Bye, Bye “Bailout”: CROmnibus Takes a Small but Important Bite out of Obamacare
The CROmnibus, with which the lame-duck Congress keeps the government open in 2015, takes small but important steps to repeal Obamacare. For the short term, the most important anti-Obamacare achievement is eliminating taxpayers’ liability for Obamacare’s risk corridors, often described as a “bailout,” to health insurers participating in Obamacare’s exchanges. 
In June, I testified before the House Oversight and Investigations Committee about this insurance “bailout.” In that testimony, I advised Congress to define a limited liability to the program.
So, budget neutrality is a better result for taxpayers than I had expected. Also, the CROmnibus prevents any other funds controlled by the Centers for Medicare and Medicaid Services from being used to fund risk-corridor payouts. This is a significant win for taxpayers.
A year ago, I described how Obamacare’s risk corridors created an unlimited liability for taxpayers to compensate health insurers who lose money in Obamacare’s exchanges. Although risk corridors take money from unexpectedly profitable insurers and hand it over to insurers with unexpected losses, the program does not necessarily balance. That is, if there are more insurers that lose money than make money, the risk corridors look to taxpayers to make up the difference. As the year progressed, we learned that the administration was stretching this liability to its utmost power. However, we also learned that, if the risk corridors are to pay out more money than they take in from profitable insurers, Congress has to appropriate funds.
The administration made light of this requirement, asserting that the cash flows from profitable to unprofitable insurers would balance, making risk corridors budget neutral. However, it had had no real grounds for claiming budget neutrality. Indeed, the administration wriggled around its claim of budget neutrality by indicating that it would take excess payments from 2015 risk corridors to pay for 2014 risk corridors. Why the administration believes that health insurers overall will be profitable in the exchanges in 2015 is a question left unanswered.
Health insurers had clearly been counting on a taxpayer assist. Communications between insurers and the White House revealed that at least one insurer complained to the White House that getting rid of the “bailout” would make premiums jump 20 percent or more. In an October research note, Carl McDonald of Citibank noted that only one of the 85 issuers that he analyzed had budgeted an amount payable to the risk corridors. Eighty-four expected to receive money.
Obviously, the health plans were not expecting that the program would be budget neutral as the administration had indicated. Needless to say, the CROmnibus has drawn a response from health insurers. AHIP, the trade association representing the industry, “blasted” the bill for not appropriating risk-corridor funding next year, according to The Hill:
The fight reveals the strained relationship between the health insurance industry and Republican lawmakers.
Traditionally viewed as allies, the two sides are estranged over the healthcare law. Younger, more conservative Republicans have little deference for the industry.
This is an odd fight for health insurers to pursue. First, the risk-corridor payments are not zeroed out: they are merely budget neutral. CROmnibus simply codifies that which the administration had already asserted ― an assertion which did not cause insurers to “blast” the administration.
Second, risk corridors only persist through 2016. Appropriations for risk corridors are highly unlikely to come back in the next Congress, which has Republican majorities in both chambers. Even if a pro-Obamacare Congress is elected in November 2016, the risk corridors will have expired by the time that Congress takes power. Third, the risk corridors are a marginal business issue for insurers. According to McDonald, the actual taxpayer liability for this year would have been a little over $1 billion, on premiums of about $50 billion in the individual market this year. I estimate gross profits, after paying medical claims, would be about $10 billion.
Sure, $1 billion of $10 billion is a lot of money. However, Obamacare exchanges are a small line of business for most insurers. Group benefits (both fully insured and self-insured), Medicare Advantage, Medicaid managed care and supplemental lines will give the industry $677 billion of revenue in 2014, according to IBISWorld Research. For what is actually a very small price to health insurers, Congress has given them a very big signal that they should move beyond Obamacare and participate in developing a replacement where their profits and losses will be determined by their ability to attract customers, not politicians’ promises.
So risk of loss swings back to the insurers, where it rightfully belonged from the beginning.
Bribing insurers to get them to play was not a good idea and imo revealed what the Feds really thought of Obamacare all along: it wasn’t attractive to insurers without the promise of financial guarantees.
These guarantees were innocuously described as “risk corridors” perhaps with the hope that a less-than-transparent name would camouflage what was really going on (i.e., that the Feds were insuring the insurers). So maybe this illustrates once again the Gruber Principle: lack of transparency is a political advantage.
This kind of switcheroo is a risk of doing business with any government agency. They can – and depressingly often do – change the rules after persuading players to enter the game. Smart players know this.
