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Health Insurers Don’t Need Federal “Risk Corridors”

The “risk corridor” provisions that were added at the last minute to the House-passed Heroes Act would provide an unnecessary benefit for health insurers and do not merit inclusion in the next COVID-19 relief bill. With no indication that health insurers’ net costs are rising due to the pandemic, even well-designed risk corridors should be a low priority for federal legislation compared to other, far more urgent needs. But features of the House bill provisions provide a subsidy to insurers, with minimal benefit to consumers.

Under the House bill’s risk corridor provisions, the federal government would pay insurers in the small-group, large-group, and Medicare Advantage markets, as well as self-insured large employers, if their costs proved unexpectedly high. If the insurers’ costs exceeded 105 percent of the expected (or “target”) amount, the government would cover 75 percent of the excess. This provision would apply for 2020 and 2021 and, for Medicare Advantage, for any year that falls wholly or partly within the official public health emergency that’s now in effect. The risk corridors were not included in the bill originally introduced by House leadership but were added before the floor vote in order to secure the support of some members.

In urging Congress to create risk corridor programs for the commercial market and Medicare Advantage, the major health insurer associations wrote that these programs were needed due to “extraordinary, unanticipated costs related to COVID-19.” It’s now clear, however, that the COVID-19 pandemic has on average lowered insurer costs to date, and it may not raise them significantly going forward.

The pandemic is affecting health care costs in two opposite ways. Testing and treatment of patients with or suspected to have COVID-19 will directly add to costs. The extent of this cost increase will depend on such factors as the duration of the pandemic, the number of people infected, the severity of the cases, the extent of hospital capacity, and the availability and cost of therapeutics and vaccines. Additional costs will likely be more significant for Medicare Advantage than marketplace plans, since COVID-19 tends to hit older people and those with other health conditions harder, and these groups tend to be enrolled in Medicare.

At the same time, other factors are reducing health care spending. Both providers and patients are delaying or canceling significant amounts of routine, non-urgent, and elective health care. Hospitals have freed up capacity to create more room for COVID-19 patients, and consumers are avoiding in-person health care encounters to protect themselves and comply with social distancing directives. Telemedicine is replacing some in-person visits, and people won’t make up all visits, tests, and treatments that they’ve deferred. Deferring or canceling care could also lead to more health problems later on.

Because of the uncertainty surrounding both of these impacts, predicting their combined effect on spending is even harder. So far, health care use has decreased on net. Hospitals have been laying off staff, and many physicians’ offices are reporting a large drop in income. In calls with investors, insurance company executives have said that corporate earnings in 2020 will remain strong. Analysts have widely concluded that the pandemic will reduce health spending for 2020 as a whole, meaning that insurers’ medical costs will be lower than expected when they set premiums.

The crystal ball for 2021 is cloudier, but if the coronavirus remains widespread and generates significant costs for insurers, offsetting health care savings will likely continue as well, since people will likely remain reluctant to visit hospitals and other health care providers. If the coronavirus threat recedes, insurers may face higher costs from pent-up demand for care, but overall health care use may not return to previous trends for some time.

To be sure, a risk corridor program would reduce the chance that insurers raise premiums for 2021 to protect themselves against the small but real possibility of very high costs. But with no clear evidence that insurer costs will rise substantially — or that insurers plan to raise premiums significantly next year — even a well-designed risk corridor program should be a very low priority for the next COVID-19 response bill, especially compared to urgent needs such as providing relief to states that are on the brink of making harsh and damaging budget cuts, continuing enhanced unemployment insurance benefits, and expanding access to comprehensive health coverage.

And the House bill’s risk corridor provisions are not well designed. Instead, they have two key features that subsidize insurers with limited or no benefit to consumers.

First, the risk corridor provisions apply to 2020. None of the benefits from a 2020 program would flow to consumers through lower premiums, however, since this year’s premiums have already been set. There’s also no reason to think that insurers face solvency challenges. Insurers entered 2020 poised to be highly profitable, and, as noted above, have so far seen lower costs due to the pandemic. For any insurers with unexpectedly high costs in 2020 (largely for reasons unrelated to COVID-19), risk corridor payments would represent a windfall to shareholders. By offsetting some of these unexpected medical costs, risk corridor payments would just increase insurers’ profits (or reduce their losses).

Second, the House-passed risk corridor program is asymmetric: insurers would receive federal payments if their costs were unexpectedly high, but wouldn’t make payments (or owe money back) if their costs were unexpectedly low. Other risk corridor arrangements, such as that in Medicare Part D, share risk in both directions — they limit both insurers’ losses and profits if their costs are much higher or lower than anticipated.

If policymakers do consider a risk corridor program, they should design it to mitigate risk and maximize benefits for consumers without providing unnecessary subsidies for insurers.