Rubio Scores a Direct Hit on Obamacare

By Mario Loyola

Thursday, December 17, 2015

Since it fell into GOP hands, the House of Representatives has voted more than 50 times to repeal Obamacare, in whole or in part. The exercise was worthwhile, because political theater is sometimes worthwhile. But with the Senate in the way, and a presidential veto as certain as night follows day, there was never much hope that a “frontal assault” on the fortress walls would succeed.

As Senator Marco Rubio has shown, a careful study of how Obamacare works suggests a much better strategy: Besiege the program until it surrenders. Establish a cordon around Obamacare so that it can’t expand, cut it off from its main sources of support, and use sappers to undermine the defenses.

Obamacare has the same congenital weakness as every other law that seeks to “guarantee” issuance of health insurance to all who apply for it: It starts by imposing huge losses on insurance companies that are absolutely vital for the law to function properly. Any program of guaranteed issuance must therefore find a way to subsidize the participation of insurance companies, or they will exit the market altogether. Once insurance companies exit the market, the jig is up, and there is no choice but to repeal the law.

That’s precisely what happened at the state level in the 1990s, after the failure of the Clintons’ health-reform effort. Some eight states adopted guaranteed-issue reforms for the “individual market” (the 10 percent or so of health insurance not purchased through employers and hence not federally regulated). Almost immediately, those laws produced what health-care analysts call “adverse-selection death spirals”: Increasing numbers of healthy people chose to wait until they were sick to get health insurance. Despite provisions that allowed insurers to exclude those with pre-existing conditions, the per-unit costs of health insurance rose dramatically, driving premiums sky-high, thus driving still more healthy people off the insurance rolls. Health insurers quickly exited the market.

That’s why most of the states legislatures that adopted individual market reforms in the 1990s voted overwhelmingly to repeal them just a few years later. That is not likely to happen with Obamacare, for only one reason: While the law imposes major losses on insurance companies at almost every step, it puts the federal government (meaning taxpayers) on the hook for compensating those losses.

Obamacare wouldn’t have passed without the support of insurance companies, and it can’t exist without their support. They supported it to start with only because of the tens and eventually hundreds of billions they were offered in bribes. But virtually every element of Obamacare was guaranteed to cost much more than the law’s original cost projections. The insurance companies therefore now face much greater losses than Obamacare advocates claimed. If the federal subsidies aren’t enough to make up for those losses, insurers who previously supported the law will exit the market — and if that happens, legislators who previously voted for the law will vote against it, as happened in the states in the 1990s.

That’s why Senator Marco Rubio’s strategy of targeting “risk corridors” is so important. It was in a November 2013 Wall Street Journal op-ed that Rubio first revealed the potential problem with risk corridors to the broader public, warning that the Obama administration might try to pull a fast one on American taxpayers, through a backroom bailout. 

The idea of risk corridors is that insurers in the individual and small-group market are protected from excessive losses by cross-subsidies from those insurers who are deemed to be making “excessive profits.” Because Obamacare plans were not that attractive to the young and healthy, the risk corridors were bound to operate at a loss. If the federal government couldn’t backstop the losses through increased bailouts, the insurance companies would exit that part of the market.

In response to Rubio’s warnings of a potential backroom bailout, the Obama administration pledged that risk corridors would be implemented in a “budget neutral” manner, meaning they wouldn’t add a dime in net federal spending. In December 2014, Congress inserted a simple provision into an omnibus spending bill that essentially codified that promise. Democrats voted for it, and the president signed it.

Now, according to Brian Blase of the Mercatus Center, it turns out that the insurers selling Obamacare plans indeed incurred significant losses, on the order of $4 billion in 2014, and are on track to produce similar losses again this year. Losing insurers were hoping for $2.9 billion in compensation under the law, but their profitable competitors could pay in only about $362 million. The expected profits never materialized. Without a (now illegal) federal subsidy, insurance companies were forced to accept significant losses. The omnibus spending bill currently before Congress continues the prohibition on a backroom bailout for risk corridors, and the president will have to sign that, too.

Meanwhile, yet another major subsidy in Obamacare (a “re-insurance” mechanism meant to protect insurers from the medical costs of extremely sick people) has resulted in subsidies to the tune of nearly 23 percent of all insurance-company premiums. That subsidy is to be phased out in the next few years, which means that premiums will have to rise by at least that much over the increases last year and this year. That will push more healthy people off the insurance rolls, particularly among the top two-thirds of income earners.

The amount of money that Rubio helped save taxpayers is significant, but not huge — certainly not large enough to bring down Obamacare altogether. What’s important is the demonstration effect. By strategically targeting a weak link between Obamacare and the insurer companies necessary to the law’s survival, Rubio has scored a direct hit on Obamacare. He demonstrated that there is a politically realistic way to get Democrats to undermine Obamacare: Force them to vote their own cost projections into law.

It’s not the end of Obamacare, but, we hope, the beginning of the end. As the 1990s show, heavy-handed attempts to socialize health care on the cheap, without rationing, can unravel with spectacular speed. Just weeks ago, the nation’s largest health insurer, UnitedHealth, announced that it will probably exit the Obamacare exchanges in 2017. “We can’t sustain these losses,” CEO Steve Hemsley explained. “We can’t subsidize a market that doesn’t appear at this point to be sustaining itself.” Think about that. Even on top of enormous federal subsidies, which include huge direct payments to the insurers, the market created by Obamacare is failing to sustain itself.

There’s one thing we know for sure about Obamacare: It cannot work without blowing the deficit sky-high. That’s particularly true of the Medicaid expansion. The GOP’s strategy should be to carefully stage the conditions for the law to unravel on its own. Cap federal spending on the law, and eventually Democrats will have no choice but to vote for repeal.

As Rubio has demonstrated, Obamacare is more vulnerable than most people think.