What stats do you have showing how many insurers had to be bailed out this year … Or did they do better than you wanted? You are also forgetting that the safety net ‘bailout’ exists for only a short time, therefore grandstanding budget items are of little significance.
No one has been bailed out for 2014. The year has not ended and there is no accounting yet. However, in the article above one analyst found that of 85 insurers only one expected to pay; all the rest expected to receive.
Exactly. And the fact that it only exists for three years suggests that losing it should not be that big a deal for insurers.
How will this show up with respect to the pricing of coverage within the public exchange? Fully 85% of participants in the public exchange are receiving taxpayer financial support. Their contributions are a function of their household income – NOT the actual cost of the coverage (at least with respect to the target silver option). So, when the taxpayer bailout ends (“bye, bye bailout”), won’t we see a bailout from another source – in the form of higher taxpayer premium financial support?
Yes you will see higher prices and higher subsidies.
The subsidy is set off the second lowest price for silver plans, so it encourages new entrants to engage in “suicide” pricing in order to gain share. That is, it encourages very aggressive pricing behavior for what is essentially an uninsurable risk in the absence of underwriting or full or nearly full participation.
The big guys can take the losses. The new entrants, like co-op plans are essentially zombie plans. They are dead already but they don’t know it yet, and won’t figure it out until next year sometime. In many states they won’t be able to get adequate increases.
Bankruptcies will be settled by state insolvency mechanisms, meaning the Blues, Aetna, United and the other big players may have to contribute to settling their insolvency.
Premiums will increase dramatically. I expect many carriers who are participating in 2015 regret entering the market, as they were expecting risk-corridor payments.
Great explanation that I had not heard about in any explanation of the CROmibus bill. The insurance industry got into bed with Obama and ObamaCare now we will see what happens when they again are at risk.
With HillaryCare,in the 1990’s,it was the insurance industry helping to kill health reform with “Harry & Louise” ads. They only supported ObamaCare because they were being given subsidies.
Lesson #1 – The government is always an unreliable business partner.
John:
Interesting post. I am glad you are defending the US taxpayer in this way. I am one of them.
Thus I am sure you fought also the risk corridors in the MMA 03. As a Kaiser Family Foundation fact sheet noted:
“In 2015, private plans are projected to receive average annual payments of $548 per enrollee overall and $1,996 for LIS enrollees; employers are expected to receive, on average, $604 for retirees in employer-subsidy plans.7 Plans also receive additional risk-adjusted payments for high-cost enrollees and reinsurance payments for a share of their enrollees’ costs above the catastrophic threshold. Part D plans’ potential losses or profits are limited by risk-sharing arrangements with the federal government (“risk corridors”).”
See http://kff.org/medicare/fact-sheet/the-medicare-prescription-drug-benefit-fact-sheet/
Could you share with us what you wrote in connection with that risk corridor?I am sure you protested it.
Happy holidays.
Uwe
I was going to respond, but I think Dennis Byron had a very effective rebuttal below of your claim.
Thank you for the question, Prof. Reinhardt. I regret that I have an easy escape route: At the time I was at the Fraser Institute in Canada, and not paying attention to U.S. health reform. I did not immigrate until May 2005!
Of course it is a fair question to ask what I have to say about it now. I would state that, with respect to Medicare, the horse is out of the barn. It is a massive taxpayer liability that will have no end until we get to some kind of premium support.
Thank you, Dr Reinhardt.
I have been puzzled for several months about the opposition of Mr Graham and others to risk adjustment — and have said so on this blog.
1. The net cost of risk adjustments are very minor in the federal budget. The DOD spends more than all our risk adjustments in about a week.
2. Every other nations that uses multiple insurers and has guaranteed issue uses risk adjustment.
3. Every American state that tried guaranteed issue in the past and did NOT include risk adjustment saw their insurance markets constrict horribly. ( New York, NJ, Wash, et al)
Why then the opposition to risk adjustment?
a. It is not a manly, Ayn Randian approach to insurance competition. In the manly world of full underwriting, carriers that are too liberal and get hit by large claims will soon the leave the market.
This is pretty shallow and I doubt that Mr Graham or Mr Herrick really believes it.
b. Risk adjustment and federal reinsurance appear to lower the premiums on the exchanges by about 15 per cent.
This gives the ACA a little more popularity. That causes some conservatives to therefore oppose risk adjustment, on tactical grounds.
c. Risk adjustment is keeping some big insurers in the game. Without big insurers, the ACA will collapse.’
If the ACA does collapse, it will be the original Pyrrhic victory for Republican opponents. I suspect that the ensuring chaos will harm millions of Americans. It will sure as hell harm them more than paying $100 million or even $1 billion in extra taxes for federal risk adjustment.
