Failed ACA Reinsurance Program Shows: Government Subsidies Don’t Reduce Premiums

By By Michael F. Cannon of Cato.

"ObamaCare turns eight years old today. Some opponents had hoped to mark the occasion by giving supporters the birthday gift they’ve always wanted: a GOP-sponsored bailout of ObamaCare-participating private insurance companies. Fortunately, a dispute over subsidies for abortion providers killed what could have been the first of many GOP ObamaCare bailouts.

ObamaCare premiums have been skyrocketing. All indications are this will continue in 2019, with insurers announcing premium increases up to 32 percent or more just before this year’s mid-term elections. Some Republicans fear voters will punish them for the effects of a law every Republican opposed and most still want to repeal.

Senate health committee chairman Lamar Alexander (R-TN), Sen. Susan Collins (R-ME), and House Energy & Commerce Committee chairman Greg Walden (R-OR) hope to avert calamity by expanding on a proven failure. For months, they have been pushing legislation that would resurrect ObamaCare’s expired “reinsurance” program with $30 billion of new funding.

ObamaCare’s architects knew the law’s preexisting-conditions provisions would effectively destroy the individual health insurance market. They added the reinsurance program in an attempt to put Humpty Dumpty back together again.

ObamaCare’s preexisting-conditions provisions both increase health-insurance premiums and reduce health-insurance quality. They achieve the former, first, by requiring insurers to cover patients with uninsurable preexisting conditions, and again by unleashing adverse selection. Those factors in turn reduce quality by literally punishing insurers who offer high-quality coverage for the sick.

From 2014 until it expired at the end of 2016, ObamaCare’s reinsurance program gave participating insurers extra taxpayer subsidies to cover the claims of high-cost patients whom its preexisting-conditions provisions require them to cover at a loss. The extra subsidies were supposed to reduce premiums, and prevent a race to the bottom fueled by ObamaCare’s penalties on quality coverage.

If ObamaCare’s reinsurance program was supposed to keep premiums from skyrocketing, it was an utter failure. Premiums increased 18-25 percent per year from 2013 through 2016, well above the trend of 3-4 percent from 2008 to 2013. By 2017, premiums had doubled—a cumulative increase of 99 percent or 105 percent, depending on the source—from pre-ObamaCare levels. ObamaCare’s preexisting-conditions provisions were the driving force behind these premium increases.

Likewise, ObamaCare’s reinsurance program failed to prevent its preexisting-conditions provisions from triggering a race to the bottom on health-insurance quality. Research indicates the penalties those provisions impose on high-quality coverage are indeed making coverage increasingly worse for patients with multiple sclerosis and other high-cost conditions, with no end in sight. All the king’s reinsurance and all the king’s men cannot put Humpty together again.

At this point, ObamaCare supporters might object that premiums would have risen even more without the reinsurance program in place. But this is false. Reinsurance programs do not reduce premiums at all.

To illustrate, take Sen. Collins’ claim that $30 billion in reinsurance subsidies would reduce ObamaCare premiums 40 percent. The claim is complete nonsense. Giving insurance companies $30 billion of taxpayer money would not magically make them 40 percent more efficient. If that were true, a $75 billion bailout would make ObamaCare totally free.

ObamaCare’s reinsurance program did not reduce premiums by a single penny, and neither would a Republican reinsurance program, because government subsidies do not reduce premiums. Giving taxpayer dollars to private insurance companies merely shifts part of the premium from enrollees to taxpayers. If a $30 billion insurance-industry bailout causes the amount ObamaCare enrollees pay for their coverage to fall 40 percent, it is because that 40 percent is being shifted to someone else—i.e., you. (If anything, government subsidies increase premiums through moral hazard.)

Nevertheless, the idea that subsidies reduce premiums is the kind of falsehood Washington will forever exclaim as gospel because it serves the economic interests of insurance companies, and the political interests of politicians who want to be seen as Doing Something, without actually solving anything.

The only thing reinsurance subsidies are guaranteed to do is hand even more taxpayer dollars to private insurance companies. ObamaCare already hands more than $50 billion in explicit government subsidies to participating insurance companies each year. It hands insurers billions more by forcing healthy enrollees to overpay for health insurance. If the first $50 billion didn’t solve the problem, why should we expect another $30 billion would? And if it doesn’t, how much more good money will Congress throw after bad?

Fortunately, a dispute over whether these subsidies could go to insurers that cover abortion prevented the Alexander-Collins-Walden bailout from passing as part of the massive $1.3 trillion spending bill Congress passed to avert a government shutdown today.

Alexander, Collins, and Walden should take the hint and stop trying to bail out ObamaCare, which would just double (or triple, or quadruple) down on a failed system. If Congress is unwilling to repeal and replace ObamaCare yet, opponents should be pushing states to allow individuals and employers to purchase health insurance licensed by U.S. territories, which are exempt from ObamaCare’s costliest regulations, and pushing HHS to reverse its administrative ban on “renewal guarantees” in short term plans. These steps would provide relief for the vast majority of those in the individual market, before the mid-term elections, and disproportionately in areas where the GOP is defending congressional seats. They would also give ObamaCare opponents greater leverage in Congress, and even force supporters to the negotiating table.

If instead Alexander, Collins, and Walden succeed in delivering an ObamaCare bailout, it would mark a stunning reversal for the GOP. Republicans spent seven years promising to repeal ObamaCare and one year trying to replace it, while supporters of the law refused to help—or even to acknowledge ObamaCare’s fundamental flaws. A bailout would hand supporters what they have always wanted but Republicans have heretofore refused to give: more government spending, zero reform, and a bipartisan imprimatur on ObamaCare. One thing is certain: the GOP’s first ObamaCare bailout would not be their last."