A key piece of the Obama administration’s plan to control the health insurance market is in a state of collapse. With it will go the philosophical underpinning of big government solutions to private-sector problems--and that will pose a core question for voters in the upcoming national elections.
In the original plan for the Affordable Care Act (ACA), better known as Obamacare, Democrats wanted to include a “public option” in the health insurance exchanges – a government-run plan that advocates claimed would guarantee affordable access. To critics and consumers, it looked like an end run to a single-payer health care system.
A government-funded plan could run deficits with no consequences, forcing health insurers to either match the price and go out of business or leave the markets altogether. Republicans accused Democrats of plotting to drive private insurers out of business, while supporters of the public option accused Republicans of leaving consumers at the mercy of for-profit corporations in accessing health care.
When it became clear that the public option would be a non-starter, Barack Obama and Democrats in Congress settled on a compromise: health insurance co-ops. These non-profit entities would operate under consumer control, providing an option outside of for-profit insurer plans that would focus entirely on patient care. The ACA provided for a significant amount of backing from the federal government, both in loans and in the so-called “risk corridor” funding that gave the Obama administration the option of covering losses for insurers in the first few years of Obamacare.
That backstop was necessary, advocates insisted, as insurers and especially the co-ops needed time to adjust for unknown utilization patterns, premium pricing, and the proper level of deductibles. The co-ops remained an important component for advocates of the government-controlled system, both as a check on for-profit insurers and as a proof of concept for excluding profit-based coverage entirely at some point.
Eventually, the Obama administration managed to get 23 co-ops in operation by the time of the October 2013 rollout of the Obamacare exchanges. Thanks to the risk corridor and reinsurance provisions within the ACA, those co-ops survived the first two full years of the program, albeit with the same premium pricing issues that other insurers experienced. However, the so-called “cromnibus” bill that resolved the FY2015 budget restricted HHS’ risk-corridor funding only to monies collected for that purpose, rather than through the agency’s budget or other revenue sources. And that is when the house of cards began to tumble.
Predictably, the financial model that critics warned would lead to a death spiral for insurers hit the co-ops first.
As it turns out, the non-profit co-op model for health insurance turns out to be unsustainable without government subsidies. More than half of the co-ops have been shut down this year, and nine of the 12 have shut down since October 1, either by HHS or by the states in which they operate. Over a billion dollars in loans and and backstop payments have been lost. The latest failure to be announced was in Michigan, where Consumers Mutual Insurance announced Tuesday that it would not sell insurance for 2016. The failure of these dozen co-ops has left nearly 750,000 consumers in the cold, looking for a plan from a traditional insurer at a higher price.
What happened? Predictably, the financial model that critics warned would lead to a death spiral for insurers hit the co-ops first. “They were low-cost alternatives,” Kaiser Health’s Mary Agnes Carey told PBS anchor Judy Woodruff. “If they were the lower price point, that tended to attract sicker beneficiaries. That would drive up their costs.”
This was the very point that critics of Obamacare made from the beginning. Mandates to cover pre-existing conditions at market pricing would create a utilization surge that would require broad premium increases to offset. The co-ops couldn’t keep up with that, although as Carey explained, they assumed they wouldn’t have to keep up with them.
“They had anticipated fairly large payments from the federal government to help offset the cost of those sicker folks,” Carey said, and the policy changes to keep costs under control exposed the unsustainability of the co-op models. “The insurers, including many of these co-ops, expected a much more generous payment from the administration than they’re receiving. And that has hurt their bottom line.”
The problem with the co-op model is that it’s a back-door public option meant to crowd out the private insurers who have had to hike premiums in order to keep up with costs.
Carey argues that Congress has to restore its subsidies of the co-ops in order to rescue them. Rep. Diane Black argues that this is the problem with the co-op model in the first place – that it’s a back-door public option meant to crowd out the private insurers who have had to hike premiums in order to keep up with costs.
“It’s not taxpayer dollars,” Black says. “It doesn’t come from some dropping of dollars out of the sky.” Rep. Peter Roskam is more direct. “At many levels, it’s out of balance,” he said during a hearing on the collapse of the co-ops. “It just seems like it’s a disaster. Let’s turn the page, call it what it is, and move on.”
This disaster isn’t limited to the co-ops, though. The same model has forced premium prices on other plans to skyrocket three years in a row, and deductibles to rise to the level where many of these plans are nothing more than overpriced catastrophic coverage. Had the Democrats gotten their way, the public option would have covered up those issues and pushed the insurers out of business.
The solution to this isn’t more government intervention and cost masking, but the elimination of government rationing and reform based on free market principles. At the very least, it’s one option that the federal government has yet to try.
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