Repealing Health Reform’s Risk Corridors Would Boost Deficits and Premiums

House Republican leaders are considering adding a provision to repeal health reform’s “risk corridors” program to legislation to raise the nation’s debt ceiling.  But such a step would hurt both consumers and the budget.

Eliminating the risk corridors would:

• Increase the federal deficits by $8 billion over the next 10 years, according to estimates that the Congressional Budget Office (CBO) released today; and
• Raise premiums in the new health insurance marketplaces (also known as exchanges).

Under the Affordable Care Act’s (ACA) risk corridor program, if insurers that offer marketplace plans experience higher-than-expected costs, the federal government will pick up part of those costs.  But, if insurers’ costs are lower than expected, the federal government will share in those savings.  The temporary program will exist for three years (2014-2016).

Repealing the risk corridors would increase the deficit.  Risk corridors are calculated after accounting for two other risk mitigation mechanisms under the ACA:  temporary reinsurance and risk adjustment.  Under reinsurance, the federal government will pick up part of the costs of covering high-cost patients in the individual market for three years.  Under risk adjustment, which is permanent, insurers in the individual and small group market that enroll healthier-than-average members will compensate those that enroll sicker-than-average patients.

Together, reinsurance and risk adjustment would likely offset most or all (or more than offset) of the higher-than-expected costs that insurers may experience, lessening the need for risk corridor payments to insurers.  That’s likely one reason why CBO estimates that payments to the federal government will exceed federal payments to insurers by about $8 billion.  House Republicans’ push to repeal the risk corridors would therefore increase the deficit — despite claims that it’s part of a campaign to cut the deficit.

The experience with the permanent risk corridor program under the Medicare drug benefit (which conservatives tout as a model for Medicare reform) also includes the impact of its risk adjustment and reinsurance programs and helps explain why CBO estimated that the ACA’s risk corridors would produce net federal savings.  Part D insurers, on average, have paid more in risk corridor payments than they’ve received — every year.  They paid about $7 billion in net risk corridor payments to Medicare between 2006-2012, according to our analysis of Part D payment data from the Centers for Medicare and Medicaid Services.

Some of health reform’s opponents claim that CBO is overestimating the government’s savings from the risk corridors because it doesn’t account for two factors that could result in a less-healthy, higher-cost, marketplace population than insurers originally anticipated:  the technical problems that have limited marketplace participation during the 2014 open enrollment period and the Administration decision to allow states to permit more people to remain enrolled in non-ACA compliant plans.  But, CBO’s estimate does account for these factors (including the Administration policy increasing risk corridor payments to insurers in those states taking up the option for greater enrollment in non-compliant plans).

It’s therefore hard to claim that the risk corridors are a “bailout,” as the program’s opponents have coined it.  Even conservative health experts who generally oppose health reform agree.  Christopher Holt of the American Action Forum states: “The risk-corridor and reinsurance provisions in the ACA made policy sense at the time the law was drafted, make policy sense today, and protect consumers. They do not constitute a bailout.”  Yevgeniy Feyman similarly posted on Avik Roy’s conservative health blog a column entitled “Obamacare’s Risk Corridors Won’t Be a Bailout of Insurers.”

Repealing the risk corridors would result in higher premiums for marketplace plans.  That’s because instituting major reforms to the poorly functioning individual market — like prohibiting insurers from charging higher premiums to people in poorer health or excluding them entirely — and creating new health insurance marketplaces, as health reform does, creates significant uncertainty for insurers when they set their premiums.  They aren’t sure who will ultimately enroll in the marketplaces and their need for health care.  As a result, without the risk corridors (and other risk-mitigation tools) insurers would have to charge higher premiums in 2015 and 2016 to offset the risk of this uncertainty, making coverage less affordable.  Some insurers may opt to not participate in the marketplaces at all.

Once insurers have had several years of actual claims experience with their marketplace plans, they’ll be able to price their premiums with more confidence and accuracy.  At that point, the risk corridors (and temporary reinsurance program) will no longer be needed and will expire as scheduled.