Republican Senator Marco Rubio of Florida will introduce a bill today that represents a new and potentially crippling line of attack against the Affordable Care Act, aka Obamacare. The first line of attack entailed Republican efforts to try to repeal the law outright. That failed. Next came bills Republicans and Democrats introduced to allow people whose insurance plans were cancelled to extend them. This would keep an important group of mostly healthy people from participating in the federal exchanges, driving up costs. These bills are in limbo, but President Obama’s “fix” to the law could have a similar effect, if insurers and state regulators go along.
Rubio’s bill takes a new tack by seeking to abolish “risk corridors,” one of several mechanisms in the law meant to hold down premium costs and entice insurers to participate in the exchanges by ensuring they won’t lose a lot of money if they draw a costlier applicant pool than anticipated. Risk corridors function like Major League Baseball profit-sharing: Insurers who wind up with unexpectedly healthy applicants and lower costs will “pay in” money to the government, which in turn “pays out” to insurers with costlier applicants, thereby stabilizing the nascent market.
Here’s a useful chart from Bloomberg Government’s senior health-care analyst Peter Gosselin explaining “The Three R’s”—risk corridors, reinsurance, and risk adjustment—that together function as shock absorbers for insurers adjusting to the new system:
When the law was written, the winners and losers were expected to balance out, making the risk corridors budget-neutral. But if too many insurers lose money, the government may need to step in. While the ACA’s risk corridors are meant to transfer money from winners to losers, the text of the law (it’s Section 1342, for those following at home) makes clear that the government will pay insurers whose costs end up being significantly higher than anticipated. This is what Rubio is seizing on in his new bill—he’s calling it a “bailout” and trying to stop it.
There’s definitely some validity to the scenario Rubio is warning about, although no one can yet say whether it will happen—or, if it does, what the cost might be to taxpayers. Obama’s decision to allow people in the individual market to keep their plans certainly raises the likelihood. A Nov. 14 letter to Congress from the American Academy of Actuaries warned that if “lower-cost individuals retain their prior coverage, and higher-cost people move to new coverage, the medical costs for those purchasing new insurance would be higher than expected.” This would create a set of conditions “more likely to trigger risk corridor payments.”
If Rubio were truly motivated by concern that taxpayers might end up footing a “bailout,” there’s an easy solution: Write a bill stipulating that risk corridors must be budget-neutral. Presto, problem solved. But Rubio’s bill is far more sweeping than that—it eliminates risk corridors altogether by striking Section 1342 from the law. This is a clue that his real motivation isn’t to eliminate the possibility of a payout but to eliminate the Affordable Care Act altogether.
“The insurers who signed up for the exchange did so with the understanding that their risk was limited,” says Professor Timothy Jost, a health-care expert at the Washington and Lee University School of Law. “So repealing those risk corridors is basically breaking a contract with the insurers that if they would come into this program, there’d be some limit to their risk exposure.”
Eliminating risk corridors could set off a chain reaction that undermines the law. Some insurers would drop out or decline to participate in the exchanges. Others would run into solvency issues or start charging a risk premium. The actuaries who set rates would jack up premiums for 2015. This could lead to the death spiral of rising costs and declining participation that the law’s supporters worry about. “Basically, it’s a way of killing the exchanges,” says Jost.
Rubio’s bill isn’t going anywhere in the Democratic-controlled Senate. But House Republicans are sure to take up his cause, since the “bailout” label has such tremendous political potency. In a Tuesday Wall Street Journal op-ed touting his bill, Rubio dutifully calls for repealing Obamacare. That remains a remote possibility. But given the damage his reputation sustained among conservatives for supporting comprehensive immigration reform, Rubio would probably settle for regaining their good graces, which this bill could conceivably accomplish.