More on Obamacare’s “Bailout” for Health Insurers

We have written a lot about the so-called “risk corridors” in Obamacare. Risk corridors are one of three mechanisms whereby health insurers that lose more money than they expected in Obamacare exchanges get reimbursed for part of their losses.

We covered the details of the mechanism in this post. As the administration kept changing the rules, we covered it 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 absolutely no guarantee that this will all wash out over the three-year period of the risk corridors. Nevertheless, the Obama 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 would happen, according to another letter to insurers  the agency published earlier this month.

“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 Obama 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.

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For the pivotal alternative to Obamacare, please see the Independent Institute’s widely acclaimed book: Priceless: Curing the Healthcare Crisis, by John C. Goodman.

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