The Corner

On the Obamacare Risk Corridors

In this recent Q&A explainer piece regarding Obamacare’s risk-corridor provision, the Washington Post’s Sarah Kliff (who is normally a very good health-care reporter) uncharacteristically gets some crucial basic facts wrong, and so ends up wrongly dismissing the core concern of critics of the provision. 

The key problem is in this portion, which purports to explain where the money for federal risk-corridor payments to insurers would come from if the insurers suffered serious losses on the Obamacare exchanges:

Where does the money to pay insurance companies come from?

Other insurance companies. All non-grandfathered plans are required to pay into a pot of money that’s used to fund the risk corridor program. This means there’s potential for insurers to lose money through the risk corridor program, which is what you see represented on the left side of the above chart. If an insurance company finds that their premiums way more than cover claims paid out – the technical definition of “way more” here is defined as claims cost at least 3 percent less  than premiums – then that health plan has to fork over some of that money into the risk corridor pool.

This is just not correct. The risk-corridor program is not funded by a pot of money toward which all non-grandfathered plans are required to contribute. Rather, the program requires insurers to pay the federal government if their revenues on exchange plans exceed their spending on those plans by a certain percentage and entitles them to be paid by the federal government if the opposite happens and they experience losses beyond a certain percentage. There is no reason to expect all non-grandfathered plans to make or receive payments, and, most importantly, there is no necessary relationship between incoming and outgoing payments. 

That last point is where concerns about a taxpayer bailout of insurers come from. If outgoing payments exceed incoming ones then federal taxpayers, not insurance companies, pay the difference. The risk-corridor provision of the law commits taxpayers to cover insurance-company losses beyond a certain level and places no limit on the taxpayers’ exposure to the risk of such losses. If the balance of risk in the exchange system as a whole ends up being badly out of whack, taxpayers could easily end up turning over billions to cover insurer losses. 

The debate about this in recent weeks has focused on the term “bailout.” Some people argue that putting the taxpayer on the hook to cover major insurer losses isn’t technically a bailout because most insurers wouldn’t be at risk of an actual bankruptcy, or because the injection of taxpayer dollars isn’t ad hoc or after the fact. But I don’t think anyone has denied the basic fact that the risk-corridor provision means that large insurer losses in the Obamacare exchanges would be heavily mitigated by the taxpayer, which means that the insurers don’t bear the full risk and so don’t have to price their products accordingly or withdraw from the exchanges. Losses resulting from an insurer’s failure to rationally price its products would trigger a public payout—and the scope of the payout would grow with the scope of the losses, however large they end up being. The point is to rescue the insurers from the financial distress they might suffer as a result of their participation in the exchanges. That’s what opponents of this provision mean by bailout, and I don’t think a rescue from money problems or financial distress is an unreasonable definition of the term. The dictionary agrees.  

Kliff’s error or confusion on this point may be a result of the way the Congressional Budget Office and the Office of Management and Budget scored this provision. When originally scoring the risk-corridor program, both assumed for the sake of convenience that incoming risk-corridor payments would exactly equal outgoing ones, and so scored the provision as budget neutral (and thus, in effect, insurer funded). In President Obama’s 2014 budget, for instance, OMB assumed pay-ins and pay-outs for the first year of the exchanges would both equal $5.45 billion. But there is no particular reason for thinking incoming and outgoing payments would be symmetrical, and in fact in the one remotely analogous program the federal government has attempted (the risk-corridor provision of the Medicare prescription-drug benefit, about which more below), incoming and outgoing payments have never been equal: The gap has averaged $800 million a year since the program started. 

That gap has been a positive amount: Insurers, not taxpayers, have paid an average of $800 million a year and the provision has never cost taxpayers a dime, because Medicare Part D has consistently worked better than expected to contain costs, and so insurers’ profits have exceeded their expectations. That is an important part of why that risk-corridor provision has never garnered much controversy. Had it seemed as though taxpayers might end up giving insurance companies billions to cover their losses (as seems altogether plausible in the Obamacare exchanges), it might well have been very controversial. But that was never a particularly plausible outcome, given the nature and design of the Medicare prescription-drug program. 

And this points to an important problem with the argument that various people have offered for the Obamacare risk corridors. Kliff herself, in the same explainer document, points to the Medicare Part D risk corridors in noting that such a provision has been used before, as other defenders of the Obamacare risk corridors have also noted. But the differences between Medicare Part D and Obamacare make the analogy not a defense of Obamacare’s risk-corridor provision but a further element of the case against it. 

Simply put, Medicare is a federal entitlement program while the exchanges are supposed to be regulated private markets. According to the defenders of Obamacare’s risk corridors, providing this kind of protection to insurers acting as agents of the federal government in implementing an entitlement program designed to pay for care for the highest-risk population in America is the same as providing it to insurers selling coverage in a private market that is expected to achieve a balanced risk pool. People who say that are basically suggesting that they think of Obamacare as a government takeover of the individual insurance market on the model of a comprehensive entitlement. Is that really what Obamacare’s defenders want to suggest?

Another important difference between the risk corridors in Medicare Part D and those in Obamacare is that the former are not designed to account for a profit margin. The benchmark used to determine which insurers will pay into or be paid out of the Obamacare version of the program includes an allowance for a 3 percent profit margin for the insurers. The benchmark for the Part D risk corridors excludes profit. This and other smaller differences make the Obamacare risk corridors a significantly more obnoxious form of corporate welfare, quite apart from the decisive difference in context between the two programs.

I don’t think the analogy to the Medicare prescription-drug benefit does anything but highlight the inappropriateness of such a provision in the regulation of a supposedly private insurance market. 

None of that makes the risk-corridor provision by any stretch the worst thing about Obamacare. It’s not even the most obnoxious corporate welfare in Obamacare. But it is a discrete instance of highly inappropriate unlimited taxpayer exposure to private corporate risk. And while addressing the worst provisions of Obamacare would basically require repealing the law (which of course will not happen under this president and senate) this provision could be readily repealed or at least made formally budget neutral (by requiring that outgoing payments not exceed incoming ones) by itself. 

Obviously such a move would not be welcomed by the insurers, and in many states it could undermine the viability of the exchanges. But that just means that the exchanges are not viable without the promise of a taxpayer bailout of major insurer losses. That’s not exactly a case for Obamacare either.

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