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87–202 PDF 2014

OBAMACARE: WHY THE NEED FOR AN 

INSURANCE COMPANY BAILOUT? 

HEARING 

BEFORE THE

COMMITTEE ON OVERSIGHT 

AND GOVERNMENT REFORM 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

FEBRUARY 5, 2014 

Serial No. 113–89 

Printed for the use of the Committee on Oversight and Government Reform 

( 

Available via the World Wide Web: http://www.fdsys.gov 

http://www.house.gov/reform 

(II) 

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM 

DARRELL E. ISSA, California, Chairman 

JOHN L. MICA, Florida 

MICHAEL R. TURNER, Ohio 

JOHN J. DUNCAN, JR., Tennessee 

PATRICK T. MCHENRY, North Carolina 

JIM JORDAN, Ohio 

JASON CHAFFETZ, Utah 

TIM WALBERG, Michigan 

JAMES LANKFORD, Oklahoma 

JUSTIN AMASH, Michigan 

PAUL A. GOSAR, Arizona 

PATRICK MEEHAN, Pennsylvania 

SCOTT DESJARLAIS, Tennessee 

TREY GOWDY, South Carolina 

BLAKE FARENTHOLD, Texas 

DOC HASTINGS, Washington 

CYNTHIA M. LUMMIS, Wyoming 

ROB WOODALL, Georgia 

THOMAS MASSIE, Kentucky 

DOUG COLLINS, Georgia 

MARK MEADOWS, North Carolina 

KERRY L. BENTIVOLIO, Michigan 

RON DESANTIS, Florida 

ELIJAH E. CUMMINGS, Maryland, Ranking 

Minority Member 

CAROLYN B. MALONEY, New York 

ELEANOR HOLMES NORTON, District of 

Columbia 

JOHN F. TIERNEY, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

JIM COOPER, Tennessee 

GERALD E. CONNOLLY, Virginia 

JACKIE SPEIER, California 

MATTHEW A. CARTWRIGHT, Pennsylvania 

TAMMY DUCKWORTH, Illinois 

ROBIN L. KELLY, Illinois 

DANNY K. DAVIS, Illinois 

PETER WELCH, Vermont 

TONY CARDENAS, California 

STEVEN A. HORSFORD, Nevada 

MICHELLE LUJAN GRISHAM, New Mexico 

Vacancy 

LAWRENCE J. BRADY, Staff Director 

JOHN D. CUADERES, Deputy Staff Director 

STEPHEN CASTOR, General Counsel 

LINDA A. GOOD, Chief Clerk 

DAVID RAPALLO, Minority Staff Director 

(III) 

C O N T E N T S 

Page 

Hearing held on February 5, 2013 ......................................................................... 1 

WITNESSES 

The Hon. Marco Rubio, U.S. Senator, Florida 

Oral Statement ................................................................................................. 6 

Mr. John C. Goodman, Ph.D., President and CEO, National Center for Policy 

Analysis Washington, D.C. 

Oral Statement ................................................................................................. 8 

Written Statement ............................................................................................ 11 

Mr. Doug Badger, Former Senior White House Adviser for Health Policy 

to President George W. Bush 

Oral Statement ................................................................................................. 19 

Written Statement ............................................................................................ 21 

Professor Timothy S. Jost, Washington and Lee University 

Oral Statement ................................................................................................. 36 

Written Statement ............................................................................................ 38 

APPENDIX 

5 Devastating Obamacare Facts from CBO’s Latest Economic Report, by 

Sean Davis ............................................................................................................ 74 

Statement of Cori E. Uccello, MAAA, FSA, FCA, MPP, Senior Health Fellow 

American Academy of Actuaries ......................................................................... 78 

Hon. Gerald E. Connolly, a Member of Congress from the State of Virginia, 

Opening Statement .............................................................................................. 82 

CRS Report submitted by Rep. Farenthold ........................................................... 84 

Letter from the U.S. Chamber of Commerce submitted by Rep. Connolly ......... 87 

For the Record Statement by America’s Health Insurance Plans, submitted 

by Rep. Horsford .................................................................................................. 89 

(1) 

OBAMACARE: WHY THE NEED FOR AN 

INSURANCE COMPANY BAILOUT? 

Wednesday, February 5, 2014 

HOUSE OF REPRESENTATIVES

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

WASHINGTON, D.C. 

The committee met, pursuant to call, at 9:35 a.m., in Room 2154, 

Rayburn Office Building, Hon. Darrell E. Issa [chairman of the 

committee] presiding. 

Present: Representatives Issa, Mica, Turner, Duncan, Jordan, 

Walberg, Lankford, DesJarlais, Gowdy, Farenthold, Woodall, 

Massie, Collins, Meadows, Bentivolio, DeSantis, Cummings, 

Maloney, Norton, Tierney, Connolly, Speier, Kelly, Horsford, and 

Lujan-Grisham. 

