In its next Obamacare-related decision, the Supreme Court will decide whether employers in states that chose not to establish their own Obamacare exchanges can be forced to pay penalties for not offering insurance the government deems acceptable.
The case is somewhat complicated and based on textual questions and legislative history. But if the court rules that the phrase “established by the state” means what it looks like it means, this will bring a small dose of chaos to up to 37 states that now rely on the federal exchange — the infamous healthcare.gov.
A majority of those who bought insurance from the federal exchanges in those states would no longer be eligible for the subsidies that have made the high price of Obamacare insurance less unpalatable for Americans of modest means. And the employer fines that are currently triggered when employees who aren’t offered qualifying health insurance obtain subsidies to purchase it on the exchange would go away.
Some have speculated that a ruling against Obama will set off a mad rush by states to establish exchanges of their own. Before state legislators embark on this rash course, however, they might want to look at the experience of the 15 states and the District of Columbia that originally set up their own exchanges.
As it turns out, they are a rather messy and expensive proposition. As the Washington Post reported last week, about half of these state-run exchanges — which were very, very expensive to build in the first place — don’t bring in enough money to sustain themselves. Some states have already been forced to impose or are now considering new taxes and fees on health insurance policies to cover their exchanges’ costs. This obviously defeats the purpose of subsidizing insurance in the first place.
The case of Oregon is the most extreme. After spending $200 million to develop its own health insurance exchange, the Beaver State was forced to abandon it altogether because of pervasive and intractable technical problems.
Tiny Vermont spent roughly $4,000 for every uninsured Vermonter to develop its exchange — more than enough to buy a pre-Obamacare policy for everyone for an entire year. And yet after spending so much, the Green Mountain State may soon follow Oregon’s lead in abandoning its creation. Minnesota faces a similar situation.
And it gets worse, because many insurers selling their wares on these exchanges will soon get another rude awakening. Obamacare contained a provision known as “risk corridors,” to prevent massive losses for participating insurers. The program uses a large tax on insurers who make windfall profits to cover other insurers’ large losses. But as Bloomberg reported Friday, too many of the insurers are losing money and not enough are making bank. As Bloomberg noted, “There may be just $1 in the piggy bank to cover every $10 in claims at an Obamacare program designed to spread risk among insurers.”
What does it all mean? It reinforces several fundamental economic facts that should have prevented Obamacare from becoming law in the first place. Government is not an economically responsive institution. It doesn’t know how to create marketplaces; it doesn’t understand risk; it doesn’t know what consumers want or what they need.
The one thing government sometimes does well is to meet extremely urgent human needs when money is no object. The state legislators who consider whether to establish new exchanges should weigh that full sentence carefully before proceeding.
