Risk corridor stabilization fund - another ACA failure

Big shortfall in Obamacare risk program could hurt insurers

By Tami Luhby
CNN Money, October 2, 2015

A key federal program designed to cushion health insurers' risks in the Obamacare exchanges has a massive shortfall, which could throw some insurers into financial turmoil.

Insurers requested $2.87 billion in so-called "risk corridors" payments for 2014, but will only receive $362 million, or 12.6%, said the Centers for Medicare & Medicaid Services, which oversees Obamacare.

The risk corridors program's goal is to help insurers transition into the individual exchanges, which opened in 2014. Insurers had a tough time setting premiums since they didn't know how sick their new customers would be.

Under the three-year program, insurers whose premiums exceeded claims pay into the fund, while their peers who didn't charge enough premiums to cover claims could draw from it.

But too many insurers miscalculated when they set their rates for 2014.

"Insurers underestimated the riskiness of their customer base and set their premiums too low," said Tim Jost, a health law professor at Washington and Lee University School of Law.

The shortfall could put a financial strain on some insurers, especially some smaller ones who were counting on the funds. Some firms have reported losses in their Obamacare line of business, while four health insurance cooperatives are shutting down because of financial pressures.

Obamacare insurers have already set their premiums for 2016 and can't adjust them now. The shortfall in risk corridor payments could prompt insurers to raise premiums in future years or exit the program.

The administration said the remaining 2014 risk corridor claims will be paid out of the 2015 and, if needed, the 2016 collections.

Insurers are still getting billions from two other Obamacare risk programs. They will receive $7.9 billion from the reinsurance program, designed to spread the cost of very large insurance claims across all insurers. And they will receive $4.6 billion from the risk adjustment program, which requires insurance companies with healthier consumers in a state to help offset some of the costs of those insurance companies with sicker customers in that state.


Health Policy Briefs

Health Affairs, February 19, 2015

With the new restrictions on premium setting and the unpredictability of medical expenses from the newly insured, insurers faced a high level of uncertainty when setting their premiums. To buffer insurers from high losses in the initial years, keep premiums affordable, encourage insurers to participate in the Marketplaces, and minimize year-to-year premium fluctuations, the ACA authorized three premium stabilization programs: risk adjustment, reinsurance, and risk corridors.

The risk corridor program has proven to be one of the more controversial aspects of the ACA with critics, including a number of Republicans in Congress, characterizing the program as an insurer bailout. They argue that as a result of HHS and state officials putting pressure on insurers to keep premiums low in the Marketplaces, the federal government will end up picking up the tab to bail out insurers if they underpriced.

Critics also claim that the program encourages insurers to underprice their plans in order to gain market share, knowing the government will offset their losses.

While the Consolidated and Further Continuing Appropriations Act of 2015, which funded the government for the 2015 fiscal year, did give HHS the authority to collect user fees, an amendment was included that specifically prohibited HHS from transferring money from either trust fund. The amendment did not eliminate the risk corridor program, nor did it prevent HHS from using payments received from insurers to pay out claims under the program (that is, user fees), but it effectively made the risk corridor program budget neutral unless HHS can find another source of funding.

If risk corridor claims exceed receivables and HHS does not find an alternative source of funding, it seems likely it will revert to its earlier proposal to prioritize paying off shortfalls from previous years before making new payments. If the shortfalls were great enough, this could effectively eliminate payments to insurers for the final two years of the program.



By Don McCanne, MD

Although the media are covering this story as a shortfall in the risk corridor stabilization funds, the real story here is about the behavior of private insurers competing in the insurance exchanges established under the Affordable Care Act (ACA). An explanation is in order.

So what are the risk corridors and why do they exist? It was understood that insurers could be exposed to significant losses if they attracted more than an expected number of enrollees who had greater health care costs. So for the first three years, a portion of losses above a certain threshold (the upper margin of the corridor) would be covered by a stabilization fund. Likewise, if the insurers were successful in enrolling more individuals with very low health care costs (below the lower margin of the corridor), those insurers would be required to pay a portion of their net gain into the stabilization fund (“user fees”).

So how would private insurers respond? For the first year of marketing plans on the exchanges, they would want to have lower, competitive premiums in order to corner market share. Their losses for high cost enrollees would be largely covered (up to 80%) so they could accept some losses for those with average health care needs, knowing that they could later adjust fees modestly upwards after having gained market dominance (a version of the insurance underwriting cycle). As would be expected of the private insurers who are masters at gamesmanship, they were able to show that not many of their enrollees fell under the lower margin of the corridor, thus their payments to the stabilization fund (user fees) were kept to a minimum.

As a result, the stabilization fund is able to cover only about 13% of of the losses above the upper margin of the corridor. Although HHS says that they would find the funds, Congress has created barriers to using funds other than the user fees authorized by the risk corridor stabilization program. Since they are budgeting 2015 and 2016 user fees to pay for 2014 losses, obviously the funds will be rapidly depleted, with little or none available for the second and third years of the program.

Risk corridors, risk adjustment, and reinsurance are not for the benefit of patients, rather they are to protect the insurers. Not only do they add to our profound administrative waste, they also open up opportunities for insurers to profit even more through chicanery and gamesmanship.

We could completely do away with this and all of the other insurer excesses by simply enacting a single payer national health program. Why not now? Are not the voters in charge?