Risk Corridors, asset valuation and favoring incumbents

Nicholas Bagley at the Incidental Economist  argues that insurers will eventually be made whole on risk corridor payments even if the money is never appropriated by Congress.

At Rubio’s insistence, Congress in 2014 passed a budget bill prohibiting the administration from using other funding streams—the budgetary equivalent of looking under the couch cushions for change—to make up for any shortfall.

Rubio’s bill has now come back to bite the administration. On October 1, HHS announcedthat, for 2014, health plans were owed substantially more under the risk corridor program than they paid in. Unprofitable plans will thus receive just 12.6% of what they were supposed to….

there’s another option, one that hasn’t received much attention. When Congress creates an entitlement directly in legislation, the person who’s supposed to get the entitlement can file a lawsuit in the Court of Federal Claims to recover what she’s owed.  That’s why plans should still be able to get their cost-sharing reductions, even if the House of Representatives prevails in its case over whether an appropriation exists to cover the cost-sharing reductions.

The same principle holds (1) where Congress vests a federal agency with the power to obligate the United States to make certain payments and (2) the agency welches on those obligations. Here, the ACA instructs HHS to create a risk corridor program requiring the government to pay health plans a given amount of money. If the past is any guide, plans should be able to sue if HHS doesn’t pay them in accordance with the program. That’s so whether or not Congress has appropriated money to fund the program.

If I am understanding the argument correctly, PPACA tells HHS to pay, money is not appropriated, but the money is still owed, so the full faith and credit of the United States government comes into question if the government does not pay. Therefore, once insurers start suing when it is obvious that they will not be made whole for 2014 risk corridor payments, they’ll win easily in court and the government will pay.

That is good news in the long run for well capitalized insurers.   It is bad news for everyone else.

Well capitalized insurers  can wait years to get $100 million dollar payments while using other cash reserves to cover the degradation of the risk corridor account receivable on the balance sheet. However, waiting several years and using other reserves is not feasible for co-ops and other smaller start-ups and new entries to the insurance market. As I explained in October, the co-ops counted on quick payment in full to meet cash reserve requirements.

State regulators have a mission to make sure there is no chance in hell of an insurance company going bust with outstanding claims unpayable.  The state regulators rely on very large cash and capital reserves to make sure that in a three or four sigma event, the insurance company is still able to pay off all claims incurred up until the drop-dead date….

Up until the Cromnibus, the risk corridor payments were seen as near cash and counted as high quality reserves.  However the Cromnibus applied a large but unknown discount to those claims on Federal payments.  That means the state regulators started to worry that in oh-shit scenarios, the smaller insurers could not pay off all incurred claims.  And once state regulators start to worry, they shut down insurers that they worry about.

In the long run, the insurers will be made whole, or at least the creditors of the insurers that folded will be made whole. In the short run, the insurance markets got significantly less competitive as a dozen insurers folded and several more pulled products because they could not float the federal government another couple of years. This will cost the federal government more money in the short and long term.

In the short term, the effect is directly about the benchmark plan. Anywhere where a closed insurer was the issuer of the second least expensive Silver (the benchmark plan) or the cheapest silver, the Federal government will pay more in Advanced Premium Tax Credits. The new benchmark plan is either the former #3 Silver or #4 Silver plan. The gap between the personal contribution and the new benchmark plan is now wider than it would have been. Over the long run, there are fewer competitors and more importantly, fewer competitors who are mainly concerned about the Exchange market and thus can offer low provider reimbursement level products (with attendant skinny networks).


So the Rubio rider causes a lot of chaos, does not actually solve the problem it is superficially intended to solve, costs the government more money in the short term as the benchmarks are recalculated upwards, and costs the government more money in the long term as there are fewer insurers and thus less competition. The big winners are Rubio (as he gets to fundraise and preen off of it) and incumbent insurers that have large cash reserves.


Update 1: Brachiator thinks things through a bit more and sees how this rider could leave more people uninsured:

more taxpayers might be able to get exemptions from requiring health care because plans fail the affordability test.


11 replies
  1. 1
    BGinCHI says:

    If you cut off the title, as below, this could well have been the Sex Advice post Balloon Juice readers have been waiting for (since your last post let us down).

    Risk Corridors, Ass

  2. 2
    azlib says:

    Another reason why I do not understand why any small business owner is a Republican.

  3. 3

    @BGinCHI: Keep both hands on the keyboard where everyone can see them

  4. 4
    West of the Cascades says:

    This could also end up being not too serious a blip if a large set of insurers sues HHS and the Obama Administration Justice Department immediately settles saying “yep, you’re right, we have to pay” and essentially establishes the payments through a court-ordered settlement despite the Rubio ratfucking. A “sweetheart settlement” like that would be a nice poke in Congress’s eye.

  5. 5
    BGinCHI says:

    @Richard Mayhew: If you want your comment numbers in the high 300s, you are going to have to play ball.

  6. 6
    Brachiator says:

    Some of the earlier stories about the Rubio Rider had wondered whether it might deliver a crippling blow to ACA and exchanges. Good to see that this is not necessarily the case, but it sure seems like there will be more confusion.

    So we’ve had attempts to eliminate state exchanges and now pressure on remaining exchanges. What would be the effect if more insurers decide to drop out of the system? Could we see steep prices in insurance rates?

    And if I understand what is happening here, more taxpayers might have to resort to Premium Tax Credits, and more taxpayers might be able to get exemptions from requiring health care because plans fail the affordability test.

  7. 7

    @Brachiator: I had not even thought about how this bumps affordability criteria upwards as the low cost Bronzes tend to be offered by the same firms offering low cost Silvers. If the Silvers gone, the Bronzes are gone as well. So yes, a few more people will be uninsured as they can’t find affordable coverage.

  8. 8
    Glidwrith says:

    Would the suing mechanism also apply for Social Security payments if Congress doesn’t fix it?

  9. 9
    Richard Mayhew says:

    @Glidwrith: ianal so I do not know

  10. 10
    ecks says:

    @BGinCHI: just one?

  11. 11

    […] wheels for insurers as they get used to the new system. Balloon Juice’s Richard Mayhew has a great explanation of what the risk corridor actually did, and how Rubio threw a wrench in […]

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