How and why the risk corridor program will cost more

The following is a guest post by Nicholas Bagley, University of Michigan Assistant Professor of Law.

When it announced the administrative fix for the “like it/keep it” problem, the White House knew that it would tick off insurers offering plans on the exchanges. The people who currently have individual insurance coverage are disproportionately healthy. If enough of them renew their coverage and opt out of the exchanges, exchange plans will find themselves responsible for covering an unhealthier population than they expected. They could take a serious financial hit.

To ease the pain, the administration said that it would think about sweetening the risk-corridor program. As Adrianna has previously discussed, risk corridors are meant to protect insurers for the next three years in the event that their outlays are substantially greater than anticipated.

The mere possibility that the administration might modify the program sparked controversy. In an op-ed at the Wall Street Journal a few days after the fix was announced, Senator Marco Rubio decried the contemplated adjustment to the risk-corridor program as an insurer “bailout.” He even introduced legislation to eliminate risk corridors altogether.

The administration has now offered details about what it has in mind. In a proposed rule issued last week, the administration said that it hopes to introduce a state-by-state adjustment into the risk-corridor calculation. In states that allow renewal (at least ten have said they will), risk-corridor payments will increase. How much will depend on the number of people in the state who renew their plans. The more renewals, the bigger the adjustment.

How exactly does the administration mean to go about this? The ACA links risk-corridor payments to the difference between a plan’s “allowable costs” and a “target amount.” A plan’s allowable costs are basically the costs of providing benefits. The target amount is defined as the premiums that the plan receives, minus “administrative costs.” If what a plan pays out (its allowable costs) exceeds what’s been paid in (the target amount) by a big enough margin, the feds will cut the plan a check.

To do this calculation, you’ve got to figure out what counts as an “administrative cost.” And here’s the key: the plans that stand to be hurt by the administrative fix want to say that lots and lots of things are administrative costs. As those costs go up, the difference between allowable costs and the target amount also goes up. That means that more and more plans will be eligible for risk-corridor payments. The payments will be larger, too.

Because the ACA doesn’t define “administrative costs,” HHS is responsible for fleshing out its meaning. In an earlier rulemaking, the agency made two important decisions. First, plans could include a 3% after-tax profit as an administrative cost. (Insurers gotta eat too, right?) Second, administrative costs were capped at 20% of total premiums. Anything more would be excessive.

The administration now plans on relaxing these agency-imposed rules. Plans in states with lots of renewals, for example, might be allowed to include a 4% profit as an administrative cost. Other plans might be able to say that 24% of the premiums they collected went to administrative costs. Either way, the result will be to inflate risk-corridor payments to insurers that might otherwise get clobbered.

As a legal matter, this looks OK to me. Yes, it’s a little odd that administrative costs will be deemed to be higher in some states than in others. But the ACA gives HHS a ton of discretion in establishing the risk-corridor program. Here, the agency hasn’t acted in a way that contradicts the statute. It’s just fiddled with its own prior definition of an open-ended term. There’s nothing wrong with that.

Even if it’s legal, though, the administration’s proposal won’t be popular. The risk-corridor program was supposed to be budget neutral: payments to plans that underestimated their medical losses would be matched by payments from plans that overestimated them. The assumption of budget neutrality was never very plausible, but this modification tosses it out the window. The revamped program will be expensive—and all in service of an administrative fix of questionable legality.

Just how expensive? The administration can’t say. “Because of the difficulty associated with predicting State enforcement of 2014 market rules and estimating the enrollment in transitional plans and in [qualified health plans], we cannot estimate the magnitude of this impact on aggregate risk corridors payments and charges at this time.”

In other words, the price tag will depend on how many old plans are renewed. The better the administrative fix works, the more it’ll cost.

Senator Rubio won’t be pleased.

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