There are worse things than paying taxes in some cases.
Frankly, I do not believe it is the substance of risk adjustment. As I noted, the MMA 03 had it, too.
It strikes me purely political.
I accept Mr. Hertz’ comments, and can go even one better: The reinsurance fund is $25 billion. Why did the anti-Obamacare forces not line up against that?
Because it was out and in the open. The risk corridors pretended to be budget neutral and also pretended that they did not need appropriations. Both were discovered to be untrue.
We are tactical about dismembering Obamacare in advance of repeal. We could not have defunded reinsurance because that would have required too big a lift. But because the Obamacare legislators tried to hide the real cost of risk corridors, they left an easier legislative route to attacking them.
The article referenced risk corridors, one of the 3Rs. The others are risk adjustment and reinsurance. It is risk corridors that are potentially out of balance and may require taxpayer money to fulfill the promises made to insurers in ACA. The argument is that Congress has to appropriate the extra if inflows do not match outflows; the Executive cannot “find” the money somewhere else.
“If the ACA does collapse, it will be the original Pyrrhic victory for Republican opponents.”
I think there is no “if” about it. ACA will collapse.
But it will not collapse because of risk corridors, or reinsurance, or metal plans, or cadillac plans, or mandates, or IPAB, or Medicaid expansion, or any of the other usual suspects.
At this point, the collapse does not even need opponents – Republican, Democrat, or whatever.
ACA will collapse because it does almost nothing to address the underlying problem: the high, and rising, cost of medical delivery in the U.S. If medical care were not expensive, medical insurance would not be expensive; if the cost of medical care were not rising, the cost of medical insurance would not be rising. The underlying problem is the cost of medical care in the U.S.
And ACA makes that problem worse.
ACA makes the problem worse by pouring oceans more tax money, disguised as insurance subsidies, into a medical delivery system that has historically shown neither the will nor the ability to control its costs. Pouring more money into this system means higher costs, not lower. As medical costs continue to rise, so will ACA subsidies and so will taxes.
That is not the solution; it’s just more of the same problem.
And that’s why I think ACA will most definitely collapse.
Amen.
Risk corridors were promised and insurers priced premiums according for 2014 and 2015. Regardless of what you think of PPACA and insurance companies, I am appalled that they can do this in hindsight. That is like telling me you will paint my house for $10,000 but afterwards saying I must pay $25,000. It is just plain wrong.
Disagree: The Government Accountability Office determined that the risk corridors require annual appropriations, like most laws. If insurers did not understand this, and thought that three years of funding was guaranteed under the law, then that is their responsibility for not understanding the law thoroughly, and taking a risk that they did not understand that they were taking.
I am against risk corridors in Medicare Part D and also against higher subsidies to those on capitated Medicare A/B/C (like me) vs. the subsidy received by my best friend who is on FFS Medicare A/B/D plus a private Medigap plan or by my cousin who is on FFS Medicare A/B/D/VA plus a private retiree supplement. These market manipulations – risk corridors and my higher subsidy — are both part of MMA ’03 and I oppose market manipulations.
But readers should be aware of the sleight of hand on the subject of risk corridors in one of the comments above. The comment says
“In 2015, private (Part D) plans are projected to receive average annual payments of $548 per enrollee overall and $1,996 for LIS enrollees; employers are expected to receive, on average, $604 for retirees in employer-subsidy plans.”
The comment is written in such a way that the reader might think that those dollar amounts were “risk corridor payments.” According to Kaiser, they were the total annual subsidy payments for the three major Part D member categories. LIS (income below 150% FPL) Part D enrollees — and Part C LIS enrollees with an integrated drug plan — get their premiums paid, up to a regionally determined threshold, and pay only nominal co-pays for their prescriptions, which is why their subsidy is almost four times higher.
But why use data from the far left wing Kaiser Insurance Company for information? Kaiser has no way of knowing what is going to happen in 2015. MedPAC – the government itself – is only just reporting to its board on 2012 (see presentation from October meeting or http://www.medpac.gov/blog/october-2014/october-2014/2014/10/15/explainer-risk-sharing-mechanisms-in-part-d ). MedPAC says the risk adjustment and risk corridor portions of Part D – two different things – are mostly about re-insurance for very high cost Part D beneficiaries, who only represent a few percent of the Part D population but about 31% of the spending. (In turn, Part D beneficiaries in turn represent only about two thirds of the Medicare population.)
