Health Policy$ense

Why Repealing the ACA’s “Risk Corridor” Program is a Bad Idea

A seemingly arcane but important provision in the Affordable Care Act (ACA) created a system of risk corridor payments during 2014-2016 for insurers offering individual coverage through the exchanges. Similar to an existing risk corridor system for insurers offering Medicare prescription drug coverage, the ACA’s risk corridor system will partially shield insurers from unexpectedly high costs in relation to premiums for coverage sold on the exchanges.

The provision hadn’t attracted much attention until last week, when the President announced that insurers have the option of continuing health policies in 2014 that fail to meet the ACA’s new coverage and rating requirements. The accompanying letter to State Insurance Commissioners said that HHS intended to “explore ways to modify the risk corridor program final rules to provide additional assistance” to insurers that might face unanticipated costs as a result of the decision.

The risk corridor program and HHS statement have generated debate about whether the program could be used to “bail out” private health insurers if they lose money on the exchanges. Senator Marco Rubio (R., FL) has introduced legislation that would fully repeal the ACA’s risk corridor program, writing in a November 19 WSJ op-ed “No Bailouts for ObamaCare” that “The American people are already being directly hurt by Obamacare’s early failures, and it is unconscionable that they be expected to bail out companies when more failures emerge.”

The ACA’s temporary risk corridor program is one of the so-called “3 Rs.” The other two “Rs” are a permanent risk adjustment program and a temporary (2014-2016) reinsurance program. As HHS notes, the overall goal of these programs is to stabilize premiums and protect insurers against large losses as market reforms are implemented.

The risk adjustment program applies to individual and small group non-grandfathered plans sold inside or outside of the exchanges. It will adjust insurers’ revenues to reflect differences in the average health status of their enrollees. Insurers with healthier than average enrollees will essentially make payments to insurers with less healthy enrollees. This program is designed to facilitate guaranteed issue and pricing of coverage without regard to enrollees’ health status and with the law’s restriction on varying rates in relation to age. It will protect health plans from large losses that would arise if they attract sicker than average enrollees, and reduce incentives for insurer risk selection within and outside of the exchanges.

The temporary reinsurance program applies to individual non-grandfathered plans sold inside and outside of the exchanges. Subject to an overall cap, it will reimburse insurers for 80% of medical costs for individual enrollees with medical costs above $60,000 in 2014, with lower anticipated reimbursement for 2015-2016. The reinsurance program is financed by fees assessed against all enrollees in insured and self-funded health plans (with the recently proposed exception for 2015-2016 of plans that are self-funded and self-administered, as opposed to using a third party administrator). The program is designed to provide partial protection against an insurer attracting a disproportionate number of very high cost cases during 2014-2016, and to help lower average premiums in the individual market during that period.

In contrast to the risk adjustment and reinsurance programs, the risk corridor program only applies to individual coverage sold through the exchanges. It is designed to address aggregate pricing uncertainty during the first three years following January 1, 2014, when the ACA’s guaranteed issue, rating, and coverage requirements take effect. Given the magnitude of rating and coverage changes required by the law, and the fact that most new enrollees in plans will have previously been uninsured, health insurers had to confront enormous uncertainties when pricing plans, including the percentage of people who will enroll, their health status, their likely utilization of medical services, and competitors’ pricing.

The risk corridor program reduces insurers’ risk, thus encouraging their participation in the new exchanges and helping to promote market stability. While the details are complex, the program essentially will reimburse insurers for part of the excess if their costs exceed target amounts in relation to the premiums charged. An insurer will be reimbursed for 50% of any costs from 103% to 108% of the target and 80% of any costs above 108% of the target. If costs instead turn out to be lower than the targets, insurers will have to pay fees equal to a portion of the gains. Specifically, an insurer will pay a fee equal to 50% of the shortfall if costs fall within 92% to 97% of the target and 80% of any additional shortfall if costs are less than 92% of the target.

While Congressional Budget Office projections of the ACA’s revenues and costs have thus far assumed that the risk corridor program will be budget neutral, there is no statutory requirement that payments to insurers be limited to collections from insurers. Such a requirement would eviscerate the program’s ability to reduce insurers’ risk that costs could be much higher than predicted, thus discouraging their participation in the exchanges. The final HHS rules implementing the risk corridor program accordingly made it clear that payments would be made to insurers according to the rules “regardless of the balance of payments and receipts.”

The problems with and early data on exchange enrollment may increase the odds that insurers’ costs will exceed the targets and produce some amount of risk corridor payments to insurers for 2014 experience. Moreover, the President’s decision to allow insurers to continue plans that do not conform to the ACA’s requirements in 2014 could lead to adverse selection, with healthier people being more likely than those less healthy to continue their existing plans, further increasing the likelihood of significant risk corridor payments to insurers.

Those developments notwithstanding, legislative action to repeal the risk corridor program would violate the statutory provision and regulatory rules on which insurers relied when signing up to participate in the exchanges and pricing their products, thus effectively changing the rules after the start of the game and further destabilizing individual health insurance markets. Whether and how the risk corridor program rules could or should be modified in light of the President’s decision, or possibly in response to any additional “fixes” to the rollout of the exchanges, is worthy of more thoughtful debate.