Limits on Health Insurance “Risk Corridors” Hurt Nonprofit Insurers and the ACA

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November 25, 2015; HealthcareDive

NPQ has reported extensively on the financial and competitive issues facing the 23 nonprofit health insurance cooperatives established as part of the Affordable Care Act. About half the cooperatives have already gone out of business for lack of funds, despite having shared in about $2 billion in startup capital provided by the federal government in a bid to establish nonprofit competition to traditional health insurance companies. Conservative groups are lining up to oppose additional federal spending designed to assist co-ops and other insurers facing losses under the new system.

Financial stability is a problem plaguing all insurers, due in large part to an arcane provision of the ACA called “risk corridors.” This provision of the law guaranteed insurers they wouldn’t lose money as a result of selling policies under the new terms imposed by the healthcare reform law. Since the ACA represented a major change in who was eligible to purchase insurance and under what conditions, the marketplace would be unpredictable, especially in the short term. Risk corridors assured insurance companies that their losses as a result of underpricing new policies would be paid by a federal fund contributed to by insurance companies that made significant profits under the new rules.

However, there wasn’t enough money in the pool to cover all losses, and Congress in 2014 mandated that no supplemental federal funds could be used for risk corridor payments. As a result, insurance companies with losses could only recover about 12 percent of their ACA-related losses, or less than $400 million out of almost $3 billion requested. The U.S. Centers for Medicare and Medicaid (CMS) recently committed to finding a way to increase the funds available in the risk corridor program. In reaction, conservative groups have alerted Congress and committed to opposing administration efforts to put more money into the risk corridors.

The U.S.’s largest health insurer, UnitedHealthGroup, announced in November that it has lost $425 million on insurance exchange policies and would be reevaluating its future participation on the exchanges. South Dakota-based Dakotacare, the nonprofit health insurance arm of the state’s medical association and the second-largest health insurer in the state, has been acquired by the $3 billion Catholic-affiliated Avera Health system, which has its own health insurance group.

There are many reasons for health insurance company distress as the marketplace adjusts to Obamacare. Dakotacare points to examples of hospitals inviting already-admitted uninsured patients to sign up for insurance not issued by their own hospital system. Some insurers took advantage of the risk corridor program’s short-term benefits to intentionally underprice policies to sign up the newly insured. Other insurance companies simply miscalculated the mix of (relatively few) healthy and (relatively many) unhealthy people who would sign up for often-subsidized health insurance on the exchanges. Both advocates and opponents of the ACA have agreed that ACA’s success hinges on large part on getting enough younger and healthier people to start paying health insurance premiums.

Many opinion pieces have been written recently about whether the insurance company losses are a signal of the death of the ACA. Some conservatives are again talking of market-based alternatives while others, both liberal and conservative, say the demise of the ACA is the opening for a discussion of a single-payer healthcare insurance system. Regardless of political ideology, no one is happy with the lack of insurance stability in the current healthcare market.—Michael Wyland