Will the Federal Government Turn a Profit on Risk Corridors? That Can Be Stopped.



Money-Spiral-Image-for-PostI have written twice about the “risk corridors” in Obamacare’s health-insurance exchanges. The first post described how risk corridors will work in the exchanges. Risk corridors exist for three years and are designed to partially immunize insurers from losing money in the exchanges.

Recently, the risk corridors have been described as a “bailout,” especially by Republicans who seek to have them repealed. The political goal is to discourage insurers from continuing to participate in exchanges in 2015, thereby further weakening and crippling Obamacare.

The major difference between risk corridors and the two other methods of protecting insurers in the exchanges (“reinsurance” and “risk adjustment”) is that risk corridors have an unlimited claim on federal taxpayers for three years, whereas the other two are funded by insurers and capped.

Because the exchanges are enrolling more older and (likely) sicker people than originally anticipated, it has dawned on many observers that insurers, overall, will likely lose a lot of money in the exchanges this year. My second post examined the likelihood of any Congressional Republican attempt to repeal the risk corridors (or “bailout”).

Originally, the Congressional Budget Office (CBO) had estimated (“scored”) that the risk corridors would be revenue neutral. That is, the amount of money that the federal government takes from the health insurers will be equal to the amount it has to pay out to the losers.

A few days ago, however, the CBO issued a new budget outlook that anticipates the government turning a profit of $8 billion during the risk corridors’ existence: $16 billion of revenue versus $8 billion of spending (see especially pp. 114-115). I find the CBO’s reasoning difficult to accept, and expect the risk corridors to lose taxpayers’ money. However, that does not matter: Congress is bound to take CBO’s estimates seriously.

It matters little: This properly explained CBO score is more useful than the previous one, which was not explained at all. It gives Republicans a way to limit, if not repeal, the risk corridors. One approach would be to recognize the CBO spending estimate ($8 billion) as an outer boundary of the “bailout” and introduce legislation capping the liability at that amount (as Obamacare’s original legislation did with the similar “reinsurance” scheme). This could be linked with a tax cut to the health-insurance tax (which funds the reinsurance) such that both programs net out to budget neutrality.

This approach might earn support of the health insurers, who have been lobbying to eliminate their Obamacare taxes. It is certainly worth a shot.

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For the pivotal alternative to Obamacare, please see the Independent Institute’s widely acclaimed book: Priceless: Curing the Healthcare Crisis, by John C. Goodman.

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