Understanding Affordable Care Act Risk Corridors and the Shortfall that Caught Some Health Plans by Surprise and Put Others Out of Business
In early October 2015, health plans around the country received terrible news: the U.S. Department of Health and Human Services expected roughly a $2.4 billion shortfall in connection with Affordable Care Act (ACA) risk corridor program that was intended to subsidize their losses caring for expensive new patients brought in by the ACA. In the wake of an 87% shortfall from the promised subsidies, several health cooperatives around the country promptly announced folded. Others are threatening to follow suit.
Before we address what went wrong, a little background may be useful as to what was supposed to happen. The ACA risk corridor program was one of several risk-sharing initiatives designed to bolster health plans against anticipated losses on the subsidized insurance exchanges. Risk corridors had previously proven effective as a way to allow insurers to ease into the risk associated with Medicare Part D expenses. The concept appeared to solve the challenge for insurers of the risk of difficult-to-predict costs arising from ACA reforms intended to bring in previously uninsured patients.
As health plans certified to participate in the insurance exchanges issued coverage to patients under ACA guidelines, with guaranteed issue irrespective of preexisting conditions, without using past medical history to underwrite limits, and under new medical loss ratio requirements, policymakers and plans recognized the risks. The influx of millions of previously uninsured patients, many with untreated conditions, threatened to present new, unknown claims patterns and uncertain costs. The rational choice would be to set prices high to protect against those risks, but the concern was that this would translate into the newly entering patient population not being able to afford coverage. Setting prices too low to cover the actual costs, on the other hand, would be a recipe for financial disaster – one that actually has come to fruition for many cooperatives.
Risk corridors, along with two other insurance market-stabilizing programs, risk adjustment and reinsurance, offered a solution to enable plans to take on the risk gradually: for three years (2014-2016), highly profitable plans would pay in and subsidize plans that lost money and needed support. The calculation measured various plans by comparing the premiums collected against each plan’s allowable costs (claims and other costs). against the insurer’s “target amount”—its premiums minus administrative expenses, including profit. Plans that roughly broke even or had a profit or loss margin within 3% (i.e. a 97-103% ratio) would keep their profits or be responsible for their losses. The “winners” with a profit margin above 3% would pay the government from their profits,. The “losing” plans with losses greater than 3% would benefit from the pool of reimbursement from the profitable plans. Health plans that had costs between 103-108% of the premiums they collected would receive 50% reimbursement of their losses. Plans with costs over 108% would receive 80% subsidization of their losses.
While this sounded like a promising model to stabilize the insurance market, it turns out that, for the first year of the program, profitable plans owed only $362 million, far short of the $2.87 billion requested from plans that lost money. The government is not permitted to rectify the program, which was supposed to remain revenue neutral, by covering the shortfall. As a consequence, health plans that were depending on these subsidies are in financial trouble.
Where did things go wrong with health corridors? The other two premium-stabilizing programs, reinsurance and risk adjustment, have functioned well and achieved their . Risk corridors, however, fell victim to political considerations. First, one reason why the pool fell so far short of the funds needed to offset requests for reimbursement was unexpected changes in response to political pressure that undermined the economic formula. For example, in response to political pressure from those who wanted to maintain policies that did not comply with the ACA, the Obama administration allowed health plans (subject to state approval) to renew noncompliant policies. This transitional program allowed enrollees to remain in plans that do not comply with the 2014 market reforms until 2017. enabled healthier, less expensive patients to renew their existing policies and thereby steer clear of the health exchange risk pool, which was good news from a risk perspective for some of the larger insurers, but worse for insurers – in particular health cooperatives and government plans, which were heavily dependent upon the exchange risk pool. In the states that permitted renewal of noncompliant policies, the government increased the profit margin floor from 3% to 5% and also increased allowable administrative costs from 20% to 22%, which created more “breathing room” for profitable plans and, consequently, lower payments into the pool.
This change, however, does not account for the full shortfall. It is apparent in retrospect that health corridors were not viable on a revenue- and budget-neutral basis. While the vast majority of insurers (an estimated 80% of health plans) were sufficiently profitable to have to pay money into the risk corridor program, their profit-sharing has been only a small fraction (roughly one-eighth) of the size of the losses from the minority of health plans that lost money. The bigger political challenge is that the Obama administration did not prepare for the possibility that the risk corridors program would not be self-financing. The administration now finds itself prevented by strong political opposition not only from covering the gap with government funds, but even from using available reinsurance and risk-adjustment fund. Republicans in Congress have criticized the risk corridor program as a bailout for the insurance industry.
If the initial announcements are a representative indication, the primary victims of the failure of the risk corridor program are going to be the health cooperatives and government plans, which had budgeted for the subsidies and now find themselves in a deep financial hole. By contrast, the larger health plans did not expect or depend on money being returned to them, and in some cases may have omitted it from their accounting, a decision that now appears prescient. In this respect, recent events follow a pattern of previous managed care misadventures, in which inaccurate financial projections impose a disproportionate financial strain on smaller players, which may have lacked both the actuarial support to make good decisions and the financial reserves and liquidity to survive. By the time the federal government makes a decision about whether or not to in and finance the shortfall, it will be too late for many cooperatives that will have already closed their doors on grounds of insolvency. The government’s exploration of alternative funding is likely to come too little too late for the coops.