Health Insurance Bailout Is Subprime Redux

Stop me if you’ve heard this story before: Financial institutions, enabled and empowered by lax regulators, make unwise multi-billion-dollar bets that threaten the well-being of millions of Americans—not to mention federal taxpayers. The subprime mortgage crisis that led to the financial meltdown of 2007-08? Sure. But it also describes insurers’ risky bets on Obamacare in 2017-18.

At issue in the latter: Federal cost-sharing reduction payments, designed to reimburse insurers for providing discounted co-payments, deductibles, and the like for certain low-income households. While the text of Obamacare includes no explicit appropriation for the payments, the Obama administration decided to start providing the payments to insurers anyway when the law’s insurance exchanges opened in 2014.

By summer 2016, anyone could have seen problems on the horizon for insurers: Collyer had declared the cost-sharing payments unconstitutional; a new president would take office in January 2017, and could easily terminate the payments unilaterally, just as Obama started them unilaterally; and neither Hillary Clinton nor Donald Trump made any clear public statements confirming the payments would continue.

Worried about their potential exposure, insurers tried to fix their dilemma, but didn’t. Insurers insisted upon language in their contracts with healthcare.gov, the federally run insurance exchange, stipulating that cost-sharing reductions “will always be available to qualifying enrollees,” and allowing them to drop out of the exchange if those reductions disappeared.

But the legal and constitutional dispute does not apply to payments to enrollees. Insurers are legally bound to provide those reductions regardless. The contract provides no help to insurers on the fundamental question: Whether the federal government will reimburse them for providing individuals the reduced cost-sharing.

Likewise, despite having multiple reasons to do so, state regulators did not appear to question the uncertain status of the cost-sharing payments when approving insurers’ 2017 rates in the fall of 2016. I asked all 50 state insurance commissioners for internal documents analyzing the impact of the May 2016 court ruling declaring the payments unconstitutional on the 2017 plan year. In response, I have yet to receive a single document to indicate that regulators demonstrated concern about the incoming administration cutting off billions of dollars in federal subsidies to insurers.

Having under-reacted surrounding the cost-sharing reductions for much of 2016, insurers and insurance commissioners have spent the past several months over-reacting. Industry lobbyists have swarmed Capitol Hill demanding Congress pass an explicit appropriation for the payments—and more bailout payments besides.

But the hyperventilation regarding the cost-sharing payments sends the wrong message to financial markets: They can ignore significant risks, so long as their competitors do so as well. The “uncertainty” surrounding the payments was knowable, and known, both to insurers who tried to change their contracts with the federal exchange, and to analysts like this one. Yet insurers did not change their behavior to reflect those risks, nor did regulators require them to do so.

This post was originally published at The Federalist.