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How long should the risk corridors last?

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(Bloomberg) — Industry sources have told the Washington Examiner’s Susan Ferrechio that the Obama administration is thinking of extending the Patient Protection and Affordable Care Act (PPACA) risk corridor program.

This is not the first time we’ve seen this idea floated, and frankly, believing that the administration is considering it is all too easy.

The so-called PPACA 3 R’s risk-management programs are supposed to help insurers adjust to new PPACA underwriting rules and the creation of the public exchange system.

The 3 R’s include a “permanent” risk-adjustment system, that reimburses insurers as the plan year goes on based on enrollee risk scores; a “temporary” reinsurance program, which is supposed to protect insurers against high-cost patients; and a “temporary” risk corridor program, which is supposed to protect public exchange plans underwriting profit margins.

The risk corridor program is supposed to offset an exchange plan’s losses when claims are greater than 103 percent of projections. The program will try to get the money to make insurers whole from exchange – and non-exchange — insurers with claims that are less than 97 percent of what they expected. The program is not designed to be revenue-neutral. If most health insurers lose money, the federal government might have to help make up for the lack of funding from profitable insurers.

In other words: if the overall health insurance risk pool is a lot sicker than initially expected, the federal government could end up transferring a bunch of money to the insurance industry.

Because a lot of insurers seem to be saying that they’re going to lose money on their exchange policies this year, that’s a little worrying for the U.S. taxpayer.

But not that worrying, because the corridors are supposed to expire in three years. If it’s true that the administration is seriously considering extending them, that raises some disturbing possibilities:

  • Most obviously, the administration (and insurers) believes the market for individual exchange policies is likely to be still having serious problems in 2017.
  • The insurers have clearly been willing to lose money on these policies for a couple of years in order to help the exchanges get established. But with the rollout difficulties and the somewhat underwhelming enrollment numbers, they may be threatening to bolt unless they get some guarantee that they can sell policies people will actually be willing to buy.
  • A risk-corridor extension would help keep the price of policies down by funneling a backdoor subsidy to the insurers. However, it would not keep the cost down — indeed, it could have the opposite effect. With the administration subsidizing the lion’s share of any losses, the incentives to control costs would be dramatically weakened.
  • With health-care cost growth already running well above inflation in most years, this could be quite expensive. Basically, the administration would be violating all the promises that were made about deficit reduction and cost control in a desperate bid to keep insurers on the exchanges.

It’s hard to see how they can do this legally, as the text of the statute seems quite clear: “IN GENERAL.—The Secretary shall establish and administer a program of risk corridors for calendar years 2014, 2015, and 2016 under which a qualified health plan offered in the individual or small group market shall participate in a payment adjustment system based on the ratio of the allowable costs of the plan to the plan’s aggregate premiums.” This doesn’t seem to leave much room for the U.S. Department of Health and Human Services (HHS) to issue a rule extending the program unless it declares that for the purposes of the law, 2017 and years beyond will be considered to actually be happening in 2016.

Of course, the administration has gotten creative before, so don’t count it out. But if it does extend the program, it is basically confessing two things: It thinks the law is whatever it says it is, and it never really cared how much the program cost.

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