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Republicans Support "Bailout" for Private Medicare Insurers

January 23, 2014

Republicans need to make up their minds. They simultaneously claim that Obamacare will "destroy the private-insurance market" and will give insurers a massive "bailout" at taxpayer expense. Both statements can't be true. (Judging the recent statements of the insurers' CEO's--and their skyrocketing stocks prices-- it is increasingly clear that neither is true.) Nevertheless, GOP leaders and their conservative amen corner are denouncing the so-called "Obamacare bailout" and demanding the repeal of Affordable Care Act provisions which for the next three years help protect health insurers from higher-than-expected costs of their newly covered customers.
Sadly, Republicans aren't just contradicting themselves now. They are conveniently forgetting their own voting records. As it turns out, President Bush's unfunded Medicare Part D prescription drug plan, which enjoyed overwhelming GOP support, uses an almost identical approach to "risk corridors" to encourage carriers to participate and protect them from unforeseen losses.
As the Wall Street Journal explained Wednesday, "The idea of risk corridors is to compensate insurance companies that end up with bigger costs than they expected." Because insurers can no longer deny customers coverage due to pre-existing conditions, some carriers may end up with sicker and more expensive policyholders than anticipated when they set their annual premiums for policies sold in the ACA exchanges:

If an insurer's actual claims in 2014 are at least 3% greater than the claims projected when the insurer set 2014 rates, the government must reimburse the insurer for half of the excess. If actual claims jump 8% beyond projected claims, the government covers 80% of the excess...Federal officials say they're counting on the program, which lasts through 2016, to forestall any nervousness among insurers about their initial customer base and prevent them from raising rates.

But the Republicans now on the verge bursting a blood vessel over that possible federal expense need to take a deep breath. As Jonathan Cohn pointed out in the New Republic:

The reinsurance and risk corridors in Obamacare and Medicare Part D are remarkably similar, except that Obamacare's are temporary and Medicare Part D's are permanent--which is to say, they are still part of the program.

To see just how similar, take a quick glance at this April 2006 assessment of "Medicare Drug Plans and Risk Mitigation: Risk Corridors, Risk Adjustment, and Federal Reinsurance":

Here's how it works. After each contract year, CMS will compare each drug plan's expected and actual benefit costs. The thresholds (when the mechanism kicks in) and the proportions of profit and loss shared vary.
For 2006 and 2007, Medicare drug plans will bear all gains and losses that fall within 2.5 percent of their expected costs. If costs differ from expectations by more than 2.5 percent but less than 5 percent, the risk corridor payment will cover 75 percent of the amount in that range. If actual and expected costs differ by more than 5 percent, the risk corridor payment will cover 75 percent of the amount between 2.5 percent and 5 percent and 80 percent of the amount in excess of 5 percent. If a sufficient number of plans serving a substantial majority of enrollees receive risk corridor payments for a given year, the feds will cover 90 percent of costs falling within the corridor (instead of 75 percent).
For 2008 through 2011, the risk corridor thresholds will double. The assumption is that by then the private drug plans will have sufficient experience in bidding and projecting costs. Specifically, the 2.5 percent factor goes to 5 percent and 5 percent is replaced by 10 percent. Within these new, wider corridors, the federal share covered by the risk corridors drops from 75 percent to 50 percent. For cost deviations exceeding 10 percent, the federal share will remain at 80 percent.
For contract years 2012 and beyond, CMS has the authority to further increase the risk corridor thresholds provided they are structured symmetrically.

So much for the protests of James Capretta and Yuval Levin in The Weekly Standard that "It is hard to imagine that many Americans, regardless of their political leanings, want taxpayers to be on the hook for covering the losses of shareholder-owned insurance companies." ." In 2003, 204 of 229 House Republicans and 42 of 51 GOP Senators voted for precisely that.
If conservatives are so concerned about the budgetary exposure from a federal "bailout" to private insurers, they should call for the repeal of these provisions of the 2003 Medicare Modernization Act immediately. (At the very least, Republicans should raise the revenue to pay for the Medicare Rx plan that will cost Uncle Sam $400 billion in its first decade, all in the form of red ink. In contrast, the Affordable Care Act is forecast to reduce the national debt, due to the mix of new tax revenue and savings from elsewhere in the budget.)
So, Obamacare is no more a bailout for private insurers than the Republican Medicare drug program. In fact, Part D is a massive Medicare windfall for both the insurance companies and the pharmaceutical industry. After all, Medicare Part D provides 49 million American seniors with public tax dollars to purchase prescription coverage from private insurers. And as it turns out, the Medicare Modernization Act Republicans passed and President Bush signed expressly forbids the government from either offering a "public option" for prescription insurance within the government-run Medicare program or negotiating drug prices directly with pharmaceutical firms. The MMA's ban on Medicare negotiating better prices directly with the drug companies is the key reason why only 16 Democratic House members voted for it in 2003.
Ultimately, the dire 2005 forecasts that Part D might cost as much as $720 billion over its first decade rather than the $400 billion the Bush administration promised did not come to pass. But it was largely due to much lower enrollment (77 versus 93 percent) and the rapid adoption of generic drugs, rather than its "competitive mechanisms," which largely explain the lower Medicare Part D bill for taxpayers. Nevertheless, in a November 2005 report released by Democratic staff on the House Government Reform Committee showed that under the new Medicare plan, prices for 10 commonly prescribed drugs were 80 percent higher than those negotiated by the Veterans Department, 60 percent above that paid by Canadian consumers and still 3 percent higher than volume pharmacies such as Costco and The report concluded that:

"The prices offered by the Medicare drug plans are higher than all four benchmarks, in some cases significantly so. This increases costs to seniors and federal taxpayers and makes it doubtful that the complicated design of Medicare Part D provides any tangible benefit to anyone but drug manufacturers and insurers."

Or as the likes of Marco Rubio, Tim Griffin, Charles Krauthammer, the National Review and the Weekly Standard might put it, a "bailout."
NOTE: It is worth highlighting that risk adjustment mechanisms have been a central feature of Medicare for decades. As Gerald Kaminski explained in his August 2007 report, "Medicare's Use of Risk Adjustment":

Medicare accounts for expected differences in resource needs of patients or health plan enrollees by risk-adjusting the payments it makes to health care facilities, such as hospitals, skilled nursing facilities, and home health agencies, and the premiums it pays to health plans. Risk adjustment is intended to ensure that payments or premiums are adequate for patients or plan enrollees who require more resources than average in order to protect beneficiary access as well as the financial condition of the provider or plan. At the same time, risk adjustment lowers payments or premiums for beneficiaries who are expected to use fewer resources to reduce incentives for providers or plans to favor these beneficiaries.


Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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