A Little Choice About PPACA Risk Corridors That Could Have Big Consequences

The Patient Protection and Affordable Care Act has made even the most technical questions of healthcare coverage regulation newsworthy. Policy questions that would be noticed only by experts and interested parties in the regulation of Medicare or Medicaid, even with billions of dollars in taxpayer or beneficiary money at stake (think DSH and the transition to MS-DRGs), are front-page news when they have a connection to the PPACA.  The best example may be the recent attention to the PPACA’s risk corridors, which was the subject of an op-ed by Senator Rubio last week that led to a lot of discussion in the press.  (For background on the risk corridors, as well as their cousins, the risk adjustment program and transitional reinsurance, see the helpful efforts of Seth Chandler, Mark Hall (also here), and Timothy Jost.)

In that spirit, I noticed in my research a tiny regulatory policy choice made by the HHS about the risk corridors that may wind up making news one of these days, in a lawsuit or otherwise.  It has to do with the way the risk corridor payments are calculated, and could have an impact on the extent of taxpayer liability for risk corridor payments. 

The question is whether to calculate eligibility for risk corridor payments on a more or less granular level, that is, plan-by-plan or state-by-state (for each issuer).  If plan costs tend to equal expected costs system-wide, as seems to have been assumed by the HHS and industry in setting the policy, then I do not expect the issue to make much of a difference.  But  Chandler has suggested that plan costs could tend to exceed expected costs system wide because, for example, the pool of beneficiaries in the exchanges may be less healthy than was anticipated.   Senator Rubio thought the same thing would happen because of the President’s “like it/keep it” fix.

If they are right, then the level of granularity on which the HHS calculates risk corridor payments will influence the taxpayers’ liability, because an issuer is eligible for payment only if its actual costs exceed its expected costs by a certain threshold, specifically, by more than 3%, and that amount jumps when the difference becomes really large (8%).  As a result, if you assume a normal distribution of actual costs across plans that tends, on average, to exceed expected costs by less than 8%, then the more granular the calculation method the more plans will be eligible for payment from the government (because aggregation will wash out outliers).  (If expected costs exceed actual costs by more than 8% then a more granular method would reduce, rather than increase, government payments, depending on the distribution.)

The HHS initially said that it would calculate risk corridor payments plan-by-plan, so that one issuer with multiple plans in a state might receive payments for some of its plans, make payments for others, and neither make nor receive payments for still other plans.  That is the most granular method.  Commenters—mostly insurance companies—complained that this was administratively not feasible because of the way they collect data about their plans, asking for a more granular method, such as state-by-state.  The HHS said its hands were tied: it had to use the plan-by-plan method, rather than a less granular method, because the statute required it, specifically, because the “statutory language governing risk corridors does not afford the necessary flexibility.”  77 Fed. Reg. at 17,238.  That rationale was the only one the HHS offered for rejecting commenters’ proposals to use a method less granular than plan-by-plan.

The insurers persisted and, in a relatively uncommon (though not unheard of) move, the HHS did an about face.  It issued an emergency regulation—without time for additional notice and comment—changing the calculation method to state-by-state within each market.  78 Fed. Reg. 15,544.  The HHS said it had changed its mind about the “flexibility” of the statutory language.

So will the HHS’s new policy, the one that it said was illegal before it adopted, be subject to legal challenge?  Time will tell; we won’t know if the choice actually hurts or helps insurers (and benefits or costs the taxpayers) until we find out whether and by how much insurers’ actual costs for operating plans from the exchanges exceeds their expected costs.  Come what may, I expect this question to serve as another example of how, in the world of healthcare payment decision-making, even the smallest choices can have big consequences.