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Insurance risk-corridor program charts uncertain path


By Paul Demko
Posted: March 5, 2014 - 5:45 pm ET
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President Barack Obama's proposed 2015 budget contains $5.5 billion slated to be paid to insurers who suffer significant losses on plans sold through the state and federal insurance exchanges. The risk-corridor program has been pilloried by congressional Republicans as a bailout for the insurance companies, even as experts have said it would produce a net surplus.

But the president's budget also includes $5.5 billion in anticipated revenues from insurers who profit on plans sold through the government-run online marketplaces. That means Obama is counting on the risk-corridor program to be budget neutral, contrary to a Bloomberg News report that said the program would be a money-loser for the government.

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The risk-corridor program, as established by the Patient Protection and Affordable Care Act, was designed to shield insurers from excessive risk in the retooled individual and small group marketplaces if they sign up a sicker-than-average patient population. Insurers that suffer losses of at least 3% will be eligible for federal subsidies, while plans that see profits of at least 3% will be required to write a check to the federal government. The program is slated to last three years. Along with reinsurance and risk-adjustment programs, it was created to entice insurers into untested waters by limiting their financial losses.

“It's a really important protection,” said Ross Winkelman, a director with Wakely Consulting Group. “It really is meant to be a mechanism that encourages competition.”

Last month, the nonpartisan Congressional Budget Office projected that the risk-corridor program will produce $8 billion in revenue for the government. That estimate was based in part on the government's experience with a similar program for the Medicare Part D prescription-drug program. As Edwin Park, of the liberal-leaning Center on Budget and Policy Priorities, said, that program has provided net revenue to the federal government every year since it was put in place.

But Hans Leida, a principal and consulting actuary with Milliman, questions whether comparing the risk-corridor program to the prescription-drug plan is an entirely valid analogy. “This is a very different situation,” he said.

Whether the risk-corridor program will ultimately cost the federal government money will depend on the characteristics of the patient population who purchases plans through the exchanges, as well as the calculations insurers made in setting their premiums. Complicating matters is the Obama administration's permission for plans that don't comply with Obamacare coverage requirements to be extended for two years.

On Wednesday, the CMS announced that those non-compliant policies can be renewed through 2016. That means healthier people in the individual insurance markets may remain in their old plans and not enroll in exchange plans, possibly skewing the exchange population toward sicker people.

“That was the biggest curveball to the issuers,” Winkelman said. “That was not considered in pricing.”

But some experts say federally subsidized coverage on the exchanges will prove attractive to most people in the individual market, and that the number of people who keep their old, non-compliant plans will be relatively insignificant.

Leida said it's too early to determine the costs of the risk-corridor program. “I wouldn't be comfortable putting money either way yet,” he said.

Follow Paul Demko on Twitter: @MHpdemko


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