The following is a guest post from Institute to Reduce Spending Research Director Jordan King.
While watching Mel Brooks’ Young Frankenstein the other day, I was struck by the comical, yet disturbing, similarities between Gene Wilder’s buffoonery as Dr. Frankenstein, and the Obama administration’s behavior during the health care rollout.
Before they ever begin tapping to Puttin’ on the Ritz, Wilder goes through a dangerous process of training the monster. And every time Dr. Frankenstein tries to educate his creation, the monster tries to strangle and kill him. Without the proper sedative injections, the movie would have been cut short. But the good doctor hangs on and constantly tries to fix his disaster one booster shot at a time. Similarly, President Obama keeps hoping that the monster of a health law will function properly despite many unfixable flaws.
For instance, hidden within the 2,000-page health law is a provision to essentially bail out insurance companies if enrollment in the exchanges is low and full of sick people. Known as “risk corridors,” this program will spend taxpayer money on insurance companies who don’t get enough premium dollars to cover high-cost individuals. Right now, the law can’t guarantee that the exchanges will pay off for insurers, so a little taxpayer booster shot is in order.
This measure kicks in for any insurance company that pays more than $60,000 for an individual in the exchange. However, the President is changing that rule and reducing the threshold to $45,000. Because sicker and older people are expected to make up the vast bulk of the exchanges early on, the lower threshold is supposed to give added comfort to insurance companies should costs exceed expectations.
The risk corridor makes the government bear 50% of the spending between ± 3% and 8% of the target gains/losses, and 80% of the spending beyond ± 8% of the target. This means that the government could reimburse insurers up to 80% of additional costs in the first three years as a buffer to losses in the exchange. However, according to the American Academy of Actuaries, the rule works both ways as the government would pay the insurer if costs are more than expected, and the insurer would pay the government if costs are lower than expected.
The Congressional Budget Office assumed the risk corridors would be “budget neutral” with insurers’ collections in the exchanges equal to payments. But that assumption relied on enrolling 7 million people in the first year, and that 30% of enrollees would be under the age of 35. According to Michael Tanner at the CATO Institute, the risk corridor bailout would be under half-billion-dollars initially in the short term, but could be well over $1 billion in the long term.
Needless to say, the costs will skyrocket if the program fails to sign up 7 million people by March.
In addition, the likelihood that taxpayers will be on the hook for this bailout in the first year is quite high. Obama himself almost guaranteed this to be the case after he decided to allow insurers to resume selling policies that according to him were “substandard.” If people are allowed to stay on their existing policies it means they won’t go into the exchanges. Low enrollment of just sick people will cause huge premium spikes despite the initial sticker prices observed on the website including federal subsidies. In short, the less money the insurance companies make in the exchanges the more taxpayers will have pick up the tab.
Obviously, the risk corridor provision should be eliminated as should several major parts of the law. Instead of corralling people into the gloomy exchanges, the administration could alleviate some damage by repealing the minimum benefit standards, the 50 employee insurance mandate, and the 30 hour work requirement. Of course, the administration will never do this, so at the very least, it should offset every bailout dollar by cutting other areas of the budget.
Hoping that the monster will eventually talk, walk, dance, and sing seems far more realistic for Dr. Frankenstein than for the President. We shall see if this new injection of life can save his beloved monster. But it looks rather unlikely.