CBO Says Obamacare's Bailouts Might Make Money for the Government. Here's Why CBO Might Be Wrong.



Several weeks ago, Sen. Marco Rubio (R-Fl.) and Washington Post columnist Charles Krauthammer took aim at a little known provision within Obamacare known as risk corridors, dubbing the mechanism a bailout of insurers and calling for repeal.

The risk corridors are a temporary program designed to share the financial risk of health plans offered through Obamacare's exchanges between insurers and the federal government. In theory, the sharing is symmetrical: If insurer expenses within those plans are lower than expected, then insurers pay the federal government a percentage of the difference between their expected target and actual spending. If insurer costs turn out to be higher than expected, because members are sicker and use more expensive medical care than predicted, the federal government picks up a chunk of the tab.

The bigger the difference between insurer costs and expectations, the more that the federal government pays out. When the law was written, the goal of the provision was to entice insurers to offer plans in the exchanges by limiting their risk exposure.

This illustration from the American Academy of Actuaries shows how it works:

American Academy of Actuaries

The provision was generally expected to have no budgetary effect. Some insurers would end up with higher than expected costs. Some would end up lower than estimated. The payments would balance each other out.

But while budget neutrality was expected, it wasn't mandatory. If insurers paid in more than they received, it was possible that the government could actually come out ahead. But if all participating insurers ended up with higher than expected costs (say because the plan members skewed older and sicker than projected), then the result would be that taxpayers would simply be covering a chunk of insurer losses—hence, a bailout.

That possibility began to look more likely as the administration reported fewer young people signing up than hoped and as insurers indicated that exchange plans were more adverse than expected and could result in losses.     

Republicans ran with the idea of ending the program, talking up the possibility of attaching it to a debt limit hike. Health insurers got nervous, issuing talking points suggesting that repealing the provision might result in insurer insolvency.

That's the backstory. But yesterday, the Congressional Budget Office (CBO) added another plot point. The nonpartisan budget analysts estimated that the federal government would end up paying out about $8 billion through the program. But insurers would pay about $16 billion into the government for a net public revenue gain of $8 billion—hardly a bailout, if accurate.

So why does the CBO now believe that the risk corridor program will essentially make money for the government? Because that's what happened with Medicare Part D, the federal prescription drug program for seniors, which also relied on a risk corridor program to entice insurers to offer plans. The structure was slightly different, but in broad strokes it worked the same way, with insurers paying the government when costs came in lower than expected, and being paid when costs came in higher.

What CBO is saying, then, is that if Medicare Part D's experience with risk corridors is any indication, the government will ultimately be paid more from the program than it pays out.

So the question we need to ask is whether Medicare Part D provides a useful guide to what we can expect from Obamacare. And I think there are a few reasons to be skeptical about the notion that it does.

When the Part D prescription drug benefit began in 2006, insurers had a pretty good idea of who was going to participate. The population of seniors who might be interested in the program's drug coverage was pretty well defined, and there wasn't much reason to be concerned about high-cost individuals ditching their old plans for new ones sold through Part D. In fact, as John Goodman of the National Center for Policy Analysis pointed out in congressional testimony today, Part D actually offered subsidies to employers for maintaining existing drug insurance programs in order to keep that from happening.

Meanwhile, formerly sky-high prescription drug spending was in the midst of a significant slowdown that started just before Medicare Part D went into effect. Fewer blockbuster drugs came onto the market. The use of generics became more common. Seniors turned out to be quite value-focused when choosing drug plans.

The result was that insurers operating in Part D had relatively predictable sign-ups, and lower than expected costs. Consequently, they paid far more money back to the government through the risk corridors program than they were paid.

Is that what we should expect from insurers selling plans through Obamacare? With Huamana saying in an SEC filing that the demographic mix in its exchange plans is "more adverse" than expected, Cigna's CEO warning that his company might take a loss on the exchange plans, and Aetna's CEO bringing up the possibility that the company might eventually pull out of the exchanges? The gloomy financial outlook for exchange plans is an industry-wide phenomenon. When Moody's cut its outlook for health insurers from stable to negative to negative last month, it cited "uncertainty over the demographics of those enrolling in individual products through the exchanges" as a "key factor."

