A Butterfly Flaps Its Wings in Central Park and the Risk Corridors Need an Infusion of Billions of Dollars to Address a Shortfall

I saw this story a few days ago.  It involves the Centers for Medicare & Medicaid Services’ risk corridors program, which, as the article states, essentially is a regulatory mechanism designed to shift funds from insurers with a healthier population of insureds to those with an older or sicker base.  These programs – which will be in place from 2014 until the end of 2016 – have been the subject of intense criticism since last fall, though a lot of that tempered down when we started to get a good idea of what the overall policyholder demographics would be.  They require the insurance industry to contribute (on a per capita basis) $20 billion over the next three years; the federal government will match that to the tune of $5 billion, plus cover any cost overruns.

Well, it turns out that there has been a recent development.  According to the Los Angeles Times article, it seems that the administration and the Department of Health & Human Services have “quietly” been reserving “billions” of dollars to cover potential shortfalls.  It suggests that one potential cause is the administration’s decision earlier in the spring to let old plans that are not Affordable Care Act-compliant stay in place for two more years.  Essentially, the story goes, healthy people with plans that are skimpier than required under the ACA elected to stay in those (cheaper) plans, while older or sick people fled to the new and more generous ACA-compliant policies.  Combine that with intense pressure by the administration on insurance companies not to implement drastic premium increases, and you have a situation where the insureds in ACA-compliant plans are older and sicker than expected, and premiums are underpriced.  For its part, the administration and CMS deny that they anticipate the funds will be needed, and instead say it’s a case of “better safe than sorry.”

My thought is that this is yet another example of how inter-related all of the different pieces of the ACA really are.  The biggest example, of course, is the relationship between Medicaid expansion and the individual insurance mandate.  Because the law was written to make everyone up to 138 percent of the modified adjusted gross income (MAGI) poverty line eligible for Medicaid, and everyone over that line required to buy insurance, the effect of U.S. Supreme Court Chief Justice John Roberts Jr.’s decision to make expansion optional created a gap in the MAGI line under which people in non-expanding states wouldn’t be eligible for Medicaid and they wouldn’t be covered by the individual mandate or (more importantly) the subsidies designed to help poorer (but not Medicaid-eligible) people purchase policies.

We’re seeing the same type of phenomenon with respect to the risk corridors.  As initially written, old ACA-noncompliant policies weren’t grandfathered in, and the young and old and sick and healthy were directed to the same exchanges.  Voila, problem solved!  But that’s not how it works anymore.  For whatever reason, the administration decided to backtrack and allow insureds on old (noncompliant) policies to keep them until 2016.  That decision – regardless of its motivations – has thrown yet another wrench in the works of a very complicated and carefully designed law.

Image courtesy of Flickr by Good Eye Might