House Report: Insurers Underpriced Exchange Plans In Expectation of “Bailout” from Risk Corridors

July 28th, 2014

The House Oversight Committee has released a lengthy report on the Affordable Care Act’s risk corridors, which have the effect of providing additional payments to insurance companies that suffer losses under the law. One of the more interesting findings is that several insurance companies deliberately underpriced plans in the expectation of receiving a “bailout” under the risk corridors. If the risk corridors were not fully funded, the “carriers will have to increase rates substantially.”

Here is a letter Chet Burrell, the President and CEO of CareFirst Blue Cross Blue Shield sent to  White House adviser Valerie Jarrett:

Very recently, this position appears to have been reversed under a rule issued by HHS that requires “budget neutrality” – possibly meaning that if the amounts paid in by “winning carriers” turn out to be insufficient to cover the cost of the “losing” carriers, the Federal government would not step in.

If this is indeed the policy, then carriers will have to price premiums as if the Risk Corridor features is not fully available. While this is a highly technical matter that few understand, the impacts are real and immediate. That is, if the transitional protection is not there, carriers will have to increase rates substantially (i.e., as much as 20% or more beyond what they would otherwise file) to make sure that premiums adequately reflect expected costs – because there would be little protection if they do not.

Here is the urgency: Premium rate filings for January 1, 2015, are due on May 1, 2014, and all carriers are not making rate-filing decisions. There is great concern among carriers about the intent behind the recent change in rule. Uncertainty or confusion will equate to higher rates. This could confront the Administration with a sea of far larger premiums increases than expected. Once the filings are made, they will likely quickly become public.

Immediate action to clarify the administration’s position is needed to avert this. The most effective action would be assurance that the original HHS interpretation of the ACA (which conforms best to a plain language reading of the ACA) still stands and that carriers could count on federal funding for risk corridors during the transition years (2014-2016)

The Report concludes that this memo effectively told the President that he can either fund their losses, or deal with higher-than-expected premiums:

Mr. Burrell’s memo is further evidence that insurers generally expect to receive payments through the Risk Corridor program. It also shows that this expectation of receiving payments allowed insurers to keep exchange plan premiums significantly cheaper than they would have been without taxpayers being on the hook for a bailout. Mr. Burrell’s memo essentially presents the Administration with a choice: face significantly higher premium increases in 2015 for exchange plans or make taxpayers bail out insurance companies. 

Jarret replied that “the policy team is aggressively pursuing options.” The Administration issued a revised policy, insisting on budget neutrality, that did not address Burrell’s concerns. He wrote back to Jarrett, noting that the Administration will have to deal with rate increases:

This confirms the very policy we were concerned about and that I wrote you about. I think the WH has to be prepared for large premium rate increases in many parts of the country because a key stabilizer (risk corridors) can now not be counted on.

AHIP and BCBSA are analyzing the impact and will issue their joint assessment soon so I certainly do not speak for the industry. I offer only my opinion here.

Until last month, all in the industry assumed there would be no budget neutrality given the way ACA is written, so this is seen as a key change very late in the implementation process. It will adversely impact premium rates in 2015, I am sorry to say.

Putting aside the merits of this matter, it is jarring how rent-seeking works in reality. The president of a large corporation sends an email to the White House, practically threatening the Administration to not give them rents–if they don’t they’ll jack up rates. Of course, this would limit the number of people who sign up for Obamacare.

Jarret wrote back, surprised that this didn’t do the trick. “Jeanne [Lambrew] really thought this would help. We will regroup next week.” After some consultation, Jarret replied again:

“After speaking at length today with Jeanne and our other policy folks, I do not think I have any more to add. They seem to have given you 80 percent of what you requested and I am not in a position to second guess there [sic] analysis.”

Burrell still wasn’t happy.

Thanks, Valerie for all your efforts and follow through. I am appreciative of the discussion I had with Jeanne, Al and Julian and all you did to arrange it. My view remains the same – substantial rate increases are coming but it seems it can’t be helped.

After the insurance lobby continued to state that premiums would increase if risk corridors stuck to risk neutrality, the Administration “reversed course.”

After receiving warnings of substantially higher premiums if the Administration implemented the Risk Corridor program in a budget neutral manner, the Administration reversed course and indicated that it would not implement the program in a budget neutral manner. On May 16, 2014, CMS finalized a rule that addressed changes to the Risk Corridor program for plans in 2015.105 In this rule, HHS wrote “In the unlikely event of a shortfall for the 2015 program year, HHS recognizes that the Affordable Care Act requires the Secretary to make full payments to issuers. In that event, HHS will use other sources of funding for the risk corridors payments, subject to the availability of appropriations.”

What those “other sources” are, who knows. If you want to dive deep into the weeds, search for the testimony of my friend Seth Chandler. I saw Seth light up the Committee hearing room in person, and he brought his expertise to the discussion. In short, it is almost impossible for the government to assert that the risk corridors will be risk neutral. Further, to the extent they are not budget neutral, the Secretary lacks the authority to make these payments. Seth raised the point that tinkering with the funding of the statute, without congressional authorization, threatens the separation of powers.

According to Professor Chandler, the Administration’s transitional policy not only raised major questions about separation of powers, but it also increased the likelihood and cost of a taxpayer bailout of insurance companies:

[T]he Obama Administration’s sabotage of its own delicate mechanisms for adverse selection containment by what it calls a transitional policy … violat[es] the law [Congress] passed and permit[s] insurers in many States to sell policies that fail to provide essential health benefits and that otherwise violate the ACA. That action increased the cost of risk corridors substantially, even as it challenged separation of powers.

It is simply remarkable how callously the rule of law, and billions of taxpayer dollars are whisked around, in the face of no congressional authorization, when policy decisions are being made.