Bailout has never been a pretty word in politics or business and since the Great Recession, the stigma has only intensified. When Wall Street banks and automakers General Motors and Chrysler were awash in red ink, Washington threw them a $420 billion lifeline (of which $430 billion came back), while the Federal Reserve bought nearly $1.5 trillion worth of toxic mortgage-backed securities.
Enter conservative columnist Charles Krauthammer with news of a new bailout. Krauthammer wrote in the Washington Post that "buried deep" in the Affordable Care Act is "a huge government bailout" to cover "up to 80 percent of insurance company losses."
Krauthammer is talking about a couple of important pieces in the law that limit insurers’ losses in the first few years of the program. Without those protections, most insurance companies likely would have avoided the government marketplaces where people can pick a health plan.
Krauthammer, who is no fan of Obamacare, supports legislation to remove those protections for health insurance providers from the law.
"Without viable insurance companies doing the work, it falls apart. No bailout, no Obamacare," he wrote.
We wanted to look deeper into Krauthammer’s assertion that these measures are bailouts, akin to the support offered to banks and car makers.
A bridge over risky waters
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," he quoted. "A rescue from financial distress."
Rescue is clearly the operative word. We looked at other definitions. The Palgrave Dictionary of Economics spoke of a rescue from "potential or actual insolvency." Investopedia had to prevent "the consequences that arise from a business's downfall."
The country’s recession bailouts fit these definitions nicely. First the private firms were in crisis and then the government stepped in with taxpayer dollars. For Scott Harrington, professor of health care management at the University of Pennsylvania Wharton School, Krauthammer’s use of the word in the context of the Affordable Care Act gets the sequence wrong.
"Bailouts involve ex post actions to address private sector screw-ups," Harrington said. "That's not what happened here."
Although the government could end up writing some large checks, the system was not explicitly set up to do that. Companies are expected to try to make a profit, and they have yet to experience any losses.
Mark A. Hall, professor of law and public health at Wake Forest University, took exception to Krauthammer’s statement because Krauthammer writes as though all the money comes from American taxpayers.
"A bailout is using general taxpayer revenues to help an industry or interest group," Hall said. "Here, the funding source is mainly from insurers themselves."
Mary van der Heijde, a principal and actuary with the health care consulting firm Milliman, told PunditFact that Krauthammer’s term "strikes me as an aggressive characterization." In her view, Krauthammer spoke only to the negative side of the program.
"This (risk corridor) provision is applied uniformly, in that both gains and losses are shared with the government," van der Heijde said. "Not just losses."
Melinda Buntin, chair of the Department of Health Policy at Vanderbilt University School of Medicine, noted that this is not the first time the government has used the risk corridor approach. It was part of the launch of the Medicare Part D prescription drug program.
"Under that, insurers have actually incurred higher profits than expected on average and have thus paid money back into the government," Buntin said.
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.
Experts we spoke with also took issue with Krauthammer’s use of the term "bailout." In the past decade, bailouts came after private businesses faced a financial crisis. The measures in the Affordable Care Act have a more complicated sequence that include a variety of outcomes.
This claim is partially accurate but leaves out important details. We rate it Half True.
Washington Post, Charles Krauthammer: Stop the bailout - now, Jan. 2, 2014
Centers for Medicare and Medicaid Services, Reinsurance, risk corridors and risk adjustment - final rule, March 2012
Legal Information Institute, 42 U.S. Code
Congressional Budget Office, Effects of the Affordable Care Act on health insurance coverage, May 2013
ACA Death Spiral, Risk corridors making it to mainstream media, Nov. 16, 2013
Heritage Foundation, Is the administration offering insurers an Obamacare bailout?, Nov. 14, 2013
Businessweek, A guide to Obamacare’s backstop for anxious insurance companies, Nov. 19, 2013
CNN, Obamacare fix could add millions of dollars to government costs Nov. 15, 2013
Wall Street Journal, Marco Rubio: No bailouts for Obamacare, Nov. 18, 2013
Society of Actuaries, Risk corridors under the ACA, Oct. 1, 2013
Kaiser Health News, FAQ: What is the ACA’s reinsurance tax?, Oct. 15, 2013
Department of Health and Human Services, Federal Register posting of final rules, March 11, 2013
Commonwealth Fund, Risk adjustment under the Affordable Care Act, May 2011
Department of Health and Human Services, Regulatory impact analysis, March 2012
Email interview, Charles Krauthammer, Jan. 10, 2014
Email interview, Melinda Buntin, Chair, Department of Health Policy, Vanderbilt University School of Medicine, Jan. 10, 2014
Email interview, Mary van der Heijde,Principal and Consulting Actuary, Milliman, Jan. 10, 2014
Email interview, Mark A. Hall, Professor of Law and Public Health ,Wake Forest University, Jan. 10, 2014
Email interview, Scott Harrington, professor of health care management at the University of Pennsylvania Wharton School, Jan. 10, 2014
Treasury Department, Daily TARP update, Jan. 10, 2014
International Journal of Central Banking, Estimated impact of the Federal Reserve’s mortgage-backed securities purchase program, June 2012
Merriam-Webster, Definition of bailout
Investopedia, Definition of bailout
Palgrave Dictionary of Economics, Definition of bailout
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