Most of the time “the three Rs” mean reading, writing, and arithmetic.  But for healthcare, what comes to mind are risk adjustment, reinsurance and risk corridors.  These are risk-sharing mechanisms for insurance companies in the Affordable Care Act (ACA), better known as Obamacare.  Taxpayers need to pay very close attention to the risk corridors because they are not functioning as planned due to the badly designed ACA.  Some politicians want to supplement the risk corridors with taxpayer dollars in order to bail out insurance companies.

When Obamacare became effective, it allowed the federal government to implement regulations, such as guaranteed issue and adjusted community rating, across the country.  Guaranteed issue requires insurers to offer insurance to any individual or group, regardless of health status.  The law’s adjusted community rating permits insurance companies to adjust insurance premiums based on four factors: individual as opposed to family enrollment, geographic area, age, and tobacco use.

Guaranteed issue and community rating regulations existed in many states prior to Obamacare.  They disrupted the health insurance marketplace and caused higher insurance premiums.  Since Obamacare would encourage those who needed insurance the most to buy it and because many would be subsidized by the government to do so, there was a worry by the law’s designers that insurers would price their premiums too high because of uncertainty about who would enroll and their health status.  Thus, the three Rs were implemented to provide a backstop to insurers in case their losses were greater than their proceeds, particularly in the law’s early years of operation.

Kaiser Family Health Foundation provided a description of the three Rs in a January 2014 issue brief:

• Risk Adjustment – This is a permanent program and reallocates funds from plans with lower-risk enrollees to plans with higher-risk enrollees.  The federal government writes the policy but states operating exchanges may diverge with approval.  All non-grandfathered individual and small-market plans inside and outside of the exchanges will participate and plans with lower average risk enrollees will make payments to plans with higher average risk enrollees.  Payments are revenue neutral.
• Reinsurance – This is a temporary program effective from 2014-2016.  The Department of Health and Human Services (HHS) collects funds from insurers and runs the program.  It provides payments to plans that enroll higher-cost individuals.  All health insurers and self-insured employer plans contribute funds; all non-grandfathered individual market plans inside and outside of exchanges are entitled to payments.  If an enrollee’s cost is greater than a certain limit, the plan becomes eligible for a payment up to a cap.  HHS delivers payments based on need rather than a proportional payment based on a state’s contribution.  Payments are revenue neutral.
• Risk Corridors – This is a temporary program effective from 2014-2016.  HHS administers the program, collects funds from plans with lower than expected claims, and makes payments to plans with higher than expected claims.  It reduces insurers’ losses and gains beyond a permitted range; plans with claims less than 97 percent of targeted amounts pay into the program and those with claims greater than 103 percent of targeted range receive funds.  Under this program, the federal government could either get an increase in revenues or an increase in costs.

Americans are unlikely to forget Obamacare’s disastrous rollout in October 2013.  By December 2013, it was becoming increasingly clear that the program was in deep trouble.  It was not working as intended and the administration was changing the law administratively on a routine basis without congressional approval.  For example, in mid-November 2013, after millions of Americans found out they could not keep the plan they liked, the administration allowed states and insurers to re-offer these non-compliant Obamacare plans until 2016.  Insurers warned the Obama administration that changing the ACA’s rules, especially after 2014 premiums had already been set, could destabilize the market.  America’s Health Insurance Plans President Karen Ignagni said, “Additional steps must be taken to stabilize the marketplace and mitigate the adverse impact on consumers.”  In other words, if Obamacare continued on its shaky path, insurers were looking to the government to bail them out.

Senator Marco Rubio (R-Fl.) saw trouble on the horizon and was the first in Congress to raise a red flag.  In a November 18, 2013 Wall Street Journal op-ed he pointed out that the administration notified insurers in a November 2013 letter to state insurance commissioners that it was intending to “modify the risk corridor program to provide additional assistance for insurance companies.”  Rubio said:

“Risk corridors are generally used to mitigate an insurer's pricing risk.  Under ObamaCare, risk corridors were established for the law's first three years as a safety-net for insurers who experience financial losses.  While risk corridors can protect taxpayers when they are budget-neutral, ObamaCare's risk corridors are designed in such an open-ended manner that the president's action now exposes taxpayers to a bailout of the health-insurance industry if and when the law fails.

