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October 17, 2017

To Save Their Insurance Markets, States Should Issue Obamacare Bonds

By Darien Shanske

[Cross-posted from Medium.com.]

There is a strong legal argument that insurers are owed cost-sharing reduction (CSR) payments, notwithstanding the refusal of the current Congress and the President to make the payments. Alas, assuming this is correct, these payments will come too late for current customers and insurers, thereby inflicting real damage to individuals and perhaps permanent damage to the ability of the health insurance system to provide affordable coverage on the individual market. The states can step in and make these payments and, given the scale of the payments relative to state budgets, it would seem that many states should be able to do so. But matters are not so simple. States typically operate under balanced budget rules and cannot simply borrow to pay for some worthy program. There will need to be a budgeting process and the balanced budget rule will force tradeoffs to be made (or taxes to be raised) if a state is to make CSR payments in the present in order to prevent current damage.

But there is another option. The CSR payments are very likely to happen eventually and thus they have a lot of value right now. If adequately compensated for the legal risk through interest payments, investors would likely advance most of the eventual value of the CSR payments today. Indeed, one might imagine that the opportunity to thwart the Trump Administration would lead to such an extraordinary response from investors that borrowing could be end up very affordable indeed.

In this way, the states can protect their citizens while not putting up state tax dollars. Aside from the economic and moral imperatives to protect their citizens that should motivate the states to act, it is also important to note that the states also possess the administrative capacity to collect the relevant insurers, estimate their CSR claims and put together a sensible financing structure. The states can even offer some kind of backup to these bonds to drive down their costs further.