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Reinsurance: Only the Latest Problem Among Obamacare's 'Three Rs
This Aug. 21, 2014, file photo shows health care tax forms 8962, 1095-A, and 8965, in Washington. Several million people hit with new federal fines for going without health insurance will get a second chance to sign up starting Sunday, March 15, 2015, and that could ease the sting of rising penalties for being uninsured. (AP Photo/Carolyn Kaster)

Reinsurance: Only the Latest Problem Among Obamacare's 'Three Rs

Obamacare's "three Rs" were sold as necessary "protections" for the insurance industry. Instead, these programs have turned into opportunities to rob taxpayers.

Did bureaucrats at the Centers for Medicare and Medicaid Services break the law by failing to hand over $3.5 billion to the U.S. Treasury?

That’s the question Congressional lawmakers are now investigating, and taxpayers and insurance customers should pay attention.

The investigation has to do with the Obamacare's reinsurance program, which collects fees from insurance companies. Some of that money, according to the statute, is supposed to go to the government. But that didn’t happen this year; instead, it went to insurers.

This Aug. 21, 2014, file photo shows health care tax forms 8962, 1095-A, and 8965, in Washington.  (AP Photo/Carolyn Kaster)

The reinsurance program is only the latest of Obamacare’s “three R’s” – the risk adjustment, risk corridors, and reinsurance programs - to come under scrutiny.

Obamacare supporters attempted to justify these programs as necessary to “protect” insurers financially during the early years of the law, but in practice it has become clear that these programs are nothing less than cronyism. They expose the bad economics behind Obamacare and new hidden costs for taxpayers and consumers.

No doubt, Obamacare made significant changes to the insurance business, and created real risks for the industry. It requires all insurers to accept all consumers, regardless of their health status or history, and prohibits insurers from taking health factors into account in pricing. In other words, Obamacare takes risk-based pricing out of health insurance.

This creates a major incentive problem: Insurance under Obamacare is a bad deal for healthier consumers who have to pay more than they should, and a more attractive deal for sicker ones who may get to pay less. Insurers legitimately feared that they’d be swamped by sick consumers and incur more claims than they could cover.

Lawmakers sought to solve this problem using “the three R’s.” Here’s how they work:

  • The (permanent) risk adjustment program redistributes money from insurance companies who had healthier pools of consumers to those with less healthy pools.
  • The (temporary) risk corridor program redistributes funds from more profitable insurance companies to less profitable ones.
  • The (temporary) reinsurance program protects insurers from losses. Like other forms of insurance, insurance companies pay a fee “per covered life” to the government which then helps them when they have members with very high medical costs.

Supposedly, the three Rs were intended to stabilize the insurance industry during the transition to Obamacare's new rules and requirements. However, they are proving to be not temporary measures needed for a transition, but rather programs that exist to correct for the intrinsically flawed economic premises in Obamacare.

Central to Obamacare is the misguided premise that government regulators can run the insurance business better than the private sector. That’s just wrong. Doing away with risk-pricing and other industry practices may have sounded nice, but the result – an insurance industry that is blindfolded to risk – is economically not viable. What we now call “insurance” is something else entirely.

The American people are now paying the price for this government hubris.

Initially, the risk corridor program was projected to have a surplus or “net receipts” of $8 billion (meaning the government expected that insurers would make such profits that gains exceeded losses). But when the opposite came true and the program faced an overall shortfall of $2.5 billion, Congress acted to prevent the program from using taxpayer dollars to pay out to insurers.

The current administration argued that this government “bailout” was necessary to keep premiums from growing higher and to help insurers suffering losses. That may be true, but that’s because of the fundamental flaws of Obamacare. If it takes government bailouts to keep insurers afloat under Obamacare, we should question the law’s economic sustainability.

The reinsurance program too was expected, and even statutorily required, to contribute money each year into the U.S. Treasury. But in clear defiance of the law, CMS is now shortchanging the Treasury $3.5 billion. If they succeed, this means the government will make up for it elsewhere, in increased taxation or deficit spending.

And where do all those reinsurance premium fees come from anyway? The fee insurance companies pay to the government “per covered life” is passed on to all health insurance consumers, even if their plans are not eligible for the benefits of the reinsurance program. In 2015, each covered life in the country paid $107 to help their insurance company pay their reinsurance fees.

These hidden costs and forced redistribution mechanisms simply aren’t necessary. Rather than removing the concept of risk and forcing health insurers to all do business the same way, health reform should have focused on giving consumers a broader array of choices and allowing insurers to compete with one another for our business. We should look to a freer market, not cronyism, in health reform efforts.

Hadley Heath Manning is a senior policy analyst and director of health policy at the Independent Women's Forum (www.iwf.org) and the Independent Women's Voice (www.iwvoice.org).

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