Taxpayers Covering Insurance Companies' Losses

February 4, 2014

Taxpayers are on the hook for insurance companies' unexpected costs, says Peter Suderman, a senior editor at Reason Magazine.

  • The federal government will reimburse insurers for 50 percent of any losses through the "risk corridors" in the Affordable Care Act.
  • When insurers spend between 3 and 8 percent above their target level, the Department of Health and Human Services will cut them a check.
  • For spending above 8 percent, the companies are reimbursed at 80 percent of their losses.
  • And what happens if insurers spend below expected targets? Insurers are supposed to pay the government a portion of those gains (50 percent of gains if the spending is between 3 and 8 percent lower, 80 percent if the spending is more than 8 percent less than expected).

The assumption was that these payments would roughly even out. But as the exchanges stand now, odds are that insurers will not be paying into the system at all, and the Affordable Care Act does not indicate exactly how the government will fund these payments to the insurance companies. This year, the government could owe insurers several billion dollars.

The corridors have been labeled insurance company bailouts by lawmakers, including Senator Marco Rubio. Suderman says that the label does not matter. Whether the corridors are termed a bailout, corporate welfare or an insurance company subsidy, one thing remains the same: taxpayers are going to be stuck paying for these losses.

What is more, the financial system that is supposed to make these risk corridor payments has not even been built yet, and the administration has said that the "entire health care reform program" could be in jeopardy without the system in place.

Source: Peter Suderman, "Obamacare Gives Insurers Money to Cover Unexpected Costs. Is That a Bailout? Does It Matter?" Reason Magazine, January 24, 2014.

 

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