In testimony before Congress last June, I think I may have shocked some Representatives by estimating that insurers selling policies on the individual exchanges as part of the Affordable Care Act would be sufficiently unprofitable that they would get only 37% of what they would have received under the Risk Corridors program had the federal government not required that the budget for that program be balanced. It turns out, however, that my gloomy estimate was, in fact, wrong — but only because it was far too cheery. In fact, according to data released yesterday, insurers will receive only 12.5% of what they thought at one time they would receive. There is a $2.5 billion shortfall between the money taken in under that program from profitable insurers and the money now owed to those who lost money, at least as the government measures it.
The shortfall spells trouble for Obamacare in a number of ways. And it is difficult to overestimate how troubling this development should be for supporters of that program.
Some Exchange insurers are likely in serious trouble
First, it likely means that some of the smaller insurers who, at least before passage of section 227 of the Cromnibus bill last December, had anticipated receiving full payment for the money the government owes under the Risk Corridors program, are going to find themselves with a serious cash flow problem. Some may even find themselves with solvency problems given the improbability that the full amount of the Risk Corridor obligation will ever be paid. Companies that had booked Risk Corridor payments as receivables valued at 100% of the face amount, may have to start writing off at least part of them off as uncollectable. Thus, when CMS says that the government’s inability to pay 87.5% of what it owes may create “some isolated solvency and liquidity challenges,” that is likely an understatement. Fortunately, as the Wall Street Journal reports, some insurers apparently saw the handwriting on the wall and accounted for the Cromnibus limitation properly so as not to deceive shareholders or state regulators.
Bad news for Exchange premiums
Second, it augurs severe pressure on insurance pricing in the healthcare exchanges. The reason that there is a $2.5 billion shortfall is that a lot of insurers lost a lot of money selling policies on the Exchanges during 2014. Insurers, like other businesses, have this habit of trying to make up for past losses by charging more in the future. So we will see later this month some of the effect when the Obama administration releases data on premiums for 2016, but the massive losses in 2014 shown by the Risk Corridors results is likely to add to pricing pressures.
The Obama plan to rescue insurers has failed
Third, it shows that broken promises have consequences. Let’s go through some history here. Remember the infamous promise, “if you like your healthcare plan, you can keep it. Period.”? That was, of course, not exactly true in light of what the statute actually said. And, when Americans saw their policies cancelled as a result, the Obama administration decided it would delay and relax enforcement of the various provisions of the ACA that would have killed enough many non-Exchange insurance plans.
But this refusal to salvage the political rhetoric by sacrificing the language of the statute got many insurers angry. The insurershad priced their policies on the assumption that of course the Obama promise was the usual political moonshine and that those healthy insureds previously owning now non-compliant policies would migrate their way over to Exchange policies and stabilize that market. In true Cat in the Hat Comes Back style, the Obama administration “solved” that problem, as I explained twice (here and here) in December of 2013, by fiddling with the accounting rules in the Risk Corridors program by making it more difficult for insurers to be deemed to have made sufficient money to owe the government and making it easier for insurers to be deemed to have lost money and thus be owed money by the government. (Although its pronouncements were a bit cryptic, as I noted last April, the CBO may have estimated that the cost of this gimmick was as much as $8 billion). Now, however, with the Cromnibus bill prohibiting the Obama administration from dipping into unspecified accounts to pay for Risk Corridors, which I guess is what they planned since no money was ever appropriated for the program, that last bit of multi-billion tinkering has backfired. Insurers will not be paid for Risk Corridors for a long time if ever and, thus, they have indeed suffered a significant loss of a chain of make-it-up-as-you-go-along policies designed to salvage the ACA.
Don’t trust government accounting
Fourth, the Risk Corridors deficit exposes as pure bunkum the statements of many in Washington in the post ACA era — and continuing even today — about the state of the insurance market and the Risk Corridors program. Recall that at one point not too long ago the CBO was asserting that the Risk Corridors would actually make the government $8 billion. This was done, perhaps not coincidentally, after an effort by Senator Marco Rubio gained prominence to defund Risk Corridors as an insurance industry bailout. Devoted readers may also recall that I found the CBO’s estimate “baffling,” a bit of cynicism whose sagacity may have improved with age. And even today with the announcement, officials at CMS repeated the technically correct and yet practically dubious notion that, yes, there were shortfalls today, but Risk Corridor payments made by insurers in 2015 and 2016 might be enough not just to overcome the 2014 deficit now valued at $2.5 billion but also to make whole insurers who lost money in 2015 and 2016.
And the plea to undo Cromnibus
It is no wonder that former CMS head administrator Marilynn Tavener, now speaking for the America’s Health Insurance Plans, is now saying it is “essential that Congress and CMS act to ensure the program works as designed and consumers are protected.” By “as designed, Ms. Tavenner means before Cromnibus when Congress, in a spasm of fiscal responsibility, required that Risk Corridors, for which no money was ever appropriated, actually pay for itself just like the Risk Adjustment program. Translation of Ms. Tavenner: find someone else’s money somewhere to bail out insurers who lost money in the Exchanges.