The Affordable Care Act (ACA) mandated that the Department of Health and Human Services (HHS) establish “Risk Corridors” to buffer insurers against high losses, keep premiums affordable and less volatile, and encourage participation in the health insurance exchanges. Deep Banerjee, a Director with S&P Insurance Ratings, joins to discuss S&P’s recent report suggesting the Risk Corridor Program could actually make the market less stable.

According to Mr. Banerjee, the Risk Corridor Program “is part of what is often referred to as the Three R’s – Risk Corridor, Reinsurance and the Risk Adjusters.” He says the Risk Corridor Program is a risk-sharing system that takes away some pricing uncertainty in the initial years of the ACA and encourages insurance companies to participate. Risk Corridors were designed so insurance companies that make higher profits would pay a portion of those profits into the program, while carriers who experience losses would receive a payout to offset some of those losses.

Mr. Banderjee says insurers made certain pricing assumptions for products based on the Three R’s. If any one of the Three- R’s doesn’t work as expected, the pricing assumptions are incorrect.

Mr. Banerjee says, based on the ACA, there is a requirement that Risk Corridors be budget neutral, however, that was not initially the case when the law was originally drafted. This change was made be Congress after the law was enacted. In the case of Risk Corridors, Budget neutrality means that in order to make payouts to insurers who had losses, there has to be enough money coming into the Risk Corridors. S&P believes the Risk Corridor Program is going to be underfunded for 2014.

The Centers for Medicare and Medicaid s (CMS) services has, should the Risk Corridor Program be underfunded in 2014, they will look at receipts in 2015 and then first pay out for 2014, according. Speaking for S&P, Mr. Banerjee says “we do not expect insurance companies to make enough profit in future years to cover the deficit of 2014, at least in the individual lines of business.” The CMS has may change the Risk Corridor calculations “backing in to make the program budget neutral.” However, the “uncertainty will mean that the premiums charged to consumers will be inconsistent “ and for insurers there will be volatility in their operating performance and a potential strain on their capital.

For more information on the Affordable Care Act and S&P’s report, visit the S&P website or the On Demand Library.

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