Shock Corridor

Megan McArdle has written an illuminating column about Obamacare’s “risk corridors”. The drafters of Obamacare recognized that particular insurance companies might, in the uncertain new world created by the statute, underestimate their particular actuarial risk. The drafters therefore established risk corridors through which payments are made to such companies, from a fund financed by companies that make out better than expected, to partially offset losses resulting from the miscalculation.

Now, the Obama administration is contemplating using risk corridors to compensate insurance companies that face losses that arise not because of individualized miscalculation, but because the mix of people throughout the Obamacare system is disproportionately old and sick. It contemplates this measure not out of sympathy for insurers, but to keep them on board and in the market.

As McArdle suggests, however, it is stretch to read the statutory language establishing risk corridors as authorizing anything approaching make-whole payments to a market place full of insurance companies facing losses due to the misdesign of Obamacare. It is no coincidence that the government has already developed risk corridor rules that do not provide for the kind of assistance Obama now wants to provide. Top Obamacarecrat Gary Cohen says he will explore ways to modify these rules.

The risk corridor program, by its design, is basically a risk sharing program among insurance companies, administered by the government. Companies that make out better than expected provide funds for companies that make out worse.

If essentially all insurance companies make out much worse than expected, as may well be the case, the risk corridor concept won’t work as intended. It will work only if reinvented to force taxpayers to subsidize the industry.

The Obama administration seems perfectly willing to reinvent risk corridors in that fashion. Fear of legal challenge will not deter it.

Accordingly, Sen. Marco Rubio says he will introduce legislation to repeal the risk corridor provision of Obamacare. Such legislation has no chance of being enacted. But Democrats who vote against it will have to explain why they supported a bail out of an industry that their president and perhaps they themselves habitually demonize.

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