Obamacare foes have been harping for the last few months on what they call the law’s “bailout” for insurance companies. Florida Senator Marco Rubio has been particularly vocal about his desire to repeal the piece of the law known as risk corridors, and fellow Republicans reportedly want to make it a condition for raising the debt ceiling.
That position just got a little less sensical now that congressional bean counters think the program will actually be a net gain for the U.S. Treasury. In other words, a potential Republican gambit over the nation’s borrowing limit would, if successful, repeal a law expected to actually reduce deficits by $8 billion over the next three years.
Some background: Risk corridors are one of the obscure pieces of the Affordable Care Act intended to stabilize insurance markets as millions of previously uninsured customers enter the system. The provision lasts three years and applies only to companies offering plans on healthcare.gov and state-run exchanges. If those insurers pay out much more in medical claims than they anticipated when setting premiums, the government will backstop some of their losses.
That’s why critics call it a bailout, even though the government offers insurers similar protection from catastrophic risks such as floods and terrorism. But if insurers set rates too high and pay out much less in medical claims than they expected, they will have to pay some of that money back to the government.
This changes insurers’ incentives in important ways. First, it encourages them to offer plans in the exchanges, knowing that their losses will be limited if the people they enroll turn out to be much costlier—i.e., sicker—than anticipated. It also gives them an incentive to be on the safe side and not price premiums too high. And it removes insurers’ incentives to recruit only the healthiest people. With losses and gains evened out after claims are settled, they have little to gain by trying to shun costly patients with chronic conditions like cancer or HIV. Actuaries like predictability, and the risk corridors inject a big dose of it into what’s otherwise a highly uncertain new market.
The Congressional Budget Office, the legislature’s nonpartisan arbiter of how new laws will affect the nation’s fiscal outlook, originally considered the risk corridor program a wash likely to collect as much as it pays out. A new budget outlook (PDF) published Tuesday, however, estimates the provision will cause a net gain of $8 billion over three years.
Why did the CBO change its estimate? Partly because it took a close look at a similar risk corridor program in the Medicare drug benefit known as Part D—and that one had been saving the government money: “Under Part D’s risk corridors, collections from insurers have exceeded payments to insurers, yielding net collections that have averaged about $1 billion per year—between 2 percent and 3 percent of total covered costs for drugs under Part D,” today’s report says. In other words, without the existing risk corridors in that program, Medicare’s prescription drug costs would go up by a couple of percentage points.
It’s theoretically possible that only really sick people will sign up for coverage in the exchanges, and insurers will wildly low-ball their premiums. That scenario would cost the government billions in Rubio’s bailout scenario. As the CBO acknowledges, “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.”
But more likely the program will help stabilize the new marketplaces and may even net the government a few billion bucks. For a “bailout,” you could do a lot worse.
