Feb 6 2014, 3:45pm CST | by Forbes
Democratic Reps. Henry Waxman, Sander Levin and George Miller, writing in a Politico opinion piece about health insurance “risk corridors,” prove once again that the crafters of Obamacare never understood health insurance. The piece claims the Obamacare risk corridors are a Republican idea that Democrats made better. It’s actually a Democratic idea, and they have made it much worse.
While it is true that the legislation contained a risk corridor—often called a “risk adjuster”—it was not a new idea, as they claim. For example, a risk adjuster was included in New Jersey’s Democratic-led health insurance reform in the early 1990s, and it was equally a disaster. Here’s why.
If health actuaries are allowed to charge a premium based on the risk the person brings to the pool—which is the foundation of all insurance—then there is no need for a risk adjuster.
But Democrats—along with a few Republicans—have long wanted to end that underwriting process. For decades their goal has been to force health insurers to accept anyone who applies for coverage (known as “guaranteed issue”) and prohibit insurers from charging more for a preexisting medical condition (“community rating”).
That mandate creates two perverse incentives: (1) People wait until they get sick to obtain insurance, hence the mandate forcing people to buy coverage, and (2) health insurers’ efforts to avoid those with expensive medical conditions because they will predictably cost far more than they pay in premiums.
A risk adjuster is a money-redistribution scheme, which may be why Democrats are all for it, intended to offset the problems created by eliminating actuarial underwriting.
If an insurer spends less on claims than a predetermined amount, the government takes some of the excess money and hands it to an insurer that spends more on claims than the set amount. Of course, one possible reason an insurer spent less on claims is that it better managed its sickest patients, or it is more efficient. And the insurer spending more may have done a poor job of managing its sickest patients. No matter, the efficient insurer gets to cross-subsidize the inefficient one. What could go wrong?
New Jersey decided to impose guaranteed issue and community rating in its individual market in the early 1990s, so the state created a risk adjuster. But premiums exploded anyway and the risk adjuster never solved the adverse selection problem of getting too may sick and not enough healthy people.
It is true that Republicans included a risk adjuster in the Medicare prescription drug legislation—which got bipartisan support. But citing that as an example once again demonstrates the authors’ ignorance of health insurance.
Medicare is a “high frequency-low severity” group, especially with respect to prescription drugs. It’s a seniors’ program, so lots of them will use some prescription drugs, but the variation won’t be that high. So an insurer participating in the Part D drug program may get some higher-cost patients, but the difference won’t be that much different than the norm because so many use some drugs.
The under-65 population, by contrast, is a “low frequency-high severity” group. Most people will use little or no medical care in a year. That means there is a huge variation between the average person and the sickest person. Getting a disproportionate number of sick people under Obamacare could be the financial ruin of an insurer.
And now that we know that the young are not signing up for coverage in the numbers Democrats had predicted, all of the risk adjustment predictions will likely be off—way off..
In addition, Medicare is a guaranteed issue program; any senior who qualifies gets in regardless of any medical condition. So when Republicans passed the prescription drug benefit, it had to be guaranteed issue. They had little choice but to create a risk adjuster to try and offset potential insurer losses.
Democrats did not have to make all health insurance guaranteed issue; they did and figured they could depend on their decades-old fondness for redistributing money to fix the problems.
Finally, the Democrats are being completely disingenuous in their claim that all they did was adapt a Republican idea, because they have a provision for funneling additional money to insurers if the risk adjuster is insufficient—which it will be./>/>
The Department of Health and Human Services made it clear in a November 14 letter to state insurance commissioners that there could be more taxpayer money available. “Though this transitional policy [i.e. Obama’s postponing the enrollment rules] was not anticipated by health insurance issuers when setting rates for 2014, the risk corridor program should help ameliorate unanticipated changes in premium revenue. We intend to explore ways to modify the risk corridor program final rules to provide additional assistance.”
Key the “explore ways … to provide additional assistance.” That’s the insurer bailout.
So, no, Messrs. Waxman, Levin and Miller, you cannot blame your risk corridor program on President Bush and Republicans. This boondoggle is all yours and we want to make sure you and the Democrats who created and passed this law get ALL the credit you deserve.
Merrill Matthews is a resident scholar with the Institute for Policy Innovation in Dallas, Texas. http://twitter.com/MerrillMatthews
Source: Forbes Business
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