We won't know how this will work out until it does. But right now, there are a lot of bad signals. It seems at least plausible that the future of Obamacare's exchanges could look less like Medicare Part D and more like the health law's high risk pools, which ended up with a smaller, sicker, and more costly (on a per-beneficiary basis) pool of enrollees than initially projected.

CBO's score of the risk corridors relied heavily on Medicare Part D's history because the federal government doesn't have a whole lot of experience with risk corridors in the health insurance market. Given the budget office's cautious nature, it's an understandable choice. But it may not actually tell us all that much about the practical reality of the provision and its probable costs. As yesterday's report noted, "the government has only limited experience with this type of program, and there are many uncertainties about how the market for health insurance will function under the ACA and how various outcomes would affect the government's costs or savings for the risk corridor program." An experience similar to Medicare Part D's is one possible outcome. But I'm not sure it's the most likely one. 

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  1. You know, if I pay myself $10, I’m not actually $10 wealthier.

    1. It’s a shame this is no more widely understood.

    2. Yes, but the point is that if you are forced to pay me $10, then I’m wealthier. 😉

  2. The 21st century model. Socialize costs. Privitize profits .Its a nice gig if you can get it.

    1. Actually, you could argue it’s kind of a 1939 model.

      1. You know who else “modeled” something new starting in 1939…

        1. Glamour magazine?

        2. Igor Sikorsky?

        3. Krupp steel?

  3. Right, because government programs so often cost less than expected!

  4. Bailouts are always good. Just like bailouts of individuals. As we all know, people on welfare all turn their lives around and become totally productive members of society, repaying the cost of their welfare by eleventy billion-fold.

      1. For each person fraudulently collecting disability, there are many people benefiting. For instance, that job the not-really-disabled person isn’t working in frees up a job for someone else. And that money we give the fraudulently disabled, that gets injected into our economy! Win, win, win!

        1. It’s fraudulent disabilities all the way down!

          1. I’ve heard this is THE big scam right now. Not that there aren’t some disabled on disability, of course. But I bet it’s close to half or “better” who are not really unable to work.

            1. Like that marathon-running disabled policewoman.

              She should be put to work generating power on a big hamster wheel.

            2. disability – the new unemployment. Complete with ads from lawyers who will help you get yours.

              1. It’s more money than SS, too, it sounds like, plus all the other “benefits” recipients become eligible for. If the rumors about this exploding are true, doesn’t that mean we’re in for SS implosion much sooner than expected?

                1. I’m of the opinion that, unless your condition amounts to something tantamount to a coma or severe brain damage, you shouldn’t be eligable for ‘disability’ so long as there is some task you can undertake for renumeration, even if it is *gasp* is a different line of work or for less pay.

                  1. I’m of the opinion that, unless your condition amounts to something tantamount to a coma or severe brain damage

                    What about a nervus condishun that makes you angry at being told you have to work for getting paid? Huh, what about that?

                    1. What about a nervus condishun that makes you angry at being told you have to work for getting paid? Huh, what about that?

                      Nope, not good enough.

              2. Like the disabled truck driver I met who now drives his RV all over this great nation?.

  5. “Health insurers got nervous, issuing talking points suggesting that repealing the provision might result in insurer insolvency.”

    It’s entirely possible that they’re not bullshitting about that.

    I think they would dramatically shrink the number of policies they were willing to write before they went the way of Lehman Brothers, but just because a boy has cried wolf so many times, that doesn’t mean there is no wolf this time.

    If their profits for calendar year 2014 are predicated on people with preexisting conditions not costing much from day one and young healthy people spending thousands on insurance they don’t need out of fear of a pittance of a penaltax? Then I don’t know if that means insolvency, but it’s not a business model I want to depend on.

    Whatever politician thought this system up must not have had any idea about to run a business.


