The risk corridor “bailout” debate overlooks important policy implications

UPDATE: A report released by the CBO today updates their projections about risk corridors. Where they had previously been scored as budget-neutral, they’re now expected to yield net savings of $8B for the federal government (p. 110). Bailout, indeed.

Eager as Republicans may be to seize on risk corridors in the next round of debt ceiling negotiations, the program can’t be neatly carved out of the health law without far-reaching implications. Jonathan Cohn has a useful discussion of what repeal would mean for premiums (spoiler: this “bailout” likely saves taxpayer dollars on subsidies). It’s also worth remembering that we refer to “the 3Rs”, not “the 2Rs and risk corridors”.

As one piece of the complex machinery that is health reform, the corridors help solve a collective action problem created by the interaction of the three risk mitigation programs. I wrote last week about how risk adjustment in particular—the one permanent program among the ACA’s 3Rs—could turn an insurer’s enrollment incentives upside down. To recap, as long as the market as a whole enrolls a sufficient number of young, healthy beneficiaries to be “balanced”, it’s actually in the interest of any given insurer to attract the sicker and more expensive enrollees; according to a Milliman report, risk adjustment and reinsurance are likely to overcompensate for these “bad risks”.

That doesn’t mean that risk adjustment and reinsurance are bad policy—they’re necessary policy, if we want to prohibit insurers from medically underwriting individuals. HHS structured the risk adjustment and reinsurance programs to prevent insurers from avoiding the older and chronically ill—the people who need health services most—which is something we’ve seen happen with private managed care in both Medicare and Medicaid. However, the agency had to design these programs under the same uncertainties that insurers faced in setting premiums. Since risk corridors kick in last, they should attenuate unintended consequences that might arise if the first two programs under- or overcompensate insurers for high-risk enrollees.

This affords HHS time to tweak the permanent risk adjustment program to match experience before the temporary programs are phased out. If In the meantime, risk corridors assure insurers that they won’t suffer losses if enrolled populations don’t live up to calculations—and they dampen any accidental incentives for insurers to game the system.

The political theatre surrounding risk corridor repeal is, of course, theatre. It won’t go anywhere legislatively, but politicians and media-types will keep arguing, because the bailout meme—lazy and inapt as I might think it is—seems to have staying power. It’s not an accident that the debate overlooks policy implications; that repeal would destabilize the insurance market is a feature, not a bug, of the GOP’s repeal proposal.

Adrianna (@onceuponA)

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