The Effect of the Risk Corridors Program on Marketplace Premiums and Participation

In 2016, premiums on the Health Insurance Exchanges rose, after a year of stability, and in 2017 they increased further, as many insurers exited the market place. These premium and participation trends coincided with two important regulatory changes in the Health Insurance Exchanges. The original ACA legislation included a temporary “risk corridors” (RC) program which, along with risk adjustment and reinsurance, was intended to stabilize premiums. The RC program was scheduled to expire for coverage year 2017, but it effectively ended early because it was never funded. In this paper, we assess the importance of the 2016 defunding of the RC program as well as the 2017 ending of the RC program, for rising premiums and falling insurer participation in the Health Insurance Marketplaces.

We begin by developing a model of individual insurers’ premium responses to the program. We show that the RC program acts as a subsidy for insurers claiming RC payments, effectively reducing their marginal costs by as much as 40 percent. Defunding or ending the RC program would undo this effective subsidy, raising premiums, reducing profitability and potentially discouraging participation. The equilibrium, market-level effects may be large, as non-claiming insurers respond to the premium increases of claiming insurers by raising their own premiums.

We study the effect of the RC program using data on insurers’ financial filings, which record risk corridor claims and contributions in 2014 and 2015, as well as data on the prices and characteristics of all plans in the Marketplaces in 2015-2017, from which we infer insurer prices and participation decisions. In 2015, 74 percent of insurers had RC claims, and the average claim amount was $53 per member month, or 12 percent of medical claims incurred.

We estimate the insurer-level and market-level effect of the RC program’s end. At the insurer level, we find that insurers who made risk corridor claims in 2015 had 9 percent higher premium increases over the next two years than did non-claiming insurers. At the market level, we find a large and statistically significant association between overall RC exposure in a given market and premium increases from 2015 to 2016 and from 2015 to 2017. Despite the premium effects, we do not detect any statistically significant effect of the RC program on insurer participation in the Marketplaces.

These results help explain rising premiums in 2017. Our estimates imply that each additional insurer making RC claims in a given rating area in 2015 was associated with 6 percent higher premium growth in 2016, and 10 percent higher growth in 2017. Extrapolating outside the range of identifying variation in the data, our estimates imply that ending the RC program accounts for 85 percent of all premium growth between 2015 and 2017. Overall, our results imply that risk corridors programs can reduce premiums.