A Taxpayer Bailout of ACA Insurers Just Got a Lot More Expensive

The Department of Health and Human Services (HHS) finally released the 2015 Affordable Care Act (ACA) risk corridor data. The data show the rapid deterioration of the ACA exchanges from 2014 to 2015.

The ACA’s risk corridor program was intended to transfer funds from profitable insurers to unprofitable ones for the first three years of the exchanges (2014 to 2016). The program ran a $2.5 billion deficit for the 2014 plan year as far more insurers incurred losses than made profits. In 2015, the deficit increased to more than $5.8 billion—a 132% increase. 

If taxpayers are forced to bail out insurers for these losses, the total tab for 2014 and 2015 now exceeds $8.3 billion. If insurers’ experience in 2016 tracks what happened in 2015, the total 3-year risk corridor deficit will exceed $14 billion. The Obama administration has given mixed signals about whether it will tap taxpayer funds to bail out insurers for these losses. We now know just how much money is at stake.

Risk Corridor Deficit Occurred Despite Massive Government Subsidies

Risk corridors do not fully subsidize insurers’ losses selling ACA plans, so insurers, in the aggregate, lost at least $5.2 billion on individual market ACA plans and at least $588 million on small group ACA plans in 2015. I previously estimated that insurers’ total losses on individual market ACA plans potentiallyexceeded $10 billion in 2015.

These losses in the individual market occurred despite huge back-end subsidies received by insurers selling ACA plans. In both 2014 and 2015, insurers received payments for people covered in individual market ACA plans of nearly $8 billion through the ACA’s reinsurance program. These payments reimbursed insurers for a large cost of their most expensive enrollees. In 2014, net reinsurance payments equaled nearly 20% of insurers’ premium revenue. In 2015, since enrollment increased, reinsurance payments likely equaled about 13% of insurers’ premium revenue.

Risk Corridor Background

The risk corridor program was intended to help stabilize the exchanges during the first three years of operation. When members of Congress expressed concern, in early 2014, about a potential taxpayer bailout through risk corridors if insurers systematically incurred losses, the administration expressed confidence that payments from profitable insurers would cover losses from unprofitable ones. Moreover, on March 11, 2014, the Department of Health and Human Services (HHS) wrote that “HHS intends to implement this program in a budget neutral manner [claims could not exceed receipts].”

We intend to implement this program in a budget neutral manner, and may make future adjustments, either upward or downward to this program (for example, as discussed below, we may modify the ceiling on allowable administrative costs) to the extent necessary to achieve this goal.

As documented in a House Committee on Oversight and Government Reform report, the administration, including senior White House advisor Valerie Jarrett, worked to address insurer concerns about budget neutrality. For example, although Jarrett told Care First Blue Cross Blue Shield CEO Chet Burrell that the administration gave insurers 80% of what they sought, Burrell nevertheless warned of large premium hikes if the risk corridor program remained budget neutral.

Shortly thereafter, on May 16, 2014, revised HHS regulations put taxpayer funds at risk:

“In the unlikely event of a shortfall for the 2015 program year, HHS recognizes that the Affordable Care Act requires the Secretary to make full payments to issuers. In that event, HHS will use other sources of funding for the risk corridors payments, subject to the availability of appropriations.”

In a desire to ensure that the administration could not use the risk corridor program as a taxpayer bailout of insurers participating in the ACA exchanges, Congress codified the administration’s previously stated intention and made the risk corridor program budget neutral in both the 2015 and 2016 government funding bills. These funding bills were signed by President Obama.

Conclusion

The large risk corridor deficits, despite insurers receiving substantial back-end payments through the law’s reinsurance program, are proof that the ACA needs to be repealed and replaced. The ACA’s insurance mandates and pricing rules have produced products that have very little appeal to people who do not receive huge subsidies to purchase them.

Regarding the risk corridor deficit, Congress should continue the language prohibiting a taxpayer bailout in the subsequent government funding bill, and prohibit the use of the Judgment Fund to pay insurers. The incoming Trump administration should direct the Treasury not to make any payments from the Judgment Fund and the Department of Justice to vigorously fight insurers’ suits claiming payment from risk corridors. Based on the 2015 data, the stake for taxpayers could be $14 billion or more.