      1. Oops, I hit mute, sorry.

  6. Translation of “risk corridor”: your asshole and colon. Bend over!

    1. “OOOOOOOOOOOH! Rockin’ down the highway!”

      /Doobie Bros.

  7. OK, once more:

    CBO Says Obamacare’s Bailouts Might Make the Government Money.

    Shorter CBO: “derp!”

    It’s getting harder and harder not to eat a bullet for breakfast. Especially when the Reason squirrels fuck with me…

    1. If the Squirrels are your undoing, you *might* have some bigger unresolved issues. Just sayin’.

    2. Just remember that “might” is basically synonymous with “might not” (for all intensive porpoises), and it makes perfect sense.

      1. I really hate those methodical dolphins.

  8. I was a partner in a financial firm during the last financial crisis. We saw it coming, warned our clients, and even made some money off of it. We required no bailout and would not have had the pull in Washington to get one if we had. We did all the right things, and what happened? Our bailed out competitors, having been annointed with the “Too Big To Fail” label, had a much easier time keeping customers and recruiting brokers, and we had a much harder time because we had no implicit backing from the government. That’s the kind of cost you never hear about with bailouts, and its always borne by people who aren’t at fault and did the smart, responsible things.

    1. Said this when the big banks were failing/in trouble. They should’ve all been allowed to fail, then the smarter, more agile mid-to-large banks (including some larger, less risk-happy banks) would’ve cleaned up. I also imagine things like lots of empty houses sitting unoccupied and unowned, essentially, wouldn’t have happened either, because assets would’ve been sold off in liquidation.

      Instead, we reward the dumb and dishonest, and we all pay a much, much higher price for financial services, homes, etc. than we would otherwise. Thanks, government!

      1. IIRC the diffuculty of liquedating the housing market has largely stemmed from the way MBS work and the lack of clarity on who exactly owns that mortgage after it is chopped up.

        1. It’s also the reduced motives. If your financial house is in dire straits and you need cash, you’ll dump the inventory as quickly as possible. If you’ve been bailed out, why not sit and wait for the market to bounce back some? Or for time to change the laws in your favor?

        2. the lack of clarity on who exactly owns that mortgage after it is chopped up.

          The clarity would be easily found by those who would have wound up not getting paid.

          The biggest difficulty was idiotic grandstanding by state politicians who made the foreclosure process slower and more complicated on purpose. The whole “no foreclosures on my watch” form of governance.

        3. the lack of clarity on who exactly owns that mortgage after it is chopped up.

          Why do we not have this lack of clarity on mortgages that are PAID (aka the vast majority of them)?

      2. I said the same to a buddy of mine who is a big shot analyst. He responded if ‘we don’t do anything it’s very bad and that ‘you can’t have pure free-markets.’


    2. I sold and bought a home at the beginning of the last financial crisis. I saw it coming, was able to sell before things got too bad, was able to buy at a bargain. I borrowed within my means and have never had less than 30% equity in my house, even at the last downturn. I required no bailout and borrowed about 80% of what the bank was willing to lend me. I did all the right things, and what happened? I got to pay so my neighbors who borrowed recklessly and beyond their means could get HAMP and HARP deals. Chocolate Nixon is allegedly all about fairness. Why is it fair that I have to pay to bail them out? I guess I should have leveraged to the hilt and bought a bigger house.

      1. It’s fair because you have the money.

    3. That’s the kind of cost you never hear about with bailouts

      Well, to be fair, you do hear about it in some circles, and did, but from my understanding, those people you heard it from are racist teabaggers. So there’s that.

  9. Re: Illustration of ACA Risk Corridors

    Would someone *kindly* explain how this scheme was devised?

    If I arbitrarily changed the -/+3% to -/+4% and the 20/80 to 30/70, would people still say “The provision was generally expected to have no budgetary effect”?

    1. Per my post above, the assumption was that insurers on average would get their rates right. So they would write checks to one another, avoiding any budgetary impact. If, as appears to be the case, insurers generally drank the kool aid about getting all of these young, healthy members, then the current exchange rates are on average too low, and thus a “bailout” is coming.