Risk adjustment works approximately the same way for Part D as the prospective hospital payment system works under FFS Part A has worked for years. As for risk corridors, MedPAC says
“In every year since Part D began, plan sponsors have—in the aggregate—paid back money to Medicare—meaning their average spending for the direct subsidy was lower than what they bid. In each year, about three-quarters of sponsors had to make payments back to Medicare. The aggregate amount they paid has been on the order of $900 million to $1 billion each year for benefit years 2010 through 2012 (for context, total Part D spending was about $90 billion in 2012).”
So, despite the comment above, if the corridors were eliminated insurers would keep those payments instead of giving them back to Medicare (but we non-LIS beneficiaries do not get paid back our share of the insurer’s overbid—which is another issue)
Dennis –
A very good explanation and rebuttal of Dr. Reinhart’s claim. I found the MedPac link very informative. As you noted, the net effect of the risk corridors in Part D was that money was sent back to the Federal government from the insurers. After 10+ years, there does seems to be pretty good understanding of the pricing of Part D.
John, in a touching way, was concerned that with the three year risk corridors, the federal government — speak taxpayer — would theoretically have an unlimited liability for these years, a truly frightening prospect. Luckily, it would be “unlimited” only for the finite period of 3 years. By contrast, the MMA 03 has no finite time limit on it.
So are you, Rich and Dennis, telling us that the MMA 03, which was not explicitly financed (even though there may have been some financial budget offsets that could be viewed as partial financing) implied no unlimited (I would use the word “unknown”) liability for the taxpayer? I would not share that view. Would anyone else?
I should think that John Graham would have been awake at night in 2003 when such a bill was proposed and passed with deft parliamentary footwork, and that it would occasion him sleepiness nights even now.
So I quite innocently asked John to share with us his written opposition to the MMA 03, which must have been profuse.
I am still waiting for it.
I am also a bit surprised, I must confess, that Republican legislators, who always try to be so studiously consistent in their views and principles over time, would worry so much about the taxpayer liability implied in the ObamaCare risk corridors now, after working so hard to pass the MMA 03. I feel like Virgina learning that there is no Santa Claus.
Thank you again. As noted above, I was in Canada and not paying attention to MMA 2003. I immigrated in 2005. I will note that my friends in the Heritage Foundation strongly opposed Medicare Part D. It was tough to pass in the Republican Congress.
The drug subsidy program was opposed by many Republicans and required extraordinary pressure by the Republican leadership to pass. It was rightly seen as a part of Bush’s big government “conservatism”. As I recall, there was a big flap about its proponents understating its cost, but it ended up costing less than projected.
In the whole scheme of things, the risk corridors under MMA 03 were a minor issue and proved to be manageable as noted elsewhere in the comments. What John is pointing out, and what the Republicans were concerned about, was the use of the Obamacare risk corridors to keep afloat the insurers who had cancelled policies (the plans which were the subject of the “if you like your plan” lie) in accordance with Obamacare requirements. The risk corridors were being repurposed to bail out that defect in the law and an open-ended obligation was in danger of becoming larger.
Now that I have been a smart aleck about Medicare Part D, by noting that I was not in the U.S. at the time, but immigrated in May 2006, I should come clean and confess to having written about Medicare Part D in February 2006.
It is at http://tinyurl.com/lnyl2r7. I called it “Republican Hillarycare”. Allow me to quote myself further, from the first paragraph:
“The complexity and confusion of the Medicare Part D drug benefit, where the media focuses its attention, is actually a relatively insignificant part of the problem posed by the new entitlement, which accelerates a vicious circle of bad incentives for politicians, citizens, and providers.”
Ditto what Fembup said.
To echo Dr Reinhardt, one gets the following impression:
Taxpayer assistance to insurance companies who serve senior citizens are viewed much more lightly by Republicans, versus taxpayer assistance to insurers who cover the working poor.
The recipients of Medicare have a high voting rate. The recipients of Medicaid and ACA subsidies are not a voting bloc in any sense at all.
So it is no accident that taxpayer money is shoveled into seniors’ health insurance, but when it comes to the working poor, dollars are treated like manhole covers.
A political scientist (which I am surely not) could make a theory about public programs and voting blocs. In America, they could cite the 2010 off year elections, which were absolutely dominated by the allegation that seniors would have to pay more for Medicare-related supplements. (a fear which turned out to be utterly unfounded, when Obama pulled back on the Medicare cuts. Medicare Advantage premiums went down in 2014.)
Of course this cuts both ways. In France, labor makes up a huge voting bloc, and a series of French governments have made somewhat astounding concessions that their nation can ill afford.
“…when Obama pulled back on the Medicare cuts. Medicare Advantage premiums went down in 2014.”
