Obamacare Rate Hikes: Incompetence or Sabotage?
Most Americans have seen the headlines about skyrocketing health-care premiums and insurers fleeing the individual marketplace—but few people understand why these things are happening. When you learn the story behind the trends, however, it’s hard not to wonder whether the Obama administration is deliberately sabotaging Obamacare.
The idea seems absurd until you examine how badly CMS, the Centers for Medicare and Medicaid Services, has administered a critical part of the law, the so-called premium stabilization programs. These programs were supposed to help the individual marketplace adjust to Obamacare’s new rules, and prevent the market from entering a “death spiral” of increasing premiums and fewer choices.
In other words, these were very important programs to get right. Unfortunately, the administration has botched almost all of them.
The Temporary Risk Corridors program, for example, was supposed to insulate insurers from the uncertainty they faced when setting rates in this new, unpredictable market. Insurers who set their premiums too low would have most of their losses subsidized by insurers who set them too high.
Repeatedly, CMS assured us that this program would be budget-neutral. Then, it suggested that taxpayer dollars could cover any deficits. Congress reacted to this bait-and-switch by inserting language into the appropriations bill expressly forbidding CMS from using taxpayer money for this purpose – essentially requiring CMS to live by its word.
Sure enough, the program ended 2014 with $2.5 billion more in insurer claims than in insurer collections. By law, CMS is required to pay the entirety of these claims to insurers, so it announced last month that the entire 2015 insurer collection will be used to pay off the 2014 balance with no money allocated for 2015 insurer losses. That means the 2016 insurer collection – the final year of the program -- will almost certainly fall short of paying what CMS owes to cover insurers’ losses in 2014, 2015, and 2016.
Unfortunately, that means that the deficit will most likely be passed along to us, the American people, in the form of large increases in premiums. Of course, this is precisely the result the program was designed to avoid.
This lack of payment from the Temporary Risk Corridors program had a ripple effect that caused a different premium stabilization program to become deadly to many small insurers.
The Permanent Risk Adjustment program was created to reduce insurers’ incentives to take health status into account when enrolling individuals. The program makes an assessment of the health status of each insurer’s customer pool, and plans with healthier populations pay into the program while those with sicker populations receive money from it.
This sounds simple enough, but in practice it hasn’t been so easy. Larger, more established insurers with more developed specialty networks tend to attract much sicker customers than smaller ones. So smaller, less established insurers end up with relatively very large required payments under the program.
This should have been anticipated and manageable by these smaller insurers. However, when taken in combination with massive risk corridor shortfalls (insurers only received 12.6 percent of their claims in 2014), the risk adjustment program ended up impacting them much more than they anticipated.
These losses drove many of these smaller insurers off the exchanges.
The ultimate result is fewer plans to choose from in the individual marketplace. Residents of roughly one-third of the counties in the United States have only one insurance option on the exchanges. And again, this is precisely the result the program was supposed to prevent.
Finally, the Temporary Reinsurance Program was designed to reduce and stabilize premiums in the individual marketplace. Insurers were required to cut their premiums in the individual marketplace from 2014 through 2016 in anticipation of receiving reinsurance payouts to make up for any losses. Those payouts were to be financed through a fee on all payers -- individual, small group, large group, union plans, and self-insured – in order to subsidize the losses insurers were likely to face in the individual marketplace.
The program was also designed to be budget-neutral, with one added wrinkle. Out of the $25 billion that was supposed to be collected during the three-year life of the program, $5 billion was to be deposited in the U.S. Treasury to pay for an unrelated program.
Perhaps predictably, however, CMS did a poor job of assessing and collecting the funds. Only $9.7 billion of the required $12 billion was collected for 2014 (about 20 percent short). Only $6.4 billion of the required $8 billion was collected for 2015 (again, about 20 percent short).
The total collection for 2016 enrollment has not yet been completed, but the formula CMS used to determine how much insurers would have to contribute to the reinsurance fund seems to have been based on the same faulty formula that caused the 2014 and 2015 collections to come up 20 percent short.
It is tempting to blame this under-collection on incompetence—except for one significant detail. CMS issued its final rules for 2016 enrollment in March of 2015, several months after it had collected the vast majority of the 2014 funds. Officials knew the formula they were using was wrong, but stuck with it for the 2016 collections anyway, guaranteeing failure.
As a result, not only have insurers received less money than budgeted to recoup the losses they sustained from lowering their premiums, but the U.S. Treasury has only received $500 million of the $5 billion it is owed.
Assuming the 2016 collection falls 20 percent short again, CMS will owe about $8.5 billion to insurers and the U.S. Treasury combined, with only about $4 billion available to pay it.
Again, this means American taxpayers will bear the burden, either in the form of more debt to be paid for with higher taxes, or in higher insurance premiums to make up for the losses.
In short, all three of the premium stabilization programs that were supposed to make Obamacare workable were administered by CMS in a way that helped drive insurers from the individual market and caused premiums to increase dramatically—at the risk of being repetitive, the exact opposite of these programs’ purpose.
Whether intentional or not, the conclusion is inescapable: President Obama’s Department of Health & Human Services has pushed the individual market into a death spiral. Insurers are fleeing the marketplace and premiums are expected to spike dramatically (the average proposed increase for 2017 is 24 percent).
So as Hillary Clinton and other Democrats propose more big government health-care as solutions to the crisis that big government health-care created, ask yourself if this was their intent all along.