A Taxpayer Bailout for ObamaCare- The Next Too-Big-to-Fail Train Wreck On The Horizon

Arnold Ahlert / Canada Free Press

An American public already reeling from the catastrophic rollout of ObamaCare will more than likely be hearing an unfamiliar term being bandied about in the new year. “Risk corridor” refers to a provision in the law that allows the government to “stabilize” premium costs for insurance companies during the first three years of the healthcare rollout.

If insurance companies’ “target” costs for providing healthcare has been miscalculated, the Department of Health and Human Services (HHS) will intercede on their behalf. Syndicated columnist Charles Krauthammerilluminates the nature of that intercession. “The insurers understand that they’re going to be completely ruined,” Krauthammer explains. “And what’s going to happen as a result of this? There’s only one way out, a huge government bailout of the insurers is waiting at the end of next year.” More accurately, it will be a taxpayer-funded bailout, similar to the ones given to the banks and the car companies.

Risk corridors were established to protect insurance companies that signed up too many sick people, relative to the number of healthy enrollees. They were part of asystem that also included two other concepts known as “reinsurance” and “risk adjustment.”

The reinsurance part of the equation initially compensated insurance companies for enrollees whose costs exceed $60,000 per year. For 2014, that compensation is funded by a $10 billion fund, fed by a $63 tax that has been levied on all healthcare plans. And while the program collects those taxes even from large employer-sponsored plans, payouts only help to underwrite the costs of individual and small-group plans.

Risk Corridors

Risk adjustment refers to the idea that, after insurance companies have calculated all the payments they have made for 2014, those that paid out less than the average cost of compensation would “redistribute” that largesse to companies that paid out more. This redistribution was designed to dis-incentivize insurers from signing up only low-risk healthy people. This part of the law is permanent, and its zero-sum feature is intended to spread risk across the entire spectrum of carriers.

Which brings us to the risk corridors. Risk corridors only apply to insurance programs being sold on the ObamaCare exchanges. It is similar to the risk adjustment concept in that it is also an attempt to even out insurers’ profits and losses. Those insurers who set their rates too high are required to pay a portion of that excess profit to the government. Those that set their rates too low will have a portion of their losses mitigated by a government payout.

As previously noted, the formula only affects adjustments for the first three years of ObamaCare’s implementation. The Incidental Economist’s Adrianna McIntyre provides a chart showing the payout structure. If insurers’ calculations fall between 97 percent and 103 percent of their actual costs, no action is taken. For those whose costs range from 103-108 percent, a 50 percent bailout applies to the amount in excess of 103 percent. Above 108 percent, HHS pays 2.5 percent of target, plus 80 percent of the costs in excess of 108 percent.

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