Well whaddya know? The feds may have to pay $12B for Marco Rubio's #RiskCorridorMassacre stunt after all!


Long-time readers of this site may recall the infamous Risk Corridor Massacre of 2014-2015. Here's a very simplified backstory:

  • When the ACA was first developed and voted on, lawmakers knew that the disruption to the individual health insurance market was going to be pretty rocky for the first few years, so they put three types of market stabilization programs into place. They were known as the "Three 'R's"...Risk Adjustment, Reinsurance and Risk Corridors:

...Risk adjustment interrupts these cycles by doing exactly what its name implies. It adjusts for differences in the health of plans’ enrollees by redistributing funds from companies with healthier-than-average customers to plans with sicker-than-average customers. Such transfers could occur within or across health plan tiers in the exchanges (bronze, silver, gold, platinum). All the redistributed monies come from insurance companies in the marketplaces. No taxpayer bailout here.

Risk Adjustment is a permanent program, and while there've been a couple of lawsuits over the exact formula used, it seems to be working pretty smoothly for the most part.

...Reinsurance manages this risk by literally insuring insurance companies against it. Using fees collected from all the nation’s health insurance companies (essentially, insurance premiums paid by insurers), the federal government proposes to pay nongrandfathered insurance plans 80 percent of the costs between $45,000 and $250,000 experienced by any of its enrollees in 2014.

The federal Reinsurance program was sunsetted after three years (the end of 2016)...which was a major reason for the 25% average unsubsidized premium rate increase in 2017. This one really should never have been ended; in response, no fewer than seven states have reinstated their own version via 1332 waivers (Alaska, Maine, Maryland, Minnesota, New Jersey, Oregon and Wisconsin), with several more on the way (Colorado, Connecticut, Delaware, North Dakota, Pennsylvania and Rhode Island). State-level reinsurance programs have reduced unsubsidized premiums back down by anywhere between 5-25% depending on the state since 2018. Here's my explainer about how 1332 reinsurance waivers work.

And finally...Risk Corridors. As described back in March 2014 by the Commonwealth Fund:

Risk corridors are perhaps the most complicated of the Three R’s, but far from costing the taxpayers any money, the Congressional Budget Office (CBO) projects that this program could actually make the Treasury a tidy $8 billion profit. Because the ACA marketplaces are so new and the health risks of new enrollees uncertain, some insurance companies could make a windfall or lose their shirts in the early years of the rollout. This could encourage companies to set premiums higher than necessary just to make sure they aren’t among the losers.

To prevent this, the federal government has created a program under which it will collect money from plans sold in the new marketplaces with unexpectedly high gains and redistribute them to plans with unexpectedly high losses. If plans make or lose up to 3 percent more than expected, they keep the gains or eat the losses. However, if they make or lose 3 percent to 8 percent more than predicted, they give up 50 percent of the winnings or are compensated for 50 percent of their shortfalls above 3 percent. If losses or gains exceed 8 percent, the insurers give up or get back 80 percent of gains or losses exceeding 8 percent of the predicted amount. If the government collects more from winners than it has to pay out to losers, it keeps the balance. CBO thinks that’s likely—thus, the predicted profit for the federal government.

In some ways Risk Corridors are similar to Risk Adjustment, except instead of partly smoothing out the risk factor, it's the actual profits & losses which were supposed to be partly smoothed out. Like the federal reinsurance program, Risk Corridors was supposed to be a 3-year program only, covering 2014, 2015 & 2016 before being sunsetted.

The basic idea was this: Let's suppose the carriers expected collectively bring in a total of, say, $80 billion in 2014: $40 billion for half the carriers, $40 billion for the other half.

Let's then suppose that the first half (The Winners) seriously underestimated their profits: They actually ended up bringing in $50 billion (25% more than expected), while the other half (The Losers) severely overestimate: They only brought in $30 billion (25% less than expected). In that scenario, the Winners would've had to pay $6.44 billion into the kitty (50% of $2 billion + 80% of $6.8 billion). Meanwhile, the Losers would be owed $6.44 billion...paid for by the Winners.

If the Winners ended up with a real windfall, while the Losers only came up a little bit short, there'd be more money going into the pool than being paid out from it. This is the ideal scenario which government officials were crossing their fingers for back in early 2014, because if that had happened, the federal government would've ended up making a tidy profit.

The flip side of this is that if the Winners only brought in, say, 5% more than expected while the Losers earned, say, 20% less than expected, there'd be less money going into the pool than being paid out...which means the federal government was supposed to pay the difference.