“Subsequent regulatory rulings have made clear that the administration views this risk-corridor authority as a blank check, requiring no further consultation or approval by Congress.  A final rule handed down in March [2013] by HHS and the Centers for Medicare and Medicaid Services states: ‘Regardless of the balance of payments and receipts, HHS will remit payments as required under section 1342 [risk corridors] of the Affordable Care Act.’”

Rubio also wrote that it is “a damning indictment of ObamaCare's viability when the president's only response to people losing their health insurance plans entails putting them on the hook for bailing out insurance companies.  The American people are already being directly hurt by ObamaCare's early failures, and it is unconscionable that they be expected to bail out companies when more failures emerge.”  The next day he introduced S.1726, the “Obamacare Taxpayer Bailout Prevention Act,” which would repeal the risk corridor program.  

On January 23, 2014, the Congressional Research Service (CRS) responded to a House Energy and Commerce Committee question on whether an appropriation was required to fund risk corridors and if funds received from qualified health plans can be used.  CRS made it clear the administration could not make payments under the risk corridor provision without a specific appropriation from Congress.

Eight months later, on July 28, 2014, the House Committee on Oversight and Government Reform (OGR) released a report, “ObamaCare’s Taxpayer Bailout of Health Insurers and the White House’s Involvement to Increase Bailout Size.”  It stated, “as currently structured, ObamaCare’s Risk Corridor program puts taxpayers at risk for a potentially unlimited taxpayer-funded bailout to cover insurance company losses.  According to information obtained by the Committee, several insurers expected Risk Corridor payments prior to the start of open enrollment, and appear to have underpriced their ObamaCare-compliant plans as a result.”

The investigation showed that soon after the administration got the negative press attention generated by Senator Rubio about a possible taxpayer-funded bailout, the president signaled in a March 11, 2014 final regulation that it would implement the Risk Corridor program in a budget neutral manner.  But insurance companies, unhappy with the proposal, lobbied the White House, and Senior Advisor to the President of the United States Valerie Jarrett, that a “budget neutral Risk Corridor program would lead to large premium increases for exchange plans in 2015.  Essentially, insurance companies presented the Administration with a choice: face significantly higher premium increases in 2015 for exchange plans or make taxpayers bail out the insurance companies.”

Major findings of the OGR report included:

• The CEO of CareFirst Blue Cross BlueShield appealed directly to Valarie Jarrett in an April 5, 2014 email, stating that “until very recently, the position of the Administration had been that the law requires the Federal government to fully fund the Risk Corridor payments if amounts paid in by the ‘winners’ turn out to be inadequate - as they likely will.  Very recently, this position appears to have been reversed under a rule issued by HHS that requires ‘budget neutrality’ - possibly meaning that if the amounts paid in by ‘winning carriers’ turn out to be insufficient to cover the cost of the ‘losing’ carriers, the Federal government would not step in.

If this is indeed the policy, then carriers will have to price premiums as if the Risk Corridor feature is not fully available.”

• Valarie Jarrett assured the insurers that her policy team was “aggressively exploring options” and that she would get back to them “as soon as the work is complete.”  An April 11, 2014 Centers for Medicare and Medicaid Services (CMS) guidance document gave “insurance companies 80 percent of what they sought.  However, in a May 2014 final regulation, the Administration further increased the generosity of the taxpayer bailout for insurance companies.”
• Key White House officials “traded talking points for TV appearances, including on Meet the Press and CBS Evening News, with health insurance executives on how to best message problems with HealthCare.gov and also the fact that millions of people were losing their insurance coverage because of ObamaCare.”
• “The Administration has indicated that it plans to use taxpayer funds to compensate insurers through the Risk Corridor program if insurers systematically lose enough money on these plans.  In total, the insurers and co-ops surveyed by the Committee expect net payments through the Risk Corridor program of about $725 million in 2014. The total taxpayer bailout expected by insurance companies could approach $1 billion this year.”

Revelations such as these only helped to spur forward legislation to stop any potential taxpayer-funded bailout of Obamacare and insurers.  On December 11, 2014 the House passed H.R. 83, the Consolidated and Further Continuing Appropriations Act (CRomnibus), which required the risk corridors to be budget neutral.  In other words, the federal government cannot pay out more than it collects from insurers for the risk corridor program.  The Senate passed the bill and the president signed it into law on December 17, 2014.

