By Jack Hoadley, Georgetown University Health Policy Institute
Senator Marco Rubio has introduced a bill to repeal the risk corridors that offer protections for both insurers and consumers who participate in the new insurance Marketplaces, while referring to these corridors as a bailout for the insurance industry. Ironically, one of the models for these risk corridors is the Medicare Part D drug benefit that was enacted when Republicans controlled both chambers of Congress and the White House.
The “3 Rs” of risk adjustment, reinsurance, and risk corridors were included in the Affordable Care Act, as in Medicare Part D, to help a new market run more predictably. The “3 Rs” are usually a subject for policy wonks, but they exist to encourage entry of insurers in a new insurance market and to stabilize premiums as the program gets started.
Here is a quick review of the “3 Rs.” Risk adjustment is a way to adjust payments to plans based on the health status of a plan’s enrollees to make sure plans and their enrollees are not penalized if their enrollees are sicker than average or rewarded if they are healthier than average coming into the program. Effective risk adjustment also deters plans from trying to avoid being chosen by people with more health risks. Reinsurance is a means of insuring the insurers by providing extra payments if certain of their enrollees incur unusually high costs, such as having more accidents or more cancer diagnoses than average. Risk corridors (or risk sharing) involve creation of a fund so that plans with unusually high gains pay back some of those gains and those with unusually high losses are partially compensated.
These measures have been in use for Part D for nine years. So how has this system worked in that program? The best measure of their success is that plan participation is still robust in the program’s ninth year, and the program is popular with both plans and enrollees. Although the science of risk adjustment is imperfect, the risk adjusters have been refined since the program’s start. Among the standalone Part D plans in 2011, risk-adjustment scores ranged from 72 percent to 146 percent of the average score. The plans at the high end would either have suffered significant losses or been forced to charge much higher premiums in the absence of risk adjustment. The opposite would have been true on the low end. Reinsurance payments for these same plans averaged about $50 per member per month; as such, they help discourage avoidance of enrollees with unusually high drug costs.
In contrast to the view that risk corridors are a means of bailing out plans, the experience in Part D suggests that they have actually protected the taxpayer. In most years, plans have made payments back to the government as a result of greater profits than expected from their bids, as opposed to receiving payments from the government. In effect, the risk corridors are protecting the government from “windfall profits” of insurers as opposed to protecting insurers against pricing too low.
All “3 Rs” continue to operate in Part D. But in the Affordable Care Act, two of them (risk corridors and reinsurance) were designed as short-term measures that will go away after 2016 after the Marketplaces have been in place for three years. Although one could argue that the role of risk corridors and reinsurance could be reduced or eliminated in Part D after nine years, there is a good case that can be made for the role they played in establishing a functional and robust market. The Part D experience also demonstrates that risk corridors, far from being a bailout for plans, are what Jonathan Cohn called shock absorbers for the program. That was something that the Republican authors of Part D understood.