Risky Business: Will Taxpayers Bail Out Health Insurers?

August 19, 2014

The Affordable Care Act imposes a number of requirements and restrictions on insurance companies, who stand to lose money if they enroll too many expensive people in their health plans. As such, the ACA established three mechanisms to handle insurers' risks: risk adjustment, reinsurance and risk corridors.

As NCPA Senior Fellow John Graham explains, two of those provisions -- reinsurance and risk corridors -- threaten to put taxpayers on the hook for insurers' losses through the end of 2016.

Concern about unexpectedly high insurance claims would typically lead an insurance company to purchase "reinsurance" policies from specialized firms, in order to protect themselves against losses. The ACA has a similar form of reinsurance, except that the government extracts a tax from all insurers (at $63 per insured person) to cover this risk. Supplemented with funds from the Treasury, reinsurance is set at $12 billion in 2014, $8 billion in 2015 and $5 billion in 2016, for a total of $25 billion.

The government, through the Department of Health and Human Services, has established a formula by which it will distribute reinsurance funds to insurers each year. However, there is a strong possibility that the reinsurance fund will not be sufficient to cover insurers' losses. Not only is there evidence that those insured by Exchange plans have more expensive drug costs than those in commercial plans, but only 28 percent of Exchange enrollees fall within the 18- to 34-year-old age range, far less than the 40 percent that had been expected.

If the reinsurance fund does not raise enough revenue and medical claims are higher than had been expected, Graham explains that insurers will turn to the risk corridor mechanism for additional funds. The risk corridors obligate taxpayers to compensate insurers for losses in excess of 103 percent of target costs. There is no limit to the amount of money that taxpayers may have to pay to compensate insurers for their losses.

Source: John R. Graham, "Risky Business: Will Taxpayers Bail Out Health Insurers?" National Center for Policy Analysis, August 2014. 

 

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