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Suppose you wanted to sabotage Obamacare and could not get Congress to help. Short of repeal legislation, the next best strategy would be to cut off funds to health insurers—in other words, starve the beast. That should work, right?
Surprisingly not, according to a new report from the Congressional Budget Office (CBO). Responding to a request from House Democrats, CBO considered what could happen to health coverage, insurance premiums, and taxpayer cost if the federal government stopped paying insurers for cost-sharing reductions (CSRs). Under CBO’s scenario, the federal government would stop making payments to insurers totaling $118 billion between 2018 and 2026.
As a result, the federal deficit would rise (not fall) by $194 billion, low-income individuals would pay about the same (not more) for coverage, and more people (not fewer) would be insured.
What many observers, including policymakers, forget is that there is always a private sector reaction to any new government policy. It’s something like Newton’s third law of motion applied to politically-driven markets. For every action by the government, there is an opposite reaction that could overwhelm the policy intention. A corollary: the more money at stake, the more vigorous the private sector’s reaction.
If Republicans were able to pass legislation permanently halting CSR payments by the end of August—obviously impossible, but that’s what the Democrats and CBO chose to assume—the Affordable Care Act (ACA) requirement that insurers must reduce the deductibles and other cost-sharing would remain. That means insurers in the insurance exchanges would lose $8 billion in CSR payments next year. If they failed to respond, every insurance CEO would be fired for incompetence.
Instead, insurers would take advantage of what Democrats consider to be a feature of the ACA. They will raise premiums to fully compensate for the $8 billion loss. The 8 million people now receiving premium credits would not pay more because their subsidy rises dollar-for-dollar with premium increases.