More on ObamaCare’s “Bailout” For Health Insurers: Administration Has No Clue How Much It Will Cost
Risk corridors are one of three mechanisms whereby health insurers which lose more money than they expected in ObamaCare exchanges get reimbursed for part of their losses.
This blog originally described risk corridors in this post. Later posts, describing how the Administration kept changing the rules, are here, here, and here. The reason people are upset at this provision is that it contains an undefined taxpayer bailout of insurers’ losses under ObamaCare.
Although there is another method whereby taxpayers subsidize insurers who lose money in exchanges (“reinsurance”) this has a limited liability. A third method (“risk adjustment”) moves money from insurers who profit more than expected from ObamaCare to their competitors who took more risk than they had expected. It is revenue neutral for taxpayers.
A quick read of risk corridors suggest that they are also revenue neutral. But this is not the case. Payments are based on premiums paid, not claims incurred. At the risk of oversimplification, if the average premium (over all insurers) is $10,000, and the average of all claims is $10,000, the reimbursement will be revenue neutral. However, if the average of all claims is $12,000, taxpayers will be on the hook for the difference. If the average of all claims is only $8,000, the Treasury will keep the difference.
However, there is no guarantee whatsoever that this will all wash out over the three-year period of the risk corridors. Nevertheless, the Administration now wants us to believe that it will. As described by the Washington Post‘s Jason Millman:
- If HHS collects more money than it needs to pay out in risk corridor charges in 2014, it will hang on to the bonus funds for 2015 in case of a shortfall. Under the example HHS provided, if it collects $800 million in 2014 and only has to pay out $600 million, then it will keep the remaining $200 million to use in future years of the program.
- If HHS doesn’t collect enough money to cover the charges, it will pro rate the amount it pays out to insurers that year. In the following year, HHS would then pay out the difference from the previous year first before paying risk corridors charges for that year.
So what happens if at the end of the three-year program, HHS hasn’t collected enough payments or it’s collected too much? Well, HHS doesn’t know yet what happens then, according to another letter to insurers from the agency explaining the policy.
“We anticipate that risk corridors collections will be sufficient to pay for all risk corridors payments over the life of the three-year program,” HHS writes. “However, we will establish in future guidance or rulemaking how we will calculate risk corridors payments if risk corridors collections (plus any excess collections held over from previous years) do not match risk corridors payments as calculated under the risk corridors formula for the final year of the program.”
In other words, the Administration does not have the slightest idea how much taxpayers’ money is jeopardized by these risk corridors. This is a reckless way to manage our finances. The Congressional Research Service has suggested that payouts from the risk corridors require appropriations. Congress would do its duty by ensuring that the Administration does not pay out any money from risk corridors without such legislative authority.
If the government’s going to insist on spending our money, I’d really like them to at least have some idea of how it’s going to all work out.
I agree. Something more than “We think it should work, probably,” would be nice.
Risk corridors are causing problems again? Shocking.
Hey. The government’s just trying to keep us on our toes. It’s part of the new wellness plan. You didn’t get the packet?
They’ve got to keep us in shape. Otherwise the bill for Obamacare will give us a heart attack.
Big government, looking out for us.
“We will establish further guidance”
That’s not very comforting.
That’s because “We will establish further guidance” is bureaucrat speak for “we’re flying by the seat of our pants.”
nice… unlimited liability on the taxpayers
What else are taxpayers for?
Ultimate safety net!!!!
what happens after 3 years?? ….ya guys we’ll just figure that part out later.
Well yeah. In 4 years it becomes the next administration’s problem.
ahhh the classic “not my chair, not my problem” trick.. seen it a hundred times.
but in all seriousness, that attitude is often propagated in Washington. That short-sightedness IS going to cost us, it’s just so sad that politicians are so focused on re-elections and satisfying short-term “hot” issues that get them the press they need to get re-elected that they forgo the more pressing issues :'(
Congressional Term Limits!!!!
So where do the excess payments go?
IF there are excess payments. IF
The final rule just came out. Stay tuned for an update tomorrow on this blog!
The bailout will be larger than people expect. Insurers are allowed to charge older enrollees three times the rates charged to young enrollees. Older enrollees have a higher demand for coverage than young enrollees, but have a six-fold expected costs.
Based on these parameters, I would expect insurers to charge older enrollees the maximum allowed. But that’s not happening. The ratio of charges from young to old appear to vary only by a factor of two — not three. What does this mean? I don’t know. But I suspect insurers believe 1) some young people won’t buy coverage at any price. 2) Some young people will buy coverage even if charged too much, and 3) risk corridors will cover the losses of older people who cost more than expected.
HHS set the age factors. So the insurers set a premium and the relativities are now NOT UP TO the insurers but defined by regulation. The 3-1 is age 65 to age 21.
I have good news and bad news.
The good news is this risk corridor, etc. program has already been tried with Part D of Medicare.
The bad news is I don’t know how successful that has been, although premiums seem to have stabilized.
The really bad news is that only 25% of the premiums have stabilized. The other 75% are expenses, which add to the deficit.
Don Levit