Unfortunately, it's the latter that actually happened:

Today, HHS is announcing proration results for 2014 risk corridors payments. Based on current data from QHP issuers’ risk corridors submissions, issuers will pay $362 million in risk corridors charges, and have submitted for $2.87 billion in risk corridors payments for 2014. At this time, assuming full collections of risk corridors charges, this will result in a proration rate of 12.6 percent.

In other words, the "losers" are owed about $2.9 billion for 2014 losses, but there's only about $360 million available to pay them, or around 12.6 cents on the dollar.

Under the original terms of the ACA Risk Corridor Program, the feds were suppposed to pony up the remaining $2.54 billion from 2014...as well as the additional net losses from 2015 and 2016. The grand total amounted to around $12.3 billion in all. This sucks for the feds, but as with any investment decision, it was fully understood by all parties involved that there was no guaranteed of a positive return on investment. The insurance carriers all signed their contracts with the HHS Dept. understanding the terms, as did the United States Federal Government.

However, in December 2014, those terms were changed...in the middle of the second Open Enrollment Period:

Several causes underlie the 2014 funding shortfall, and these factors will continue to have implications for 2015 and 2016 receivables.

The risk corridor program was designed as a two-sided program requiring insurers with better-than-expected financial results to pay the federal government a portion of their earnings, while at the same time requiring the federal government to reimburse a portion of lossesto insurers with worse-than-expected financial results. The program was not originally required to be budget neutral. In other words, payments out of the program could be greater than payments in.

That started to change in 2014, well after premium rates were set, when federal regulators began to talk about budget neutrality. This concept became official with the Cromnibus bill passed by Congress in late 2014. That bill required that 2014 risk corridor receivables paid in 2015 be funded through payables into the program from other insurers. Even before the 2014 funding shortfall was officially announced on October 1, 2015, many industry analysts foresaw that program receivables would far outstrip payables.

The "Cromnibus" bill, as you may recall, was passed at the last minute in December 2014 as a way of keeping the federal government open for awhile. One of the ugly parts included, insisted upon by the House Republicans, was a provision specific to the ACA's risk corridor program which prevented the federal government from covering the difference if "winners" came up short. Instead, they were reduced to crossing their fingers and hoping that payments in would be higher, making it a moot point.

As I noted above, it was not a moot point: Losers far outweighed winners in 2014, 2015 and 2016, to the tune of $12.3 billion which was legally and contractually owed to dozens of insurace carriers around the country never being paid out to them.

Large insurance carriers with plenty of cash reserves were able to eat the losses, but smaller carriers didn't have that luxury. As you may recall in the late summer and early fall of 2015, nearly two dozen small insurers went bankrupt within the same 3-4 month period; I called this the Risk Corridor Massacre. The results were pretty devastating.

  • up to 800,000 people nationally lost their insurance coverage, on very short notice, and were forced to scramble to find alternate coverage
  • the new coverage these people ended up with is generally more expensive, and in many cases has worse networks
  • the federal government has to therefore pay out more in premium subsidies to cover the increased costs as benchmark plans were increased
  • over a dozen insurance carriers went out of business, meaning hundreds of people lost their jobs
  • the loss of over a dozen carriers means less competition in those markets, therefore less competition, therefore higher premiums, therefore even more cost to the federal government in subsidies to make up the difference
  • since all of the carriers which went out of business were little guys, this also means the big kahunas suck up even more market share
  • the original $2.5 billion which Rubio was supposedly trying to "save" taxpayers ends up being paid out anyway; and
  • it's possible that, in addition to all of this, assuming the government decides to just concede the point (which, by all rights, they should), it's conceivable that Marco Rubio's "genius" stunt from December 2014 could also very well end up costing taxpayers $2.5 billion MORE than it would have to just let the government make the payments they were supposed to in the first place.
  • ...all so that Marco Rubio could earn a couple of political brownie points to help him win the GOP nomination for President...which he appears to be failing at anyway.

I spent a lot of time pinning the blame for the Risk Corridor Massacre on Marco Rubio, even going so far as to refer to it as the "Rubio-Con"...mainly because he was the one running around taking credit for cutting the program off at the knees, as is clearly shown in the FOX News clip above. A side irony here is that it later turned out that Rubio wasn't really that involved in the Massacre after all:

Sen. Jeff Sessions (R-Ala.), then ranking member of the Budget Committee, and Rep. Fred Upton (R-Mich.), chairman of the Energy and Commerce Committee, came up with a new strategy of attacking the legality of the payments. They also enlisted the help of then-Rep. Jack Kingston (R-Ga.), who chaired the appropriations panel that funds the Department of Health and Human Services and the Labor Department.

