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Failure of the ACA Risk Corridors

A federal appeals court ruled that the federal government is not obligated to make risk corridor payments.

Risk Corridors has become one of the major flaws with the Affordable Care Act law.

Risk Corridor:

Risk Corridor is to limits health insurance companies on profits and losses. By redistributing dollars from insurance companies with lower risk members to companies that have higher risk members.

Within the ACA risk corridors were supposed to stabilizes premiums and stop carriers from charging high premiums. It was believed by the ACA authors that this rule would stabilize the market in the first few years.

Individual health insurance companies participating in the individual markets, were supposed to have protections from significant loses, this was written into the law under section 1342 that the government would pay insurance companies the full amount of what is owed.

The Risk Corridor was a failure because insurance companies all incurred higher losses than expected by the authors of the ACA.  If a carrier had success in another state, those profits were then “tax” to help fund losses by other carriers.

Multiple Insurers sued the government for unpaid risk corridor payments. Humana who had a strong Indiana presence in the individual market, claims they are owed $611 million.

Risk Corridor was flawed from the start because more carriers applied for payment than paid into the system.  This is an example of a colossal mistake on underestimating the cost of health care. The authors did not just make this mistake but all  the insurance industry.  Actuaries did not know how to assess the risk in certain markets, because most of the people had a little history with private insurance.

The first two years of the ACA, we saw multiple Insurance companies get wiped out. The CO-OP health plans were the first casualties of the ACA.  In 2015, 9 out of 10 CO-OPS were owed payment under the risk adjustment. They completely underestimated the individual market’s risk. Quickly the federal government started questioning the long-term stability of co-ops. In 2018, only just four CO-OP’s remained offering plan in five states. Initially, there was 24 CO-OP’s established under the ACA at an estimated cost of $2.2 billion of taxpayers money.  The CO-OP’s were doomed from the start, one of the requirement was they could not use any insurance people to lead them.

The insurance industry did not do much better. In Indiana, we saw multiple carriers fail. Assurant Health was one of them. They had a presence in the individual market before the ACA but did not adjust their strategy to the new market. They were selling health plans that were designed before the ACA, and they quickly had huge losses not just in Indiana but in every state they were active in.  Once losses started piling up, they could not adjust quick enough to save the company.  Other insurance companies experienced similar situations but were able to limit their exposure by exiting the individual markets.

Now the Insurance industry had enough experience in the individual health insurance markets to determine the risk.  I doubt the non-Medicaid insurance companies will re-enter the ACA individual markets with Risk Corridor payment not being guaranteed by the federal government.