Bob. this above part of your comment is incorrect.
1. Obama has not pulled back on any Medicare cuts (I assume you are referring to the various aspects of the Patient Protection and Affordable Care Act that relate to Medicare funding)
2. Medicare Advantage premiums did not go down in 2014. According to CMS prior to 2014’s so-called open enrollment period, “The average MA premium in 2014 is projected to increase by only $1.64 from last year, coming to $32.60” So even by CMS’ highly flawed methodology (and despite trying to color the facts by the use of the adverb “only”), public Part C Medicare Advantage health plan premiums went up about 5% for this year. For 2015 (the so-called open enrollment period just ended), average Part C premiums went up almost 10%. But averaging premiums is very misleading because CMS and the insurers play a game, approving/announcing very low cost Part C plans that no one in their right mind would take and then using the prices of those strawman plans to calculate the average. The typical plan — the plans people tend to take — went up over 10% for 2015 and without looking back (see Avalere or someone like that for weighted price increase), I am sure the same was true for 2014 rates
As for the part of your comment relative to political science and France, you kind of lost me. Even if you had used the correct facts, I cannot follow your logic.
There is no doubt that what you state is true. Any politician who tries to return money from Medicare beneficiaries to taxpayers will have a short career. There is not much I can do about that. Premium support for people aged 55 or so is the best I can suggest.
Dennis, here is my source for saying that Obama rolled back the cuts to Medicare Advantage:
tipsheet/guybenson/2014/04/08/surprise-wh-delays-obamacares-medicare-cuts-n1820395
I believe the author of this article is a conservative.
As for France, all I was pointing out was that organized voting blocs exert pressure on government policies out of proportion to their numbers alone.
Bob, my source for the 5% 2014 and 10% 2015 average increases is the Obama administration, press releases put out in September of 2013 and 2014 respectively by CMS at the point in time new average premiums for Part C and Part D are announced in anticipation of the beginning of so-called Medicare open enrollment. The concept of weighted average premiums comes from Avalere or someone like them who legitimately does research about health insurance issues
Weighted average is a completely legitimate concept, of course. However, we can only calculate an accurate weighted average after the premiums are paid, and we know the relative market share of each plan.
In a mature market like Medicare Advantage, a prospectively calculated weighted average will be informative. However, a prospectively calculated weighted average in Obamacare’s exchanges, where premiums are all over the map, is not likely to be very meaningful.
According to the Kaiser Family Foundation, five companies currently account for 65% of the Part D market. They are: United Healthcare, Humana, CVS-Caremark, Express Scripts and Aetna. Health insurance policies sold on the exchanges, whether public or private exchanges will probably be dominated by a handful of companies in each state as well.
The risk corridors and reinsurance were provided to the market to allow them some time to gain experience projecting claims in an environment where applicants can’t be turned down due to pre-existing conditions. This help is supposed to disappear after three years though risk adjustment payments will remain permanently as they should.
The large insurers should be able to navigate this market just as they do in the Medicare Advantage space with pretax profit margins targeted in the 5% range or a bit less. The co-ops are probably a different story. Just because you don’t have to make a profit doesn’t give you a competitive advantage if you can’t price risk properly and if their administrative costs are too high. I doubt that they will ever be more than fringe players in the market.
John G states that reinsurance will cost $25 billlon a year. I believe that the reinsurance program pays a large portion of claims between $70,000 and $250,000.
I have read that this program allows insurers to cut premiums by 10 to 15 per cent.
If all the above is true, then let’s do the math.
If $25 billion was a straight payroll tax increase, the average worker would see their tax rate go up by one half of one percent.
In exchange for this not so horrible tax, about 4 million persons in the ACA get to pay lower premiums.
What is wrong with that? We should have reinsurance for the entire insurance market not just the ACA.
(I think that John Kerry suggested something like this in 2004.)
I know there are many wasteful government programs. But this one sure seems efficient to me!
Bob Hertz, there is reinsurance available to the entire insurance market. Many carriers lay off risks in London or other re-ins markets. This government program was part of the enticement (with risk corridors and risk adjustment) to ensure participation in the exchanges.
If participation had been a good business opportunity on its own bottom, the enticements would not have been necessary. This is another example of government intervention in markets to advance policy. If you like the policy, you may like the intervention.
Agreed: Reinsurance is a mature market. Reinsurers sell policies to commercial insurers for their policies in group, Medicare Advantage, and Medicaid managed care segments.
Ya, every government program looks good in theory and is projected to save money through volume or large market efficiencies. Reality is a different story. Tell me one government run program that came in at less than projected?