Obamacare’s Risk Corridors Are Back, And Bigger And Badder Than Ever!

Last December, I discussed with some relief that Congress had stopped the unlimited taxpayer liability of Obamacare’s risk corridors, which protect profits for health insurers by transferring money from insurers with extra profits to those whose profits from Obamacare are less than expected.

The CROmnibus, which funded the government for 2015, put a guardrail around the risk corridors by legislating that any payments beyond budget neutrality would have to be appropriated. (That is, if extra profitable insurers earned $100 “too much” and losing insurers lost $200 “too much”, the winners could pay the losers $100, but the U.S. Treasury could not just make up the balance without Congress appropriating the funds.)

Well, Standard & Poor’s has just concluded that payments from extra profitable insurers will only fund 10 percent of risk corridor payments:

Standard & Poor’s Ratings Services expects the ACA risk- corridor pool to be significantly underfunded if the government enforces budget neutrality. Budget neutrality requires the pool to be funded by payments insurers make into the pool. No external funding can be allocated to it. Our study of risk-corridor receivables and payables recorded in U.S. health insurance companies’ 2014 annual financial statements found that receivables insurers booked for the ACA corridor far outweigh the payables. In fact, our study indicates that the risk corridor payables are less than 10% of the receivables insurers reported in 2014.

Taxpayers: We dodged a bullet. U.S. Senator Marco Rubio wants to take it a step further: Simply abolish the risk corridor payments entirely. Given how quickly the Republican-majority Congress stampeded into paying for an unfunded Medicare “doc fix” just a few weeks ago, it might not be a bad idea.

Comments (5)

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  1. Susan says:

    While the risk corridors may have been a bad idea, I am not sure how you can ask companies to price products under one set of rules and then change them 2 years later in retrospect. The insurers were promised this backstop if experience was worse than anticipated. If this wasn’t there they may have priced significantly higher. You can’t change the game now.

    • Sure you can. That is why we elect a new Congress every two years. Businesses that prefer to submit to the whim of politicians instead of the market bear a different set of risks, that is all.

  2. Bob Hertz says:

    Abolishing the risk corridors will cause many insurers to desert the exchanges. The main reason that Assurant just left the market was that risk corridor payments were less than expected.

    I sense a little bit of anarchism in your proposal here, John, i.e. bring down the house.

    The Swiss system and the German systems, which are lauded by some for preserving private insurance, are filled with risk corridors and risk adjustment payments. Heck, Medicare Advantage uses risk adjustments.

    A skeptic might think that you defend Medicare Advantage because George Bush advanced it, and you oppose the ACA because Barack Obama advanced it. I know things are not that simple, but what gives?

    • It is Senator Rubio’s proposal, not mine. I am just stating that the people who gave us Obamacare significantly misrepresented its costs.

  3. Underwriterguy says:

    Given the 90/10 split, I suspect deliberate underpricing to gain share rather than worse than average morbidity is the root cause. It is hard to sympathize with a gambler when he loses. Let the market sort itself out and have rational pricing for all players. We may discover that the whole scheme is too expensive given the subsidies required for risk priced plans, Oh, well.