Punditfact blog sums up the issue about an ACA insurance bailout
The Affordable Care Act does a complete number on the insurance game as Americans know it, at least in the individual and small group markets. Instead of companies making a profit through selling policies to the healthy and avoiding the ill, the law aims to pull carriers into a world where they insure everyone and compete based on efficiency and value. We’re not saying that will necessarily happen, but that’s the goal. In sickness and health and everything in between, that’s the population the insurers must work with.
The problem is, if you are an insurance company, how do you decide how much to charge in such a different landscape? Until you have a few years to see who is actually in the pool and how much health care they use, the uncertainty is way beyond your comfort zone.
Enter the government and a few tricks to make the risk picture more manageable.
The law forces insurers to share some profits and losses across health care plans. Money shifts from companies that paid out less than average in claims to companies that paid out more than average. It’s a permanent program meant to help level the playing field.
The law also protects insurers from suffering losses for providing insurance to higher cost customers — to a point. The program is called reinsurance, and here’s how it works. The law slaps a $63 fee or tax on most policies. That pool of money, which translates to $20 billion between 2014 and 2016, helps insurers pay for claims for people who require more medical attention. The reinsurance program lasts for only three years.
A third part of the law, called a risk corridor, is another temporary program meant to mitigate an insurer’s risk. It’s the program that largely drives the concern over potential bailouts.
The idea behind the corridor is that the government and insurers share risk for plans offered through the government marketplaces. Like the reinsurance program, it lasts only from 2014-16.
Here’s how it works. The government sets financial benchmarks for each plan offered on the marketplace. As long as insurers come close to that benchmark, nothing happens. If an insurer overperforms by up to 3 percent, they can keep the extra revenue. If they underperform by up to 3 percent, they are forced to absorb those additional costs.
When the gaps get wider, however, money starts changing hands. If insurers beat their benchmark by 3-8 percent, they have to split that extra revenue with the federal government. If insurers beat the mark by more than 8 percent, the government receives 80 percent of that additional money.
On the flip side, when insurers fail to meet their benchmarks the government helps absorb those costs. If insurers underperform by 3-8 percent, the government will cover half the extra cost. The government covers 80 percent of the costs after that.
The Congressional Budget Office, the nonpartisan number cruncher of Congress, says all of these measures will be budget neutral. Some plans will share gains with the government and some will get checks from the government. Overall, the CBO predicts that the money going out will be matched by the money coming in. However, if the CBO is wrong, there is nothing to stop the money from flowing from the government to private insurers. There is no cap written into the law.
The fear among conservatives is that ad hoc changes to the law since it passed could be creating a ripple effect where the marketplace insurance pools have more sick people and losses would rise. Hence, the concern over bailouts.
The bailout dispute
We asked Krauthammer why he called this a bailout and he said he relied on the definition from Merriam-Webster. “The act of saving or rescuing something (such as a business) from money problems,”
Krauthammer said the Affordable Care Act contains a hidden government bailout for insurance companies that would cover up to 80 percent of their losses. The health care law does contain several mechanisms to mitigate potential losses for insurance companies, and the government stands to help absorb some losses up to 80 percent.
But the government also stands to gain if insurance companies are able to turn profits, and the Congressional Budget Office has projected that the government would neither make nor lose money.