Return of the Risk Corridors
April 30, 2020
The Supreme Court just ruled that insurers are owed $12 billion for losses they incurred in the early days of the Affordable Care Act. What are the origins and implications of this case?
Listen to the full episode below or scroll down for the transcript and more information.
Larry Levitt: It’s hard to imagine a more technical policy issue than risk corridors clashing with the most divisive political issue of the last couple decades.
Dan Gorenstein: For a few hours this week, the Affordable Care Act stole headlines away from the coronavirus…at least in health policy circles.
In an 8-1 decision, the Supreme Court ruled that the federal government owed health insurance companies $12 billion because, as Justice Sonia Sotomayor wrote, “The government should honor its obligations.”
The case involved a pool of money put in place to help insurers share in the pains and the gains of the ACA. It’s also known as the risk corridors program…the kind of name only an actuary could love.
I’m Dan Gorenstein and this is Tradeoffs.
We wanted to try something a little different. So we posed a challenge to Kaiser Family Foundation’s Larry Levitt: give us a rundown of this week’s Supreme Court ruling on risk corridors in five minutes or less.
He wholeheartedly agreed.
LL: If we talk about risk corridors for more than five minutes, you should probably shoot us.
DG: We had our producer Andrew Parrella put us on the clock.
No 37-part Twitter threads allowed here, Larry. Are you ready? Do you think you can live up to this?
LL: I’m game.
Andrew Parrella: And we’re counting down…now.
DG: Fine. First question, what are risk corridors? It sounds sort of like a lame feature in a high school haunted house.
LL: The whole premise of the Affordable Care Act was to give people a choice of private insurance plans to get them covered. And you need private insurance plans to participate if you’re going to do that.
But insurance companies just had no idea how this was all going to work. They had to set premiums in advance. That’s what insurance companies do. They try to forecast what things are going to look like next year and set a premium in order to cover their costs and, of course, profits. So insurance companies were kind of flying blind. I mean, it was entirely possible that insurance companies were worried that they were going to set premiums too low and lose a lot of money, but it was equally likely that they were gonna set premiums too high and make a boatload of money.
DG: Just to be clear….these were payments that spread the risk around, right?
Insurers who did worse than expected received those payments. Those that did much better had to make them…leaving no insurer too far in the red or the black.
Ok, so real quick here, Larry, since, the clock is ticking…
LL: We haven’t even gotten to the math yet
DG: I’m trying to avoid the math as much as possible.
How did these risk corridors end up in the highest court in the land?
LL: Well, so that that is a long story, and I know we only have a couple minutes left. So, you know, insurance companies were worried about setting their premiums too low and losing a lot of money. And that’s exactly what happened. Almost all of the insurance companies that participated in the Affordable Care Act in the early years lost a ton of money.
DG: Because they underbid.
LL: They underbid. Now, they weren’t as worried about that as you think they might have been because of the risk corridors. With the risk corridors, the insurance companies were expecting that the federal government was going to cover some of their losses. Then this ran into the politics of Obamacare.
Republicans in Congress, particularly Marco Rubio, a Senator from Florida, pushed back on these risk corridor payments and called them a bailout of insurance companies. And ultimately, the insurance companies that lost money got paid pennies on the dollar.
AP: Half-way through, Dan – two and a half minutes.
DG: Right, thanks, Andrew.
And as far as the insurers were concerned, this was the federal government going back on its promise to provide some financial stability in exchange for entering into this new market. So they went to court?
LL: Absolutely. I mean, from the insurance company’s perspective, the rules of the game changed in the middle of the game. So, when private corporations have that happen to them, they sue.
DG: So they won. Specifically what was the verdict?
LL: So the justices ruled almost unanimously with one dissent that insurance companies are owed $12 billion from this risk corridor program.
DG: And give us the rundown real quick here. Who are the winners? Who are the losers with this $12 billion ruling?
LL: Well, you know, taxpayers at some level are the losers here because the money has to come from from somewhere. The winners are certainly insurance companies. I mean, they are getting a big windfall here.
DG: Like in some weird bizarro universe, it seems to me like Senator Rubio’s claim about this being a bailout for insurers…almost manifests itself as, as you said earlier, a windfall for the insurers. Whereas if this money had been distributed as it had been intended, this actually may have resulted in greater competition in the individual market.
LL: Oh, yes. If this money had been paid out when it was supposed to be in the first three years of the Affordable Care Act it would have helped to stabilize the market, which would have led to more competition, probably ultimately lower premiums for consumers. Now, it’s mostly a windfall for those those insurers.
DG: Ok. Final question,
AP: That’s five minutes, Dan. We’re going to have to wrap it up now.
DG: Andrew, I just have to ask him this one last question.
AP: You got 60-seconds.
DG: OK, Larry, the ACA’s day in court is far from over. There’s this other Texas case that the Supreme Court is expected to hear later this year. And many see that one as the real the big enchilada, as it were. Can you real quick tell us what’s at stake there?
LL: I mean, this lawsuit that the Supreme Court just decided is is kind of a sideshow compared to the the big kahuna lawsuit, which would potentially overturn the Affordable Care Act entirely. So that lawsuit, which the Supreme Court is expected to hear this fall and decide on next spring, centers on the individual mandate that required people to get covered or pay a penalty.
So the argument is the individual mandate is unconstitutional and the whole rest of the law can’t be separated from the individual mandate so that’s unconstitutional as well. A lot of legal experts don’t think this lawsuit holds water, but it’s in front of the Supreme Court and who knows what’s going to happen.
DG: It’s always been strange to have the ACA in a near constant state of legal limbo, but perhaps never more so than in the midst of a pandemic with millions of Americans newly unemployed and in need of insurance.
Larry Levitt, thank you very much for joining us on Tradeoffs and talking to us today.
LL: Thanks, Dan.
DG: And this is Tradeoffs.
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Opinion of the Court (Nos. 18–1023, 18–1028 and 18–1038) (Supreme Court of the United States, 4/27/2020)
Supreme Court Rules That Insurers Are Entitled To Risk Corridors Payments: What The Court Said And What Happens Next (Katie Keith, Health Affairs, 4/28/2020)
Supreme Court Rules for Insurers in $12 Billion Obamacare Case (Adam Liptak, New York Times, 4/27/2020)
Opinion analysis: Decisive win for health insurers seeking compensation for ACA losses (Amy Howe, SCOTUSblog, 4/27/2020)
Explaining Texas v. U.S: A Guide to the Case Challenging the ACA (MaryBeth Musumeci, KFF, 3/10/2020)