For the first time, the Obama administration has offered a plan for funding the health-care law’s now somewhat controversial “risk corridors” program, which is meant to shield insurers from major losses if early Obamacare enrollees are less healthy than anticipated.

The Obamacare “risk corridors” provision sounds like the kind of wonky health-care issue that wouldn’t grab too many headlines. But it took center stage a few months ago when the law’s opponents started labeling it an “insurer bailout” and demanded its repeal.

Wonkblog had a previous explainer on how the Affordable Care Act risk corridors provision works, but just to sum up briefly here: It’s one of three programs included in the law intended to ease insurers' transition to health insurance exchanges.

The risk corridors provision, a temporary program lasting through 2016, basically limits how much a health plan can lose or make in the Obamacare health insurance marketplaces in their first three years. Insurers are dealing with a new population of enrollees, who because of Obamacare provisions can’t be denied insurance or charged more because of a pre-existing condition starting this year. So insurers may have trouble pricing their plans early on.

The risk corridor program is funded by money the government collects from insurers, which is then redistributed to health plans that had a greater share of sicker enrollees. (In that sense, this is a bit like insurance for insurers). The more that claims exceed an insurer’s expectations (by at least 3 percent), the more it receives back from the risk corridor program, as this chart illustrates:

(American Academy of Actuaries)
(American Academy of Actuaries)

Obamacare opponents have argued that that the feds would have to dip into taxpayer money if the program didn’t collect enough money from insurers to cover risk corridor costs.

That administration has rejected the charges of an insurer bailout, contending that it intends to implement the risk corridors program in a “budget neutral” way. In other words, the program won’t take in more money than it needs, and it won’t struggle to pay out insurers needing financial help.

The administration explained how it will make budget neutrality happen in a notice posted Monday night on Regtap, a technical assistant Web site the Health and Human Services Department uses to communicate policy with insurers. Here’s how they say it will work:

  • If HHS collects more money than it needs to pay out in risk corridor charges in 2014, it will hang on to the bonus funds for 2015 in case of a shortfall. Under the example HHS provided, if it collects $800 million in 2014 and only has to pay out $600 million, then it will keep the remaining $200 million to use in future years of the program.
  • If HHS doesn’t collect enough money to cover the charges, it will pro rate the amount it pays out to insurers that year. In the following year, HHS would then pay out the difference from the previous year first before paying risk corridors charges for that year.

So what happens if at the end of the three-year program, HHS hasn’t collected enough payments or it’s collected too much? Well, HHS doesn't know yet what happens then, according to another letter to insurers from the agency explaining the policy.

“We anticipate that risk corridors collections will be sufficient to pay for all risk corridors payments over the life of the three-year program,” HHS writes. “However, we will establish in future guidance or rulemaking how we will calculate risk corridors payments if risk corridors collections (plus any excess collections held over from previous years) do not match risk corridors payments as calculated under the risk corridors formula for the final year of the program.”

For what it’s worth, the Congressional Budget Office in February originally said it thought the risk corridors provision would amount to $8 billion in savings for the government, because the independent budget scorekeeper projected the federal government would take in more than it had to pay out to insurers for the program.

In its latest Obamacare update Monday, CBO now doesn’t anticipate any savings from the risk corridor program because of a HHS rule in March saying that the administration will implement it in a budget neutral way. The CBO said it expects the administration will do that.

"CBO believes that the Administration has sufficient flexibility to ensure that payments to insurers will approximately equal payments from insurers to the federal government, and thus that the program will have no net budgetary effect over the three years of its operation,” it wrote.