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|
|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|
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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.