Unwinding Obamacare

Published January 27, 2014

Weekly Standard

Obamacare is no longer a theoretical proposition. It is now being implemented, if with some notable exceptions for the portions of the law the Obama administration finds particularly inconvenient. Millions of Americans are experiencing its consequences directly, and millions more are forming their opinions of it based on what they are hearing of its effects. Those opinions are generally not positive. The fact that many of the law’s congressional supporters are now running scared for fear of voter backlash is a good indication of how poorly the rollout is going.

Obamacare’s travails seem likely to play into the hands of the law’s Republican opponents this year, even if the GOP does very little to try to reverse or slow the law’s implementation. The inevitable displeasure of those forced into inferior coverage with diminished access to care at higher cost because of Obamacare (and the concern of those who fear they might be) appears set to overwhelm the approval of those benefiting from its redistributive mechanisms, and so to swing the political pendulum at least somewhat to the right. Off-year elections in an incumbent president’s second term already tend to go poorly for that president’s party, and Obamacare appears likely to exacerbate that trend.

But to fully capitalize on the political opportunity before them, and to set the stage for a genuine rollback of Obamacare and its replacement with a far better alternative, Republicans in Congress cannot be satisfied to sit back and watch the disaster unfold. They should take the initiative, as they did at several crucial moments in 2013, and push legislation that would speed up the process of unwinding Obamacare and lay out for the public their concrete plans for a real reform.

The GOP should begin by renewing its commitment to protect Americans from being coerced into Obamacare. That means jettisoning, or at a minimum delaying, the individual mandate. The mandate has always been among the least popular elements of this unpopular law, and it has grown increasingly difficult to defend as the rollout has proceeded and more Americans have found themselves forced out of coverage they liked and faced with the prospect of paying a penalty (or a tax, as Chief Justice Roberts would have it) for not buying coverage they don’t like.

The Congressional Budget Office’s most recent estimates (made before the rollout of Obamacare began) assumed some $2 billion would be collected in 2015 from households forced to pay this uninsured tax for 2014. If the average payment is $500, that would mean 4 million Americans. And the number could be much higher if enrollment in exchange coverage is as low as it is now expected to be.

It is hard to imagine Democrats being able to sustain support for such an unpopular proposition, especially in light of the president’s unilateral decision to exempt those with canceled 2013 individual policies from the tax in 2014. Indeed, it is possible, and perhaps even likely, that the president will eventually take the next logical step himself and waive the tax for everyone in 2014 (though he would presumably wait to take such a step until after the enrollment period closes at the end of March). This is all the more reason why Republicans should make repealing this mandate, and codifying the president’s own delay of the employer mandate, their top priority in 2014, just as it was in 2013.

In addition to a repeal or delay of the individual and employer mandates, Republicans should hammer the other weak link in the Obamacare chain: the back-door subsidy that promises a massive bailout for insurance companies. Like the mandate, the promise of bailouts is there to persuade insurers to play ball despite the system’s irrationality.

Especially troubling is the “risk corridor” provision of the law, under which taxpayers are on the hook for covering large portions of the losses that insurers incur on the Obamacare exchanges. If an insurer pays out claims that exceed 108 percent of its premium collections, taxpayers would cover about 75 percent of its losses.

A mirror-image provision is also supposed to recoup 75 percent of any profits above 108 percent of premium collections. But because Obamacare’s design is so flawed and its rollout has been so bungled, enrollees in the exchange insurance plans are likely to be significantly older and sicker than the insurance company actuaries assumed (there was also a great deal of political pressure on insurers to lowball their premiums in this first year of the program). There will thus likely be few if any insurers rebating profits under this risk-corridor provision, only a large cost to the taxpayer. The insurers are counting on this massive bailout to avoid a bloodbath of losses from Obamacare.

An all-out assault on this aspect of Obamacare is well justified on both policy and political grounds​—​indeed, very few issues have the potential to unite voters politically like this one. 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. The promise of such a bailout effectively amounts to collusion between these companies and the Obama administration at the expense of the public: Insurers avoid pricing coverage in ways that take account of the distorted risk profiles of the exchanges so as to give the law a better chance of surviving a little longer, and in return the administration cushions their losses with taxpayer dollars.

There is certainly room for risk-sharing and reinsurance in a rational insurance system, should insurers desire it, but such mechanisms must be symmetrical: The losses of some insurers should be cushioned by funds drawn from the profits of other insurers. That is how the Congressional Budget Office assumed these provisions would function in Obamacare, and they projected them to be budget neutral. But risk corridors would only work this way in a market that was properly structured and allowed insurers to price for risk​—​so that while the risk might be unevenly divided among insurers, it would be accounted for by the market as a whole. Obamacare’s exchanges are not rational insurance markets, and its risk-corridor provision now looks to be very far from budget neutral. This year it could easily cost taxpayers hundreds of millions and perhaps billions of dollars.

Republicans should therefore propose either to eliminate entirely the program’s risk-corridor provisions (as a bill introduced by Florida senator Marco Rubio and Rep. Tim Griffin of Arkansas would do) or to make them explicitly budget neutral, requiring that payments to insurers suffering losses be reduced proportionally so they total an amount no larger than the payments from insurers reaping profits. That way, insurers who chose to participate in the exchanges would together bear the consequences of a failure to price their products appropriately, rather than making the taxpayer pay for their mistakes and allowing them again to lowball premiums next year to keep this broken new system on life-support.

It is important to understand how crucial the prospect of a taxpayer bailout of insurers is to the future of Obamacare. Insurers facing the prospect of participating in the exchanges in 2015 without the backstop of a taxpayer bailout would be forced either to price their products properly (and therefore likely well above their 2014 premiums) or withdraw from the exchanges altogether. Either way, the law will become even less attractive to middle-income and moderate-wage households who get little or nothing in subsidies. Insisting on budget neutrality or repealing these provisions would, like the elimination of the individual mandate, not only make good political sense but also help to speed the unwinding of Obamacare, which is essential to the ultimate repeal of the law and its replacement with a real reform of American health care.

For that very reason, the insurers and the Democrats are certain to mightily resist a repeal of the bailout provisions. But the more intense their resistance, the more it will reinforce the case against the law. A program that cannot survive without a massive taxpayer bailout of private insurers is not a program that is working. It is a program that is failing, and needs to be replaced.

Finally, Republicans should continue their efforts to minimize the harm to people with pre-Obamacare insurance coverage that they would like to keep. Their efforts to enable those whose policies were canceled to retain them late last year yielded a chaotic and lawless administration move to empower insurers in some states to continue offering those policies. That has helped some people, but a legislative reprieve would be more stable and effective, and should also be extended to small businesses​—​many of which obtained early renewals of 2013 policies and so will be facing cancellations in the course of 2014. These look likely to affect millions of families, and Republicans should help those who like their coverage to keep it.

Each of these measures would be both politically popular and substantively helpful to the cause of unwinding Obama-care and moving toward the law’s replacement. Obamacare has already encountered enormous difficulties in its early months, and more are in the offing. But Republicans cannot stand aside and assume the law will collapse of its own weight. The administration and its supporters in Congress will do all they can to mask the faults of this monstrosity and enable its survival, and they will further assert that bare survival is the new definition of success. Republicans should respond with measures that help voters see that Obamacare is neither inescapable nor irreversible​—​by saying no to the mandates, the bailouts, and the forced coverage cancellations that Obamacare requires to stay alive.


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