The lawmakers questioned whether the payments were actually appropriated correctly —forcing the administration to make changes that ultimately allowed the lawmakers to checkmate the administration. In effect, the Centers for Medicare and Medicaid Services (CMS) was forced to admit that the ACA did not automatically appropriate the funds, but it was subject to discretion of Congress. (A Government Accountability Office opinion requested by Sessions and Upton backed up much of the GOP contention.)

In any event, that brings me to the lawsuits. As noted in the bold-faced bullet points above, the insurance carriers had what should have been rock-solid contractual proof that they were still legally owed that money (I said $2.5 billion at the time, but again, it would eventually amount to over $12 billion). You can't change the terms of a contract in the middle of the contract period just because you feel like it. Naturally, they sued the federal government for doing so, as noted by U of Michigan law professor Nicholas Bagley at the time:

If the administration wins, others may become leery of contracts with the federal government, fearing agreements may later be blocked by an opposing political party, legal experts said.

“When the federal government has made a promise to pay and doesn’t, how do you enforce it?” Mr. Bagley said. “It makes it harder for parties to trust the government.”

With that in mind, Bagley had been pretty confident that the carriers had a strong, solid case...and in fact one federal court did rule in favor of the carriers:

The Court finds that the ACA requires annual payments to insurers, and that Congress did not design the risk corridors program to be budget-neutral. The Government is therefore liable for Moda’s full risk corridors payments under the ACA. In the alternative, the Court finds that the ACA constituted an offer for a unilateral contract, and Moda accepted this offer by offering qualified health plans on the [exchanges].

Today, the Court directs the Government to fulfill [its] promise. After all, “to say to [Moda], ‘The joke is on you. You shouldn’t have trusted us,’ is hardly worthy of our great government.” Brandt v. Hickel, 427 F.2d 53, 57 (9th Cir. 1970).

This is exactly right. Even before the first risk corridor lawsuit was filed, I argued that insurers had viable claims against the federal government for any deficiencies. I’ve expanded on that view in an article in the New England Journal of Medicine and in extensive coverage on the blog. It was only a matter of time before a court entered a money judgment against the United States.

Unfotunately, what should have been an open & shut case ended up with a pretty shocking decision:

We have a decision in the risk corridor cases from the Federal Circuit. Insurers lose: they can't recover a dime. Judge Newman dissents. https://t.co/qDKRwRRPJD

— Nicholas Bagley (@nicholas_bagley) June 14, 2018

As Bagley noted almost exactly a year ago:

...Even as congressional Republicans kicked up a kerfuffle over “bailouts,” HHS was reassuring insurers that the agency would “record risk corridors payments due as an obligation of the United States Government for which full payment is required.” Knowing full well that it had an obligation to pay, Congress shut off the funding stream in a deliberate effort to sabotage the ACA.

And it worked! Loads of co-ops went under in response to the unexpected financial hit. Did Republicans in Congress care that they were reneging on a promise? Not a bit. They saw a chance to hurt Obamacare, and they took it.

...I’m again at a bit of a loss. You don’t have to use magic words to enter into a contract. You just have to make a promise.

...From there, it’s on to the Supreme Court. Who knows if it’ll agree to hear the case? It’s not an implausible candidate for review, and lord knows the Court can afford to take more cases. But the Court might be gun-shy about wading into another case about the ACA.

So this isn’t the end of the road for insurers. But it’s a Michigan-sized pothole in that road. And the opinion reflects a disturbing unwillingness to hold the government accountable for its promises. That’s a point Judge Newman made in concluding her dissent.

This was the last I had heard about the Risk Corridor Massacre lawsuits, and to be honest, I pretty much forgot about it...until this morning:

Big news: SCOTUS is taking up the ACA risk corridors case. GOP's decision to stymie that program arguably did the most damage to the ACA marketplaces. https://t.co/VeMRcd5MYn

— Bob Herman (@bobjherman) June 24, 2019

Well I'll be damned. There's no way of knowing what the outcome will be, of course, and even if SCOTUS rules in favor of the insurance carriers, it won't do anything to repair the damage caused in 2015-2016. The carriers which went belly up are long gone, so it's their creditors who will see the payments.

Even so, this is an important case given how shaky the ground is for the Full Faith & Credit of the United States Government going forward.