Should Risk Corridors Stay or Go?


While last weeks’ report from the Congressional Budget Office on the Affordable Care Act  garnered a lot of attention for its analysis of how the law will impact American jobs and work incentives, the CBO’s take on risk corridors in the ACA has some analysts wondering the long-term impact of the reinsurance subsidies.

The CBO estimates that while the government will pay out $8 billion in reinsurance between 2015 and 2017 to insurers who lose cash due to hardships from the law’s rollout, the government stands to take in $16 billion from insurers who will make money during the first three years of the law. Granted Uncle Sam only gets to keep half of the revenue, some say it’s a far cry from the bailout some lawmakers are calling it.

Part of the ACA includes risk corridors that protect insurance companies from taking too big of a financial hit. If insurers have losses greater than 3% of their projections through 2017, the government is on the hook for 50% of these costs. And if losses are higher than 8% of the insurance company’s targets, the government will pay these insurers back 80% of their losses.

The risk corridors have been highly-criticized, with some Republicans, including Sen. Marco Rubio, calling them a taxpayer bailout. The Florida Republican is leading the charge in attempting to repeal the provision and introduced the “ObamaCare Taxpayer Bailout Prevention Act” in November.

Despite the CBO report that shows little taxpayer money being sent to insurance companies, Rubio seems to be standing by his attempts to strip out the provision, claiming current demographics aren’t considered in the report.

“CBO didn’t base its estimate on who has enrolled so far in ObamaCare, and based on the current demographic being insured and the botched roll-out, it’s almost guaranteed that taxpayers will have to be responsible for bailing out the insurance companies for ObamaCare,” a Rubio spokesperson told via email.

The risk corridors in the ACA are essentially “price uncertainty,” says Yevgeniy Feyman, Manhattan Institute scholar.  Since open enrollment period kicked off on Oct.1, more than 3 million Americans have enrolled in both federal and state insurance exchange plans, with 24% of these people being between the ages 18-34, according to the Department of Health and Human Services.

The law mandates every individual in the country have insurance by April 1 or they will face a fine of $95 a year, or 1% of their annual income for failing to comply. Critics on both sides of the aisle have raised concerns over the current pool of enrollees, as the law needs young and healthy people to buy insurance to keep costs down.

“The uncertainty is not as bad as it would be without the risk corridors,” Feyman says. “You can make certain assumptions about what the risk pool will look like, and base that on your previous experience, but if you don’t have a lot of experience and there are new regulations you have to price in uncertainty.”

The ACA requires insurance companies to offer plans with specific essential health benefits included—everything from ambulatory care to prescription drug costs.

Larry Kocot, who helped facilitate the rollout of Medicare Part D, says the risk corridors and reinsurance subsidies are necessary especially given the administration’s continued changes to the law as rollout continues, which has heaped greater burden onto insurers.

The CBO based its assessment of the risk corridors provision using Medicare Part D’s rollout in 2006.

“With the instability in the program, it’s better to have a mechanism to spread risk appropriately—that is exactly what the risk corridors and reinsurance subsidy program does, especially when there is uncertainty,” Kocot says. “It worked well in Part D, and continues to work well.”

Vishnu Lekraj, senior insurance analyst for Morningstar, says it’s important to remember that while the risk corridor program could have a surplus of funds through 2017, the opposite is also possible.

“The program was set up where the government could take in money, or it could pay out money—they will take in funds and then pay them out,” Lekraj says. “They could have had a surplus of funds for one year, or a deficit of funds set up over three-to-four years.”

The program is key in the early years, as insurance companies take on more risk and unknowns, Kocot adds.

“We don’t know when this will stabilize,” he says. “As long as there is instability, you need mechanisms to give more certainty to insurers, to allow them to take on the risk in a rational way. This allows them to do that, which is essential to the long-term stability of the program.”

As for the fate of insurers under the ACA, time will tell, Feyman says.

“We will have to see if ObamaCare can survive without risk corridors in 2017,” he says.