Arches website reads, “Unfortunately, today we were asked by the State Department of Insurance to wind down our business due to a shortfall in the federal governments “Risk Corridor” program, and other factors beyond our control.”
So what’s a “Risk Corridor” and how did it kill Arches?
When the Affordable Care Act (“Obamacare”) was passed, a number of new restrictions were imposed on insurance companies. As of 2014, insurers had to accept every applicant, regardless of health status or preexisting conditions, and could not charge more for people based on medical history. It was foreseen that many people who had never had insurance before would suddenly sign up, making it extremely difficult to predict how much it would cost to provide medical care. If insurers’ premiums were set too low, they would not have enough money to cover medical expenses and would either be forced out of business or would need to substantially increase premiums the following year to reflect the higher costs. If the premiums were too high, of course, they would lose their competitive advan
The new restrictions introduced dozens of unknowable variables into actuaries’ calculations. It was impossible to predict what would happen. So in an effort to protect insurers from high losses in the first few years of the program and to encourage insurers to participate in the exchanges, Obamacare authorized three premium stabilization programs: risk adjustment, reinsurance and risk corridors (three experimental programs of undetermined efficacy designed to mitigate unpredictable repercussions of an unknown and untested solution). The three programs are Risk Adjustment, Reinsurance and Risk Corridors.
Risk adjustment was designed to be a method of paying insurers based on their enrollees predicted medical costs based on risk factors known to be associated with medical claims. The idea is to not penalize insurers that enroll a high number of high-risk people by receiving payment transfers from insurers with relatively low-risk people.
Reinsurance helps to compensate insurers when enrollees experience unexpectedly high medical costs due to a catastrophic illness or accident.
Risk Corridor, the topic that will lead this rambling narrative back to our local insurer, Arches, is a plan whereby the government reduces insurers’ risk by helping offset high losses and sharing in high profits. They are based on how allowable costs compare with a target cost. If an insurer’s ratio of allowable costs relative to the target amount is high (read: their premiums didn’t cover their claims) they will receive a partial reimbursement for those losses. Those whose allowable costs relative to the target amount is low (read: they made too much money) will be charged an amount to offset their profits. The idea was that by eliminating pricing uncertainty with the new program and an unknown, untested population, insurers would be encouraged to participate in the new market.
The issue with risk corridors, though, is that they represented an unlimited taxpayer liability. What if all the payers’ costs were higher than expected? Who is on the hook? We, the People.
Well, in December 2015 the CROmnibus passed (to keep the lame-duck Congress afloat in 2015), and a provision was inserted into that bill that removed the taxpayer liability from the Risk Corridor provision of Premium Stabilization program, which had come to be seen as a bailout for the insurance companies. Many more insurance companies have lost more money than they have made on the exchanges. The new provisions require any adjustments between exchanges to be budget neutral.
The fact that half of the exchanges have gone out of business since Obamacare was enacted provides us with a fascinating window into economics, politics and social perceptions. The success of Obamacare rested on the premise that high-risk, expensive enrollees can be absorbed into the system by removing the disincentives (expense) of caring for them and by tinkering with insurers’ margins and distributions of profit.
Essentially, then, without the Risk Corridor bailout escape hatch, Arches (and other exchanges, as well) simply cannot exist. That is, not without heavy taxpayer subsidization. Arches was founded and run by good people with good ideas, and it provided coverage and care for lots of people. But, like many other aspects of healthcare in the United States, it just couldn’t pay its own way.