Because insurers suffered significant losses in 2014, the results of stopping this taxpayer bailout were felt at the end of Fiscal Year 2015.  Inside Health Policy reported on October 1, 2015 that CMS, which oversees Obamacare, announced that insurers would only receive 12.6 percent of what they sought under the risk corridor program.  Instead of the $2.87 billion they wanted, they would only receive $362 million, which was the amount insurers paid into the fund.  CMS also stated the remaining $2.5 billion would come out of the funds the agency collects from insurers in 2015, and if necessary, from 2016 collections.

But insurers are still suffering losses from Obamacare in 2015, and it is likely they will do so again in 2016.  They will be forced to either market their healthcare plans in the exchanges at their true costs or to stop selling insurance in the exchanges.

The Hill reported on November 19, 2015 that UnitedHealth Care, the nation’s largest health insurer, might leave the Obamacare exchanges, “delivering a shock announcement that could ripple through the marketplace.”  The company’s CEO, Stephen Hemsley, said, “In recent weeks, growth expectations for individual exchange participation have tempered industry wide … Co-operatives have failed, and market data has signaled higher risks and more difficulties  while our own experience has deteriorated, so we are taking this proactive step.”  He also said his company has projected that “its fourth-quarter revenue will be $425 million less than expected – amounting to 26 cents in earnings per share” and that the company “has ‘pulled back’ on marketing plans for 2016.”

Many health policy experts in Washington D.C. believe this announcement is a warning shot to the Obama administration that it should find a way to bail out UnitedHealth Care and other insurers.  And CMS acting administrator Andy Slavitt may have a sympathetic ear to their concerns.  He was the CEO of UnitedHealth Group’s subsidiary Optum/QSSI.  The company had been building the data services hub for Healthcare.gov under an $85 million contract before it was chosen to serve as the systems integrator in late October 2013, just weeks after the website famously imploded.  Citizens Against Government Waste wrote about Slavitt’s role in designing Healthcare.gov and his controversial appointment in an October 6, 2015 column in The Hill.

Insurers’ lobbyists and many members of Congress are looking for any venue to access taxpayer funds to reinvigorate the risk corridors and bail out insurance companies.  On December 3, 2015, during the Senate debate on a budget reconciliation bill (H.R. 3762) that repealed several major sections of Obamacare, such as the individual and employer mandates, Senator Patty Murray (D-Wash.) raised a point of order against a risk corridor repeal provision in the bill, stating that risk corridors do “not have a sufficient budget impact” and asking for the provision to be removed.

Only in Washington, D.C., can $2.5 billion dollars be considered chump change in a budget debate.  Under Senate budget reconciliation rules, it takes 60 votes to override a point of order.  Even so, Senator Rubio demanded a vote to do just that; unfortunately his effort failed by a 52-47 vote.  Every Democrat present voted to allow taxpayers to bail out insurance companies.  Every Republican voted to stop a bailout, except Senators Bob Corker (R-Tenn.) and Mark Kirk (R-Ill.) However, this legislation is expected to be vetoed by President Obama.

Fortunately, the FY 2016 Omnibus appropriations bill includes last year’s language preventing CMS from using funds from other government sources to prop-up the risk corridors.  Because it is likely insurers have continued to lose money in 2015, there will not be enough funds in the risk corridors program to cover their total losses and taxpayers should be protected once again from making up the difference.

But insurers are desperate for a bailout and this administration is known for ignoring Congress and the law so taxpayers must remain vigilant.  A November 19, 2015 CMS guidance document stated:

"In the event of a shortfall for the 2016 program year, the Department of Health and Human Services (HHS) will explore other sources of funding for risk corridors payments, subject to the availability of appropriations. This includes working with Congress on the necessary funding for outstanding risk corridors payments.

HHS recognizes that the Affordable Care Act requires the Secretary to make full payments to issuers, and HHS is recording those amounts that remain unpaid following our 12.6% payment this winter as fiscal year 2015 obligation of the United States Government for which full payment is required."

Not only is this an open invitation for insurers to sue the government for their bailout, constant pressure will be on Congress to provide the funding.  Propping up Obamacare will continue until it is repealed and a sensible, consumer-driven healthcare reform law takes its place.