Tag Archives: 1342

Eliminating Risk Corridors jeopardizes Exchange Insurance

Draft of S.1726
Draft of S.1726

In a Wall Street Journal op-ed today that tracks much of what has been said on this blog in recent years, Florida Senator Marco Rubio announced that he will introduce later today a bill (provisionally numbered S.1726 ) that would apparently eliminate “Risk Corridors,” the provision of the Affordable Care Act under which the government would reimburse insurers selling insurance on an Exchange for the next three years from a good portion of any losses that they suffer there. Rubio contends  that “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.”

Marco Rubio portrait
Marco Rubio

Senator Rubio is largely correct, I believe, in his understanding of Risk Corridors (section 1342 of the ACA, codified at 42 U.S.C. 18062) both as drafted in the statute and as implemented by the Department of Health and Human Services.  Unlike its cousins, the reinsurance provisions (42 U.S.C. § 18061) and the risk adjustment provisions (42 U.S.C. § 18063), both of which likewise help reduce the risks of writing policies for sale on an Exchange, Risk Corridors is not drafted to be budget neutral.  That was the way the Congressional Budget Office scored it — it assumed that receipts under the provision would equal outlays — but this was clearly a blunder that should have been apparent at the time and that minimized the advertised budgetary risk entailed by passage of the Affordable Care Act. As discussed in an earlier blog post, if the distribution of profit and loss by insurers selling in the Exchanges is skewed in the loss direction, the government will be obligated to pay out more than it takes in.  Where the funding for this new “entitlement” for the insurance industry would come from is unclear. Senator Rubio is thus correct again when he says that the bill will be paid for by the taxpayer.

Senator Rubio is not correct to imply, however, that, standing by itself, the underestimate of Risk Corridor exposure represents this enormous understatement of the cost to the taxpayer of the Affordable Care Act.  That law, for better or worse, always called for large taxpayer outlays to help prop up an insurance system that, as one of its critical architectural features, would attack medical underwriting by insurers.  Indeed, although it was not apparent to many until recently, precisely because of the Three Rs of Risk Corridors, “free” reinsurance and future “risk adjustments,” the Affordable Care Act always created this scheme that looked like it preserved private insurance but in fact converted insurers largely into claims processors in a system in which profitability and core insurance functions were largely controlled by the federal government.

To see the relative magnitude of the Risk Corridors program, consider the bigger picture. The CBO projected most recently, for example, that subsidies to help individuals purchase insurance via tax credits and cost sharing reductions would total $26 billion in 2014 and ramp up to $108 billion by 2017.  To be sure, that figure was based on the assumption, which is beginning to look very suspect, that there would be 7 million people in the Exchanges in 2014, and thus might decrease if enrollment is considerably lower.  Still, since by my calculations it seems unlikely that the Risk Corridor payments will amount to more than $1 billion per year (but see footnote below), it is not as if the cost of “Obamacare” suddenly went through the roof. Maybe Risk Corridors could be considered the “straw that broke the camel’s back,” but the Affordable Care Act has always been a stretch of the federal budget and it has been a stretch that many have long found deeply troubling.

CBO projections on the cost of the Exchanges
CBO projections on the cost of the Exchanges

The more serious issue surrounding Senator Rubio’s suggestion that Risk Corridors be repealed is that such an action might well be the straw that broke the insurers’ backs.  Insurers do not have to participate in the Exchanges and they certainly do not have to continue to do so in 2015. I suspect that if, anything stands right now or in the future between the deeply troubling enrollment numbers and an adverse selection death spiral caused by a combination of premium escalation and insurer withdrawals from the exchange marketplace, it is insurers’ belief that Uncle Sam will take care of the insurance industry.  Indeed, that’s the not-too-subtle consolatory hint that accompanied the letter sent last week by the Obama administration to state insurance commissioners. It tells regulators and insurers that, to enable the President to keep his oft-repeated campaign promise — I don’t even have  to tell you which one — the healthy insureds on which Exchange insurers were banking would now be given a sometimes cheaper (and sometimes competitive) alternative. How many of these victims of the previously broken promise would have purchased insurance on the Exchanges if forced to do so is open to question. But, at the present time, every insured helps those Exchanges survive, even if only barely.

