Risky business emerges from Obamacare

March 1, 2014

Insurers fight back as three Rs become the pawns of health reform politics

Painted as costly bailouts for insurers by “Obamacare” opponents, risk corridors and reinsurance have become hot political issues. In February,

Republicans searched for ways to further discredit the Affordable Care Act (ACA) and trained their attention on provisions designed to make exchanges more efficient.
The main charge is that the federal government will end up paying millions to insurers under the risk corridor formula, because plans will run up huge costs to meet ACA mandates and requirements. While that’s possible if all the plans end up suffering loses from pricing products too low, most actuaries and insurers believe the program will balance out. The Congressional Budget Office (CBO) recently calculated that risk corridors might actually save the government $8 billion because payments from profitable plans will greatly exceed outlays to plans that lose.
Risk adjustment, reinsurance and risk corridors- dubbed the “three Rs”-were included in the ACA to attract private insurers to the exchanges by protecting them from major losses while they gain experience on enrollees and their costs. These provisions encourage plans to initially offer relatively lower premiums by requiring profitable plans and the government to share some of the losses if costs exceed initial expectations.
Risk adjustment is a permanent program designed to balance adverse selection. Insurers that enroll more high-cost individuals will collect funds from those with lower-risk enrollees, based on risk score calculations adjusted for demographics, geographic variation, plan cost-sharing and other factors.
Reinsurance is a temporary program that expires in 2016, funded by fees paid by insurers, based on enrollment, to stabilize premiums for individual exchange plans.
Risk corridors, also authorized for only three years, similarly provide a cushion for insurers against price uncertainties. Yet, calculating risk corridors will be tricky, based on complex formulas that align with medical loss ratio rules for calculating administrative expenses as well as quality improvements.
These provisions became more critical to insurers when exchanges experienced lower-than-expected enrollment. The Department of Health and Human Services also permitted insurers to reinstate cancelled policies, which increased uncertainty in the exchanges.


Debate heats up


Sen. Marco Rubio of Florida leads the anti-bailout campaign, warning that risk provisions could cost taxpayers millions and  should be repealed, or at least required to be budget neutral. Rubio made his case at a hearing held by the House Committee on Oversight and Government Reform last month. While risk corridors are normally a valid means for protecting insurers from market anomalies, Rubio said the risk of a bailout is high under ACA because too many older and sicker individuals will sign up.
Reinsurance “is pure corporate welfare,” stated health policy analyst Doug Badger, predicting that it will transfer $20 billion over three years from enrollees in commercial plans. But Washington & Lee University professor Timothy Jost noted that risk corridors stem from the Bush administration’s Medicare Part D drug program, which encouraged private insurers to offer the untested drug-only plans.
Insurers are fighting the bailout charges, emphasizing the importance of risk protections in the wake of ACA implementation snafus. An issue brief from America’s Health Insurance Plans explains how the three Rs will help create a stable and predictable environment for new markets and will promote competition based on quality and efficiencies, rather than risk selection. Read it here.