-compete their rivals. In practice, the program has allowed big insurers to collect millions from smaller competitors — and thus cement their dominant position in the marketplace.
Obamacare’s guaranteed issue and community rating mandates prohibit insurers from turning away sick enrollees or charging them more than healthy ones. The law’s architects worried that insurers would attempt to circumvent these mandates by essentially shopping for customers — marketing themselves to the healthiest, least costly enrollees.
Perhaps they’d advertise in fitness magazines to target physically active people. Or maybe they’d include few oncologists in their provider networks to deter cancer patients from enrolling.
To guard against this potential outcome — and to entice insurers reluctant to participate in the exchanges because of concerns about signing up a disproportionately sick population by random chance — Obamacare’s drafters established the risk-adjustment program. A complex formula retroactively reallocates money from insurers whose enrollees’ have lower than average medical bills to insurers whose enrollees incur higher than average costs. Last year’s estimated risk-adjustment transfers totaled more than $10 billion.
The program has typically redistributed money from smaller insurers to larger ones. For example, Blue Cross Blue Shield of Florida, the largest insurer in the state, received more than $685 million in 2017 risk-adjustment payments. The Florida Health Care Plan, which isn’t among the top five in the Sunshine State, had to shell out more than $7 million.
In Connecticut, Anthem, the state’s largest insurer, took in more than $17 million. But ConnectiCare — which has less than one-third of Anthem’s enrollees — paid out $12 million.
Small insurers, understandably, have found this system arbitrary. So several sued the federal government, alleging that the formula hurt companies like them that kept premiums low by constraining overhead costs and striking good deals with providers.
For a brief moment, justice was served. In February, the U.S. District Court for the District of New Mexico ruled in favor of New Mexico Health Connections, one of the small insurers that had filed suit. Judge James O. Browning agreed that the formula was “arbitrary and capricious.” The Trump administration acknowledged the ruling and announced in July that it would freeze risk-adjustment payments, while the case made its way through the judiciary.
But after an outcry from Obamacare’s supporters, the administration about-faced and resumed the payments. The rule it has put forth for public comment better explains the rationale behind the formula — but doesn’t substantively change it.
Taking money from the most efficient insurers and giving it to less capable rivals allows Obamacare to limp along. It reduces risk for inefficient insurers by creating a “heads I win, tails you lose” scenario. If insurers enter the market and price their premiums appropriately, they may make a profit. But if they misprice their premiums and incur higher than expected expenses, they can still count on a partial bailout in the form of risk-adjustment payments.
For years, Obamacare has been slowly imploding under the weight of its own regulations. The Trump administrationought to let it collapse, rather than prop it up with a corporate welfare program like risk-adjustment.