Don't Force Taxpayers to Bail out Health Insurance Companies

Both the House and Senate versions of the budget reconciliation bill moving through Congress would repeal several key provisions of the Affordable Care Act (ACA). This piece focuses on the ACA’s so-called “risk corridors,” which the Senate majority also attempted to repeal though failing on a point of order. The reconciliation process will continue to feature a larger debate about the ACA that is unlikely to change many minds. But while the parties remain at loggerheads over the ACA as a whole, they nevertheless retain certain joint responsibilities concerning the law. One of them is to prevent the ACA’s risk corridors from becoming a taxpayer-financed bailout of health insurance companies.

This shared responsibility exists for reasons of both policy substance and public accountability. Substantively, it would be fiscally irresponsible to give private insurers such a tap on public funds. But doing so would also break faith with the public interest. The voting public has never approved transfers to insurance companies through this risk corridor program at public expense; to the contrary, they have repeatedly been assured this will not happen. This piece provides background on the risk corridor provisions and describes ways policy makers can ensure they do not become a public burden.

Background: The ACA established “risk corridors” for years 2014-16. The intent was to disperse risk between plans in the ACA’s new health exchanges during their uncertain startup period. If a plan’s costs came in substantially below target, insurance companies would pay the federal government a percentage of the gains; if costs came in significantly higher (perhaps because their enrollees were sicker and more expensive than expected), they would be reimbursed a percentage of the loss.

This CMS PowerPoint explains what the risk corridors were intended to be. Equally important is what they were not intended to be. They were intended to redistribute revenue from insurers who had been lucky to insurers who had been unlucky. Risk corridors were not presented as providing another avenue for subsidies for the health insurance industry as a whole. 

Several other provisions of the ACA benefit health insurers. For example, the ACA required individuals to purchase health insurance, also requiring employers to offer it, with both individuals and employers facing monetary penalties if they did not comply. In addition, the ACA established an expensive new system of federal subsidies for health insurance purchases. These provisions represented an enormous transfer of public resources to health insurers. The risk corridors were not supposed to be another.

Budget scoring of the risk corridors: Multiple analyses show that the risk corridors were not intended to provide a further subsidy. When CBO first scored the ACA it attributed no net costs to the risk corridor program. The Administration later released guidance to the effect that the program would be implemented in a “budget neutral manner.” 

CBO later revised its estimate to project that the program would actually produce a net $8 billion gain for the federal government. I questioned this estimate at the time, noting that it was based on experience with Medicare Part D’s risk corridors whereas the ACA’s health exchanges might involve a very different risk pool. In any event, it would clearly violate a widely shared understanding – both with the insurance industry and with the general voting public – if the risk corridor program were permitted to morph into a wider industry subsidy. 

What has happened since then: My Mercatus Center colleague Brian Blase has written about the mounting evidence that the ACA’s health exchange plans are less financially healthy than originally projected. The result is that insurers’ 2014 claims under the risk corridor program far exceeded their contributions. Some have suggested that companies will not be able to afford continued participation in the exchanges unless the risk corridor program provides insurers with substantial net support.

A key factor in the current environment is restrictive language (advocated by Senator Marco Rubio) attached to HHS’s appropriations last year clarifying that other revenues cannot be used, beyond those collected from insurers (interpreted by HHS as “user fees”), to make risk corridor payments. The workings are complex but the upshot is that at least for the moment no bailout is permissible; HHS may only spend as much on risk corridor outlays as it takes in. CMS accordingly announced on October 1 that “insurers will pay risk corridors charges of approximately $362 million, and insurers have requested $2.87 billion of risk corridors payments. As a result, consistent with our guidance, insurers will be paid approximately 12.6% of their risk corridors payment requests at this time.” CBO had also updated its estimates to reflect that payments will be limited to collections for each of the years 2015-17.

Options going forward: Congress has multiple options at its disposal to prevent the risk corridor program from being expanded into a general insurance industry subsidy. Among them:

• Total repeal of the risk corridor provisions. Senate Republicans pursued this avenue but it failed on a point of order. Republicans could well try again but it is unlikely that repeal will become law given President Obama’s opposition. It should also be noted that it is not strictly necessary to repeal the risk corridors outright to prevent them from having a net cost.
• Restrict the use of funds to operate the program. This is the route lawmakers took last year in appropriations legislation. It restrained HHS from making payments to insurers beyond the user fees collected from them. One way or the other Congress will need to decide the terms and conditions of continued appropriations, so it is to be expected that these or even tighter restrictions will be reconsidered.
• Clarify budget neutrality. Not exclusive of other options, lawmakers could simply enact a specification that in no year (or over any other time frame chosen) shall outlays under the risk corridor program exceed collections. 
• Repayment. Require any companies that receive payments under the risk corridor program to repay the federal government by a time certain (with appropriate interest).
• CLASS-style actuarial certification. Previously Congress (pursuant to an amendment from Senator Judd Gregg) required certification of the actuarial soundness of the ACA’s CLASS program. When it was found to be actuarially unsound, the program had to be suspended. Congress could consider requiring a similar independent study certifying that total risk corridor labilities will not exceed collections (irrespective of appropriations restrictions or administrative guidance) before payments continue.
• CBO reports. Congress needs better information about risk corridor program operations. It may be worth requiring separate periodic reports from CBO on current and projected claims via the risk corridors, in comparison with prior estimates. 
• Disclosure requirements. Companies receiving financial assistance under the TARP financial markets stabilization legislation were required to comply with various restrictions and disclosure requirements, some of them quite onerous, on the logic that taxpayer dollars were at stake. It seems inevitable that lawmakers would look into whether some similar requirements would/should be triggered for recipient health insurance companies.

The ACA’s risk corridor program is and will remain at least somewhat controversial. It is not yet as controversial as an insurance company bailout would be. Lawmakers on both sides of the aisle have a shared interest in preventing that from happening.