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“Insurance Bailout” already beginning

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osba-logo [2]By Oregon Small Business Association [3]

A proposal to eliminate a so-called “insurance industry bailout” has received a lot of attention in our Nation’s Capitol. The proposal (S.1726), advanced by U.S. Senator Marco Rubio, aims to eliminate this provision from the Affordable Care Act (ACA), often referred to as Obamacare. But, these concepts – known as “risk corridors” and “reinsurance” – aren’t bailouts; in fact, they’ve been employed before by Congress in bipartisan fashion.  The impact is already being felt.   Insurance provider Humana has stated that it will likely be requesting as much as $450 million for immediate help under this ACA provision.

The reason behind the risk corridor protections is simple: Congress is asking the private sector to price risk that they can’t yet measure – something anathema to an actuarial model. In order to backstop that risk, government essentially put in place “stop loss” protection to keep the companies from going bankrupt if the law fails to work. Without these provisions, the only way to cover the risk is through a wholly-controlled government system, which nobody should want.

The private insurance market sets premiums based on its assessment of the level of health care utilization among its customers. With the Affordable Care Act, insurance carriers were forced to set premiums based on a huge unknown: whether the right mix of customers would come into their plans to align with the rates they had to set in advance. To guard against catastrophic losses if the new law failed to work, Congress created these targeted and temporary provisions. They are not dissimilar from other insurance provisions like those found in Medicare Part D, flood insurance, or Terrorism Risk Insurance program.

As an organization that monitors small businesses ability to afford health policies for their employees, we fear that if these provisions are repealed it would lead to significantly higher premiums, reduced choice and competition, and erosion in the private market. Small businesses have had to manage years of escalating premiums. Now, the prospect of an insurance industry having to recover losses through higher premiums in a market with less competition is frightening. This may make for good sound-bites for some in Congress, but it will hit small businesses right in the pocketbook.

These insurance risk provisions are needed to maintain a private insurance market.  If the private insurance market is crippled by massive losses due to Obamacare under-enrollment, however, who exactly is supposed to administer the system once it’s repealed? I understand the political allure of opposing a “bailout,” but these are provisions designed to protect companies that were forced to swallow new policy they weren’t sure they could withstand. And, it seems, they may need it if the Affordable Care Act’s economics don’t improve.

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