The Obamacare Risk Corridors

by Reihan Salam

Florida Sen. Marco Rubio has introduced legislation aimed at abolishing the “risk corridors” established under the Affordable Care Act.

Under community rating, insurers are obligated to charge consumers the same premiums regardless of health status. To some extent, this represents a transfer from consumers who are healthy in any given year to those who are not healthy in any given year. But it also allows insurers to devote fewer resources to underwriting. Problems arise, however, when some insurance plans find that they’ve attracted a disproportionately large share of unhealthy patients. It could be that some other plans have crafted offerings that are particularly attractive to the healthy, or rather that are particularly unattractive to the unhealthy, despite the fact that they’re obligated not to discriminate against the unhealthy. Given that you have to charge healthy and unhealthy consumers the same amount, plans that attract unhealthy consumers will fare poorly relative to plans that attract healthy consumers. This strengthens the incentive for insurers to engage in a kind of shadow underwriting, and to take steps to deter unhealthy patients. There are a number of mechanisms insurance regulators can use to mitigate this practice, including risk adjustment (plans with healthy enrollees transfer funds to plans with unhealthy enrollees) and reinsurance (a reinsurer provider, public or private, covers all or some costs above some level). Obamacare creates a permanent risk adjustment mechanism, and it has temporary reinsurance program as well as a risk corridors program. The risk corridors program is like risk adjustment in principle, but it is pegged not to the relative health of the enrolled population, but rather to whether or not costs fall below 97 percent of the expected level or above 103 percent of the expected level. Because the exchanges are falling far short of expectations, and because there is a real concern that the consumers who are signing up for coverage are disproportionately unhealthy, there is a real danger that you won’t have a balance of plans that fall below and plans that fall above the aforementioned thresholds. Rather, a great many plans might fall above 103 percent, in which case the government would have to provide some compensation.

In a recent Wall Street Journal op-ed, Rubio seems to acknowledge that risk corridors have a place if they are budget-neutral, but that the program must not be allowed to serve as a bailout of insurance companies:

Risk corridors are generally used to mitigate an insurer’s pricing risk. Under ObamaCare, risk corridors were established for the law’s first three years as a safety-net for insurers who experience financial losses. While risk corridors can protect taxpayers when they are budget-neutral, ObamaCare’s risk corridors are designed in such an open-ended manner that the president’s action now exposes taxpayers to a bailout of the health-insurance industry if and when the law fails.

Subsequent regulatory rulings have made clear that the administration views this risk-corridor authority as a blank check, requiring no further consultation or approval by Congress. A final rule handed down in March by HHS and the Centers for Medicare and Medicaid Services states: “Regardless of the balance of payments and receipts, HHS will remit payments as required under section 1342 of the Affordable Care Act.”

There is a reason why the term “bailout” has become such a prominent part of our political discourse. In the wake of the 2008 financial crisis, many large financial institutions were “bailed out” despite the fact that they had engaged in (what has been characterized as) reckless risk-taking. But in this case we have insurers who seem to have been acting in accordance with the law of the land, and failures on the part of the federal government and many state governments may lead to a situation in which many insurers will face financial ruin. But even if we accept that premise that insurers ought to be punished for the egregious failures of the federal government, why not, as Joshua Green of Bloomberg Businessweek suggests, “write a bill stipulating that risk corridors must be budget-neutral”? Green’s theory is that Rubio knows that this isn’t a viable proposal, and that he’s merely trying to get back in the good graces of conservatives. I can’t really speak to that. What I can say is that Rubio’s proposal as written does not seem to be a very good idea.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.