Several weeks ago,
Sen. Marco Rubio (R-Fl.) and
Washington Post columnist Charles Krauthammer took aim
at a little known provision within Obamacare known as risk
corridors, dubbing the mechanism a bailout of insurers and calling
for repeal.
The risk corridors are a temporary program designed to share the
financial risk of health plans offered through Obamacare’s
exchanges between insurers and the federal government. In theory,
the sharing is symmetrical: If insurer expenses within those plans
are lower than expected, then insurers pay the federal government a
percentage of the difference between their expected target and
actual spending. If insurer costs turn out to be higher than
expected, because members are sicker and use more expensive medical
care than predicted, the federal government picks up a chunk of the
tab.
The bigger the difference between insurer costs and
expectations, the more that the federal government pays out. When
the law was written, the goal of the provision was to entice
insurers to offer plans in the exchanges by limiting their risk
exposure.
This illustration from the American Academy of Actuaries shows
how it works:
The provision was generally expected to have no budgetary
effect. Some insurers would end up with higher than expected costs.
Some would end up lower than estimated. The payments would balance
each other out.
But while budget neutrality was expected, it wasn’t mandatory.
If insurers paid in more than they received, it was possible that
the government could actually come out ahead. But if all
participating insurers ended up with higher than expected costs
(say because the plan members skewed older and sicker than
projected), then the result would be that taxpayers would simply be
covering a chunk of insurer losses—hence, a bailout.
That possibility began to look more likely as the administration
reported fewer young people signing up than hoped and as insurers
indicated that exchange plans were more adverse than
expected and could
result in losses.
Republicans ran with the idea of ending the program,
talking up the possibility of attaching it to a debt limit
hike. Health insurers got nervous,
issuing talking points suggesting that repealing the provision
might result in insurer insolvency.
That’s the backstory. But yesterday, the Congressional Budget
Office (CBO) added another plot point. The nonpartisan budget
analysts estimated that the federal government would end up paying
out about $8 billion through the program. But insurers would pay
about $16 billion into the government for a net public revenue gain
of $8 billion—hardly a bailout, if accurate.
So why does the CBO now believe that the risk corridor program
will essentially make money for the government? Because
that’s what happened with Medicare Part D, the federal
prescription drug program for seniors, which also relied on a risk
corridor program to entice insurers to offer plans. The
structure was slightly different, but in broad strokes it
worked the same way, with insurers paying the government when costs
came in lower than expected, and being paid when costs came in
higher.
What CBO is saying, then, is that if Medicare Part D’s
experience with risk corridors is any indication, the government
will ultimately be paid more from the program than it pays out.
So the question we need to ask is whether Medicare Part D
provides a useful guide to what we can expect from Obamacare. And I
think there are a few reasons to be skeptical about the notion that
it does.
When the Part D prescription drug benefit began in 2006,
insurers had a pretty good idea of who was going to participate.
The population of seniors who might be interested in the program’s
drug coverage was pretty well defined, and there wasn’t much reason
to be concerned about high-cost individuals ditching their old
plans for new ones sold through Part D. In fact, as John Goodman of
the National Center for Policy Analysis pointed out in
congressional testimony today, Part D actually offered
subsidies to employers for maintaining existing drug insurance
programs in order to keep that from happening.
Meanwhile, formerly sky-high prescription drug spending was in
the midst of a significant
slowdown that started just before Medicare Part D went into
effect. Fewer blockbuster drugs came onto the market. The use of
generics
became more common. Seniors turned out to be quite
value-focused when choosing drug plans.
The result was that insurers operating in Part D had relatively
predictable sign-ups, and lower than expected costs. Consequently,
they paid far more money back to the government through the risk
corridors program than they were paid.
Is that what we should expect from insurers selling plans
through Obamacare? With Huamana saying in an SEC filing
that the demographic mix in its exchange plans is “more adverse”
than expected, Cigna’s CEO warning
that his company might take a loss on the exchange plans, and
Aetna’s CEO bringing up
the possibility that the company might eventually pull out of
the exchanges? The gloomy financial outlook for exchange plans is
an industry-wide phenomenon. When Moody’s
cut its outlook for health insurers from stable to negative to
negative last month, it cited “uncertainty over the
demographics of those enrolling in individual products through the
exchanges” as a “key factor.”
We won’t know how this will work out until it does. But right
now, there are a lot of bad signals. It seems at least plausible
that the future of Obamacare’s exchanges could look less like
Medicare Part D and
more like the health law’s high risk pools, which ended up with
a smaller, sicker, and more costly (on a per-beneficiary basis)
pool of enrollees than initially projected.
CBO’s score of the risk corridors relied heavily on Medicare
Part D’s history because the federal government doesn’t have a
whole lot of experience with risk corridors in the health insurance
market. That’s understandable, especially given the budget office’s
cautious nature. But it may not actually tell us all that much
about the practical reality of the provision and its probable
costs. As yesterday’s report noted, “the government has only
limited experience with this type of program, and there are many
uncertainties about how the market for health insurance will
function under the ACA and how various outcomes would affect the
government’s costs or savings for the risk corridor program.” An
experience similar to Medicare Part D’s is one possible outcome.
But I’m not sure it’s the most likely one.
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