By telling insurers that, contrary to the strong hints at the end of  the Obama administration letter, there will be no relief for the additional average costs now imposed on insurers,  passage of Senator Rubio’s bill might lead to the implosion of the insurance Exchanges and the death of a crucial portion of the Affordable Care Act. While such a result would hardly deter many from voting in favor of the bill, those who dislike the Affordable Care Act ought to think hard not just about how much they want it to end but in what way they want it to end. Dismantling the ACA is itself going to be difficult and painful — wait until we hear the cries from the people who deeply craved the subsidized insurance they thought they were receiving or who otherwise benefited from the Act — and ultimately entails very serious and difficult policy choices about how we want to finance healthcare in the United States.  Consumer driven? Single payor? If the law is to be unwound, it would be better if it were done in as deliberate and orderly way as practicable rather than as an unforeseen result of legislation that purported to deal with a narrow aspect of the ACA.

There is, it should be noted, a compromise position that will preserve something of Risk Corridors while not adding to the federal budget deficit.  One could amend the Risk Corridors provision to force it to be budget neutral.  This has already been done in the companion provisions of stop-loss reinsurance and risk adjustment and there is no reason that, if legislators could act in good faith, the law could not be modified to state that payments by the Secretary of HHS to insurers would be reduced pro rata to the extent necessary to make payments in under Risk Corridors equal payments out.  This potential reduction in payments might, it must be acknowledged, scare insurers and contribute to the implosion of Obamacare, but it would be less likely to do so that a bill that repealed Risk Corridors altogether.

A Footnote on the cost of Risk Corridors

Footnote: I’ve been thinking some more about a back of the envelope computations in a blog entry that attempted to develop a relationship between the number of people enrolling in insurance on the Exchanges and the size of the Risk Corridor payments. As those paying the closest attention to my prior blog post will recall, I made an assumption about the spread of the distribution of insurer profits and losses.  The assumption was not unreasonable, but it was also hardly infallible.  What if, I have been wondering, the spread was much narrower than I suggested it might be?

I decided to run the experiment again using a standard deviation of profits and losses only 1/10 of what it had been.  I thus create regimes in which the financial fates of most insurers selling policies are closely tied together.  What I find is that assuming that most insurers will either make money or that most insurers will lose money has a tendency to increase the payments the government will likely have to make if enrollment is small.  In this new experiment, payments peak at about $1.5 billion rather than $1 billion in the prior experiment.  Bottom line: the prior blog post was basically correct — we are dealing here with very rough estimates — but if all insurers are subject to similar economic forces the Risk Corridor moneys paid by the government might grow somewhat. Still, it is not as if the cost of Risk Corridors is suddenly going to dwarf the cost of premium subsidies and cost sharing reductions already required by the ACA.




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Five questions journalists should be asking about the Affordable Care Act

I’m hearing a lot of the lazy “but what are the political implication” perpetual horse race questions from the media about recent developments surrounding the Affordable Care Act. That’s fun Inside-the-Beltway stuff, but in the mean time there are real people who are likely to be helped and hurt with matters as essential as their health.  So, what I am not hearing enough of yet, however, are tough, substantive questions that get to the heart of whether the Affordable Care Act is going to be stillborn. Here are some questions that I think intelligent journalists and blogger ought to be asking in light of recent developments with the Affordable Care Act.  Getting answers in many cases may take persistent questioning and closer scrutiny of existing documents. In others, FOIA requests may be needed.

1. Actual v. Anticipated Age Distributions in the Exchanges

What is the age distribution by state and in the aggregate of persons who it is claimed have enrolled in Exchange-based plans under the Affordable Care Act? Once we have this data, we can compare it to (a) census data on the age distributions in the various states and (b) any prior estimates on what the age distribution of Exchange enrollees would be such as those described in this government document.  If there is a significant difference between the age distribution encountered thus far and the anticipated age distribution, that increases the probability of the ACA succumbing to an adverse selection death spiral.  This is so because, although the ACA permits some age rating, it damps the actual variation in expected claims from lowest to highest eligible ages down to a 3:1 ratio.

2. Actual v. Anticipated Metal Tier Distributions

What is the distribution of enrollees amongst the various “metal tiers” ranging from bronze through platinum?  If the enrollees are flocking disproportionately to the platinum and gold plans, that suggests the people who are enrolling may be disproportionately unhealthy.  While those plans were expected to draw a slightly less healthy population, the government planned on there still being a significant number of healthy people in those pools.  According to data contained inside the government’s “Actuarial Value Calculator,” the predicted mean claim for bronze policies (across ages, genders, regions, etc.) was $4,977 per person whereas the predicted mean claim for platinum policies (again across ages, genders, regions, etc.) was $5,804. (Cells C88 in various tabs) I believe that significant selection of these more generous plans should give insurers (and insureds) concern about a death spiral materializing.

