Stop me if you’ve heard this story before: Financial institutions, enabled and empowered by lax regulators, make unwise multi-billion-dollar bets that threaten the well-being of millions of Americans—not to mention federal taxpayers. The subprime mortgage crisis that led to the financial meltdown of 2007-08? Sure. But it also describes insurers’ risky bets on Obamacare in 2017-18.
At issue in the latter: Federal cost-sharing reduction payments, designed to reimburse insurers for providing discounted co-payments, deductibles, and the like for certain low-income households. While the text of Obamacare includes no explicit appropriation for the payments, the Obama administration decided to start providing the payments to insurers anyway when the law’s insurance exchanges opened in 2014.
The House of Representatives, not appreciating this infringement on its constitutional “power of the purse,” filed suit against the Obama administration to stop the payments. In May 2016, the House won a key victory when Judge Rosemary Collyer ordered the payments halted unless and until Congress provided a specific appropriation. Although Collyer stayed her ruling pending an appeal, a federal district court placed flow of the payments in clear jeopardy.
By summer 2016, anyone could have seen problems on the horizon for insurers: Collyer had declared the cost-sharing payments unconstitutional; a new president would take office in January 2017, and could easily terminate the payments unilaterally, just as Obama started them unilaterally; and neither Hillary Clinton nor Donald Trump made any clear public statements confirming the payments would continue.
Worried about their potential exposure, insurers tried to fix their dilemma, but didn’t. Insurers insisted upon language in their contracts with healthcare.gov, the federally run insurance exchange, stipulating that cost-sharing reductions “will always be available to qualifying enrollees,” and allowing them to drop out of the exchange if those reductions disappeared.
But the legal and constitutional dispute does not apply to payments to enrollees. Insurers are legally bound to provide those reductions regardless. The contract provides no help to insurers on the fundamental question: Whether the federal government will reimburse them for providing individuals the reduced cost-sharing.
Beyond bungling and ineffective attempts to change their contract with the federal government, what did insurers do to resolve this uncertainty? They ignored it, hoping it would go away. Most insurers (Aetna and Centene being the exceptions) failed to disclose the uncertainty surrounding the cost-sharing payments—which totaled $7 billion for one year alone—as a material risk in their Securities and Exchange Commission filings. During the bidding process for the 2017 plan year, insurers did not cite the questions regarding cost-sharing payments as reasons to raise premiums, or drop off the exchanges.
Likewise, despite having multiple reasons to do so, state regulators did not appear to question the uncertain status of the cost-sharing payments when approving insurers’ 2017 rates in the fall of 2016. I asked all 50 state insurance commissioners for internal documents analyzing the impact of the May 2016 court ruling declaring the payments unconstitutional on the 2017 plan year. In response, I have yet to receive a single document to indicate that regulators demonstrated concern about the incoming administration cutting off billions of dollars in federal subsidies to insurers.
Having under-reacted surrounding the cost-sharing reductions for much of 2016, insurers and insurance commissioners have spent the past several months over-reacting. Industry lobbyists have swarmed Capitol Hill demanding Congress pass an explicit appropriation for the payments—and more bailout payments besides.
But the hyperventilation regarding the cost-sharing payments sends the wrong message to financial markets: They can ignore significant risks, so long as their competitors do so as well. The “uncertainty” surrounding the payments was knowable, and known, both to insurers who tried to change their contracts with the federal exchange, and to analysts like this one. Yet insurers did not change their behavior to reflect those risks, nor did regulators require them to do so.
Ironically, many of the same Democrats who claim they prevented “too big to fail” by passing the Dodd-Frank financial regulatory regime fail to recognize that they replicated “too big to fail’s” flaws in Obamacare. Perhaps, instead of merely writing a blank check to insurers for the cost-sharing payments, those lawmakers should take a closer look at the effects of what they have wrought, before taxpayers end up on the hook for a bailout of even larger proportions.
Mr. Jacobs is founder and CEO of Juniper Research Group, a policy consulting firm based in Washington. He is on Twitter: @chrisjacobsHC.
