Obamacare’s Risk Adjustment Payments Should Have Stayed Frozen

Obamacare’s Risk Adjustment Payments Should Have Stayed Frozen

In early July, the Trump administration announced that it would suspend $10 billion in transfer payments to insurers after a federal court ruled that Obamacare’s “risk-adjustment” program was flawed. The program authorizes the federal government to take money from exchange insurers with an above-average share of healthy enrollees and redistribute it to insurers with a disproportionate share of sick enrollees.

But just over two weeks later, after a backlash from insurers and Democrats, the administration reversed course and agreed to reinstate the risk-adjustment program.

This capitulation was a mistake. The risk-adjustment program has failed to spur competition among insurers and hold down premiums — two of its primary goals. The Trump administration should have stuck to its guns — and ended its micromanagement of the insurance market.

Last month’s controversy arose from a non-profit health insurance co-op’s lawsuit against the federal government. The co-op, New Mexico Health Connections, was established in 2012 and funded with $77 million in low-interest federal loans authorized by Obamacare.

Health Connections claims the government’s risk adjustment formula “penalizes insurers who keep premiums low through efficiency and innovation.” The program took roughly $30 million from Health Connections between 2014 and 2016.

A federal district court agreed with the co-op, calling the federal government’s redistribution formula “arbitrary and capricious.” So the Trump administration suspended the program.

Obamacare’s proponents alleged that the move would drive up premiums, reduce choices, and further undermine the health law.

But the administration’s detractors don’t understand how Obamacare’s risk-adjustment program works — or, more appropriately, doesn’t work.

The program was designed to counterbalance some of Obamacare’s other heavy-handed insurance regulations. The community rating mandate, for example, forbids insurers from pricing their plans based on the actual health status of their enrollees. Insurers may only vary premiums according to geography, age, and tobacco usage. And their pricing freedom is limited on those fronts, too — the old may pay no more than three times what the young do, and smokers only 1.5 times more than non-smokers.

Obamacare created the risk-adjustment program to discourage insurers from “cherry-picking” healthy enrollees. Those that ended up with sicker-than-average beneficiaries could count on the government to send them some of the funds that other insurers who were “lucky” enough to attract healthy enrollees collected.

It sounds simple, enough. But as with every other government intervention in the insurance market, it’s impossibly complicated.

Each year, insurers must send data to the Centers for Medicare and Medicaid Services about their premiums and their patient risk profiles in each state. CMS crunches the data and uses an arbitrary, complex formula to decide how much each insurer must either pay in, or take out, of a risk-adjustment fund.

The risk-adjustment program was supposed to compensate the “losers” in Obamacare’s exchanges — those who spent a lot of money covering the care of sick individuals. But in reality, the program has functioned more like a reverse Robin Hood scheme — taking money from smaller insurers, like New Mexico Health Connections, and handing it over to industry giants.

Now that the risk-adjustment program has been reinstated, New Mexico Health Connections will retroactively owe another $5.6 million in payments for 2017. On the other hand, Molina Healthcare — a $20 billion company with the most enrollees on New Mexico’s exchange — stands to gain $5.2 million.

This phenomenon is playing out across the United States. Aetna will gain more than $6.5 million from the program in Connecticut, while local insurer ConnectiCare has to pay back $12 million. Blue Cross Blue Shield of Florida will receive an eye-popping $685 million, while the Florida Health Care Plan ponies up more than $7 million. And in New York, UnitedHealth Group will receive $11 million, while start-up Oscar Health pays $47 million.

Retroactively taking millions of dollars from small insurance companies is hardly the best way to encourage more competition on the exchanges. In fact, the risk-adjustment program has contributed to the collapse of several Obamacare-created co-ops — and driven competitors out of several exchanges. Enrollees in 52 percent of counties across the country have only one insurance company to “choose” from on the marketplaces.

Consequently, there hasn’t been enough competition to keep premiums down. Individual market premiums more than doubled from 2013 to 2017.

It’s not surprising that the country’s biggest insurance companies screamed about the Trump administration’s decision to suspend these payments. They’re on the receiving end of so much of the money.

What is surprising is how many progressives, who supposedly want to strengthen the exchanges, joined them.

There’s no need for this massive, complicated, anti-competitive risk adjustment program that hurts smaller insurers. It was a mistake for the administration to reinstate it.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.