3. Where is additional “Risk Corridor” money coming from?

3. What the heck does this sentence mean in the letter from Gary Cohen, Director of the Center for Consumer Information and Insurance Oversight (pronounced suh-sy-o) to state insurance commissioners providing details on President Obama’s announcement that he would not be enforcing the Essential Health Benefit restrictions on certain non-grandfathered plans?

Though this transitional policy was not anticipated by health insurance issuers when setting rates for 2014, the risk corridor program should help ameliorate unanticipated changes in premium revenue. We intend to explore ways to modify the risk corridor program final rules to provide additional assistance.

To me, this sounds like the President is saying they will buy off the insurance companies in the Exchanges, who stand to lose as a result of the decision to starve them of mostly healthy insureds forced out of “substandard” nongroup policies.  The President may be hinting that he will  try to make them whole through providing more money under the Risk Corridors provisions of section 1342 of the Affordable Care Act, 42 U.S.C. § 18062. As discussed in a prior blog post, this may in fact be possible, but it is not clear where the money is coming from.  I suspect this issue may form a significant part of the conversations between insurance CEOs and President Obama that will apparently occur at the White House later today. If so, journalists need to push on where President Obama is finding the money and how much money are we talking about?

CBO thought Risk Corridors would be costless
CBO thought Risk Corridors would be costless

Journalists might also note in pursuing this matter that it has hitherto been assumed by the Congressional Budget Office that the Risk Corridors program would be a net zero. Here’s what they said in their Regulatory Impact Analysis of March 2012:

CBO did not score the impact of risk corridors and assumed collections would equal payments to plans and would therefore be budget neutral.

If, as I have argued, the assumption in the CBO document has always been doubtful and is now almost certainly false, again, where is the money coming from and could we be talking about tens of billions of dollars? Is President Obama going to (a) keep his promise and (b) pacify the insurers by just spending lots of money that was previously unbudgeted and undisclosed?

A shout out, by the way, to blogger Kathleen Pender for being one of the few to focus on this issue.

4. Are any insurers yet threatening to pull out?

Have any state insurance commissioners heard rumblings or worse about various insurers pulling out for 2014 or declining to take on any more enrollees, if that restriction is permitted?  I suggested in a Houston Chronicle op-ed yesterday that such a development was likely, but I don’t know of evidence that it has yet occurred.  I could imagine, for example, insurers who priced their policies high relative to others of the same metal tier in the same market wanting to exit. They would want to do so because very few people are likely to select their plan and so there may be a lot of administrative costs for very little benefits and because the people who did select their plan may have done so because they believed the networks and coverages were more generous — something the less healthy would particularly care about. I could also imagine insurers who priced their policies low relative to others of the same metal tier in the same market wanting to exit.  If, as is feared, the pool of exchange insureds is older and sicker than projected, the victims are likely to be the insurers who price low and thus have the highest amount of business in the Exchanges.

5. How serious are the  insurance industry groups and actuarial warnings?

Journalists should be pressing people like Karen Ignani, president and chief executive of America’s Health Insurance Plans, Corri Uccello, senior health fellow at the American Academy of Actuaries, Jim Donelon, President of the extremely powerful National Association of Insurance Commissioners, and others on how great they regard the threat of the Exchanges becoming destabilized as a result of the combination of minuscule current enrollments coupled with the competitive alternative that appears to have been created by President Obama’s announcement yesterday or by the Upton and Landrieu bills circulating in Congress that do roughly the same or more to starve the Exchanges of healthy insureds. These individuals are issuing some fairly significant warnings about what is going on.  Jim Donelon, for example, states:

This decision continues different rules for different policies and threatens to undermine the new market, and may lead to higher premiums and market disruptions in 2014 and beyond.

The American Academy of Actuaries, via David A. Shea, Jr., Vice President, Health Practice Council, warns:

 Premiums in the new 2014 insurance markets would have been higher if the ACA rules regarding cancelled policies had been relaxed.

 Approved premiums for 2014 are based on assumptions regarding plan cancellation requirements under ACA rules. The premiums approved for 2014 may not adequately cover the cost of providing benefits for an enrollee population with higher claims than anticipated in the premium calculations.

 Costs to the federal government could increase as higher-than-expected average medical claims are more likely to trigger risk corridor payments.

 Relaxing the plan cancellation requirements could increase premiums for 2015. Insurers cannot increase premiums in future years to make up for prior losses. However, assumptions regarding the composition of the risk pool would reflect plan experience in 2014.

This sounds very serious.  Journalists ought to try to develop some statements from these people on the “order of magnitude” of the threats they see occurring as a result of recent developments.



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