Obamacare’s Risk Corridor ‘Bailout’ Just Got Bigger, Much Bigger – OpEd

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Last Friday, the Obama administration quietly released 280 pages of rules that, among other things, increases Obamacare’s risk corridors (a.k.a. insurers’ bailout):

We propose to implement an adjustment to the risk corridors formula….. Such an adjustment could increase a QHP issuer’s risk corridors ratio if administrative expenses are unexpectedly high or claims costs are unexpectedly low, thereby increasing risk corridors payments or decreasing risk corridors charges. We propose to raise the administrative cost ceiling by 2 percentage points, from 20 percent to 22 percent. We also propose to increase the profit margin floor in the risk corridors formula (currently set at 3 percent, plus the adjustment percentage, of after-tax premiums). Such an adjustment could increase a QHP issuer’s risk corridors ratio if claims costs are unexpectedly high, thereby increasing risk corridors payments or decreasing risk corridors charges. We propose to raise the profit margin floor by 2 percentage points, from 3 percent to 5 percent. (p. 56)

An example reveals how much this change increases the “bailout.” The table below shows an insurance plan with $10 million cost target versus $11 million of allowable costs. Actual medical claims are $8.8 million. Using the formula for calculating its payout from the risk corridor, allowing 20 percent of administrative costs, the plan gets a $410,000 “bailout” (panel A). If it can add administrative costs up to 22 percent of allowable costs, the payout increases to $635,641 — an increase of 55 percent (panel B).

Health insurers continue to win with Obamacare.

Table: Risk Corridor Payouts to a Qualified Health Plan

Panel A (20% administrative costs allowed) Panel B (22% administrative costs allowed)
Qualified Health Plan Target Medical Costs $10,000,000 Qualified Health Plan Target Medical Costs $10,000,000
Qualified Health Plan Allowable Cost (including 20% administrative costs) $11,000,000 Qualified Health Plan Allowable Cost (including 22% administrative costs) $11,282,051
Allowable/Target 110% Allowable/Target 113%
108% of Target $10,800,000 108% of Target $10,800,000
Allowable Cost Minus 108% of Target $200,000 Allowable Cost Minus 108% of Target $482,051
 .
Risk Corridor Pays 2.5% of Target $250,000 Risk Corridor Pays 2.5% of Target $250,000
Plus 80% of Allowable Cost Minus Target $160,000 Plus 80% of Allowable Cost Minus Target $385,641
Total Risk Corridor Payment $410,000 Total Risk Corridor Payment $635,641

* * *

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

John R. Graham

John R. Graham is Senior Fellow at The Independent Institute. He has served as Vice President of Research, Payment and Health Care Delivery Policy at the Advanced Medical Technology Association; Director of Health Care Studies at the Pacific Research Institute; Executive Director of the Benjamin Rush Society; Director of Health and Pharmaceutical Policy Research at the Fraser Institute; Assistant Vice President at Kidder, Peabody Securities Company; Associate at Goldman Sachs and Company; Political and Military Analyst for the United Nations Operation in Somalia; Development Consultant for Covenant House Vancouver; and Captain in the Canadian Army.

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