      That’s why the risk corridors only last for a few years — it’s a break-in time for insurers to zero in on the correct rates. Meaning, higher. Much higher.

    2. er, post below…

    3. It “has no budgetary effect” in the same sense that a game where you pay $1000 to have a one in a million chance at winning a billion dollars has no effect on your financial situation. The expected value is zero.

      Of course, if you believe volatility and uncertainty are negative effects in themselves, that changes the calculation a bit. The change you’re proposing here would dampen the volatility.

  10. See, if I wrote for Reason this is the image I would have used for an alt-tex.

    Missed opportunity Peter.

  11. Since I’m almost certain to win two hundred million in the lottery, I might as well go ahead and order that Ferrari now.

    1. Ordering now will actually improve your lottery chances.

    2. Interstate 95 is now your risk corridor. Godspeed.

  12. It makes perfect sense.

    1. Create regulations that causes medical insurance companies go broke.

    2. Bailout medical insurance companies but don’t change the regulations that made them go broke in the first place.

    3. Profit!!

    What could possibly go wrong?

  13. If I was an insurance company CEO, I’d make sure I didn’t go over that 8% profit mark. I’d find a way to send all that “extra” profit back to my customers. I’d be buying “goodwill” at an 80% discount.

    1. Exactly. I’m sure Cass Sunstein approves this “nudge”.

    2. Fuck your customers. Just pay it to yourself and your cronies on the board. It is not hard to figure out how to reduce your “profits”.

    3. It doesn’t work that way — it’s not about “profit” but about the annual cost of covered members.

      Meaning, part of the ACA is that insurers have to provide disease and procedure codes for those members, which are then put into an actuarial formula to determine a normalized cost of their member population. This is compared to the rates charged, and thus whether they are writing a check or receiving one.

      If insurers on average get the exchange prices right, they end up writing checks to one another. If on average they underestimate, then bailout. Overestimate and the government keeps the difference.

      Insurers’ actual P&L is immaterial — this is a way to socialize losses due to adverse selection. It’s not that this isn’t a bad idea, but it has to be taken in context of the larger bad idea that is the ACA — trying to mitigate the foreseeable consequences of Community Rating and Guarantee Issue.

  14. Free market solution, bitchez!

  15. Does the CBO report acknowledge the current facts on exchange enrollment (even though they are admittedly incomplete) don’t support the comparison to the Medicare Part D experience? If they don’t acknowledge this, and try to explain it or control for it, then their analysis is entirely useless.

    1. …their analysis is entirely useless

      Of course it is.


      1. Wow, so in 2009 (i.e. after financial crisis, so no complaining they couldn’t have seen that coming), they were projecting deficits of:
        2010: $703B
        2011: $498B
        2012: $264B
        2013: $257B
        The actual deficits were:
        2010: $1.294T
        2011: $1.299T
        2012: $1.086T
        2013: $680B

        I get this is hard, and I’m not blaming the CBO folks. But it’s kind of crazy to be placing much reliance on analyses with that kind of error rate.

        1. And as I said above, they probably made the most optimistic assumptions they possibly could justify.

        2. Garbage in = garbage out.

          The CBO works with the numbers it is given by the government.

  16. Part D actually offered subsidies to employers for maintaining existing drug insurance programs in order to keep that from happening.

    Which the CBO conveniently left OUT of its calculation which actually means the government did NOT make any money on Part D at all.

  17. Understand also that the CBO no doubt make ever possible positive assumption it could in an attempt to put lipstick on this pig and the numbers still came out this bad. Since everything associated with this bill has been “unexpectedly” much worse than even its critics predicted, these numbers are probably an unrealistic best case scenario.

  18. Does this analysis cover the net cost of the reinsurance program? It is my understanding that the reinsurance program will cover a substantial portion of any annual client cost over $ 45,000, up to $ 250,000.

  19. Only one ObamaCare story today, and it’s NOT about the fact that the ACA makes it advantageous to quit work and go on the dole?

    1. PM links and over in 24/7

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