December 2, 2014

End Obamacare’s Insurance Company Bailout

Hidden in section 1342 of the president’s health care law is a potential taxpayer-financed bailout of insurance companies – the so-called risk corridor program. The risk corridor provision was designed to transfer money from insurers that earned “excess” profits on Obamacare plans to insurers that incurred excess losses on these plans. However, if total excess losses exceeded total excess profits, the law put taxpayers on the hook to cover the shortfall. Last summer, health insurance companies told Congress that they expect a taxpayer bailout of nearly $1 billion for the 2014 plan year. The Government Accountability Office recently argued that the administration lacks the ability to pay insurers these claims without additional appropriations from Congress. Congress should act to prevent the administration from using taxpayer funds to bail out insurance companies participating in Obamacare.  

Obamacare’s Reinsurance and Risk Corridor Programs

Several provisions of Obamacare significantly benefitted insurance companies, particularly the law’s individual and employer mandates and its massive new entitlement spending. The law also established two other ways to subsidize insurance companies offering Obamacare plans in the health insurance markets: a reinsurance program, and a risk corridor program.

Through the reinsurance program, insurers get payments from Washington to cover most of the cost of their enrollees with high annual claims. By offsetting the cost incurred by expensive enrollees, the program allowed insurers to charge lower rates for Obamacare plans. One insurance law expert estimated that the reinsurance program reduced Obamacare plan premiums by about 11 percent this year. In 2014, the program will cost $10 billion and will be financed by what is essentially a $63 tax on each of the 160 million Americans with private health insurance.

The three-year program becomes less costly over time, but still totals $6 billion and $4 billion in 2015 and 2016, respectively. Insurance industry experts have dubbed the reinsurance program “corporate welfare” that helps “insurers that sell through the exchanges [to] turn a profit or, failing that, to limit their losses.”

Under the risk corridor program, insurers that make more money than they expected are supposed to cover the losses of companies that earned less than they expected. Plans that spent at least three percent more on claims than they anticipated for the year will receive payments, while plans that spent at least three percent less on claims than they anticipated must make payments. Although the symmetrical design of the risk corridors makes the program appear to be budget neutral, it will run a deficit if most insurers incur higher claim costs than they expected, putting taxpayers on the hook.

Risk corridor scenarios

Difference between actual spending and expected medical spending

(as a percentage of expected medical spending)

Risk corridor scenarios

The Society of Actuaries acknowledged the risk if insurers priced their plans too low to cover claims: “If all of the plans in a market (or even just the most popular ones) end up pricing their products too low and so suffer losses, the government will end up needing to fund this program, and the required funds could be substantial.”

Insurers Expect a Large Bailout to Cover 2014 Obamacare Losses

A July 28 report by the House Committee on Oversight and Government Reform detailed risk corridor expectations from 15 health insurance companies and 23 Obamacare health co-ops. It found:

  • The insurers and co-ops expect net payments through the risk corridor program of about $725 million in the 2014 plan year. “Since these companies represent about 80 percent of individuals enrolled in exchange plans, the total taxpayer bailout expected by insurance companies likely approaches $1 billion in 2014.”
  • “Twelve of the 15 traditional health insurers expect to receive net payments from the risk corridor program, one of the insurers expects to make net payments into the risk corridor program, and two of the insurers expect no net payments.”
  • “Several companies that significantly exceeded their initial enrollment projections expect large taxpayer bailouts, an indication that they underpriced initial premiums,” perhaps deliberately to gain market share.

White House Actively Intervened to Increase Bailout Size

White House staff, including Valerie Jarrett, personally intervened to address insurance company concerns about Obamacare risk pools and to increase the generosity of the bailout provisions. The administration initially claimed that it would make the risk corridor program budget neutral, with no cost to taxpayers. One insurance company CEO told Jarrett that insurers would need funds from the risk corridor program to cover their losses. If the program were to be budget neutral, he wrote, insurers would need “to increase rates substantially (i.e., as much as 20% or more).” Jarrett wrote back that “the policy team is aggressively pursuing options.” When the administration finalized its plan in April 2014, Jarrett wrote to tell the CEO that the administration had given insurance companies 80 percent of what they sought.

Government Legal Analysis Shows No Authority or Money for Bailout

On September 30, GAO released a legal opinion regarding the Department of Health and Human Service’s ability to make risk corridor payments to insurance companies. According to GAO, the Consolidated Appropriations Act of 2014 allows HHS to make risk corridor payments to insurers only for fiscal year 2014. Since no money has yet been collected or distributed through Obamacare’s risk corridors and we are now operating in fiscal year 2015, HHS cannot use the Consolidated Appropriations Act to finance the risk corridor program. GAO found that HHS needs an additional congressional appropriation to make risk corridor payments in 2015 and beyond. Without an appropriation, any money spent on the program would constitute an unlawful bailout.

The administration already appears to be transferring money to insurance companies in a potentially unlawful manner. These payments are being made through the law’s cost-sharing reduction program. Despite the lack of a congressional appropriation to make these payments, the administration began making them in January 2014. Based on estimates from the Congressional Budget Office, the payments will total $175 billion over the next decade.

Obamacare Risk Corridors Differ from Part D Risk Corridors

While risk corridors existed in health insurance markets before Obamacare – including in Medicare Part D – Obamacare’s risk corridor program is fundamentally different. First, without an individual mandate to enroll in Part D coverage, there was greater potential for adverse selection problems. Second, prior to the enactment of Part D, insurers did not offer stand-alone prescription drug plans, so there was greater uncertainty in how to properly price plans. In contrast, Obamacare provides risk corridor payments despite the fact that insurers have offered and priced individual insurance plans for decades.

The biggest difference is that the Part D risk corridors resulted in money being returned to the government in every year they have been in effect. Therefore, the Part D risk corridors would not have been affected from the imposition of a budget neutral requirement.

A September poll found that 73 percent of Americans oppose having taxpayers bail out private insurance companies that lose money selling policies under Obamacare. Every Democrat Senator voted for Obamacare’s risk corridor taxpayer bailout in 2010. Congress should correct their mistake.

Issue Tag: Health Care