Also Present: Mr. Griffin and Mr. McHenry. 

Staff present: Ali Ahmad, Professional Staff Member; Brian 

Blase, Senior Professional Staff Member; Molly Boyl, Deputy General Counsel and Parliamentarian; Joseph A. Brazauskas, Counsel; 

David Brewer, Senior Counsel; Caitlin Carroll, Press Secretary; 

Sharon Casey, Senior Assistant Clerk; John Cuaderes, Deputy 

Staff Director; Brian Daner, Counsel; Adam P. Fromm, Director of 

Member Services and Committee Operations; Linda Good, Chief 

Clerk; Meinan Goto, Professional Staff Member; Ryan M. 

Hambleton, Senior Professional Staff Member; Christopher Hixon, 

Chief Counsel for Oversight; Mark D. Marin, Deputy Staff Director 

for Oversight; Aryele Bradford, Press Secretary; Susanne 

Sachsman Grooms, Deputy Staff Director/Chief Counsel; Jennifer 

Hoffman, Communications Director; Chris Knauer, Senior Investigator; Una Lee, Counsel; Juan McCullum, Clerk; Dave Rapallo, 

Staff Director; and Mark Stephenson, Director of Legislation. 

Chairman ISSA. The committee will come to order. 

I first ask unanimous consent that our colleague from Arkansas, 

Mr. Tim Griffin, be allowed to participate in today’s hearings. 

Without objection, so ordered. 

The Oversight Committee exists to secure two fundamental principles. First, Americans have a right to know that the money 

Washington takes from them is well spent. And second, Americans 

deserve an efficient, effective Government that works for them. Our 

duty on the Oversight and Government Reform Committee is to 

protect these rights. Our solemn responsibility is to hold Government accountable to taxpayers because taxpayers have a right to 

know what they get from their Government. Our job is to work 

tirelessly in partnership with citizen watchdogs to bring the facts 

2 

to the American people and bring genuine reform to the Federal 

bureaucracy. This is our mission. 

And today we continue our mission with a hearing as the American people confront ObamaCare. They are faced with a complex 

web of taxes, subsidies, mandates, regulations, and price controls. 

Yet, they are receiving little upfront information from the administration. 

Our hearing today is one of many that we have had and many 

more we will have, but it is that important. 18 percent of our economy is in healthcare, and today we are seeing healthcare costs 

grow and the Affordable Care Act exceed expectations in job loss 

and in cost. 

Four months ago, when ObamaCare opened for business, the administration had to that date refused to release complete enrollment data or how we were going to get it. Today we still do not 

know how much it has cost, how many people have signed up, what 

coverage is there because it is, in fact, one of the most opaque government programs to date. 

What little enrollment data we have is, in fact, not good news. 

For the numbers to balance, the administration officials originally 

claimed that 39 percent of enrollees needed to be young adults. As 

of January, only 24 percent of enrollees were young adults, and 

many of those young adults may be highly subsidized. Affordable 

Care depends on healthy young people buying a plan to subsidize 

the cost of the aged and the sick. It needs enrollment to balance. 

It is not something you can force. It is something that must be chosen. 

In just the last few days, the administration announced hundreds of millions of dollars will be spent trying to advertise for and 

recruit those people to sign up for a program that we were told people would flock to because it was good and they needed it. The fact 

is the Affordable Care Act is not working and the numbers are not 

working. 

Just yesterday, the Congressional Budget Office released figures 

that showed dramatic adverse effect on total enrollment and a cost 

of $2 trillion over the next decade, a trillion dollar difference in 

their estimates. The fact is the act is not performing. CBO is now 

being forced to recognize, not as the White House would say, that 

we would—not what the White House would say that people are 

choosing not to work as much and they have flexibility, but in fact, 

people who want full-time jobs are finding themselves with less 

than full-time jobs and often without health care. 

Additionally, the GDP of this country, the engine that creates 

jobs, is likely to slow by as much as 1 percent over the next decade. 

That is a long-term bad news for our economy. 

This does not mean that the goals of the Affordable Care Act are, 

in fact, to be given up. This committee and all committees of the 

Congress have an opportunity to seize better choices in how we 

fashion health care opportunities for the American people. Health 

care insurance companies make money off of the Affordable Care 

Act, and the profit is theirs to keep. In fact, although they are not 

villains, they certainly were an organization—many organizations 

that were previously vilified, vilified in a big way until it became 

convenient to get them on board with the Affordable Care Act. The 

3 

Affordable Care Act guarantees subsidies and higher enrollment for 

the health care companies. 

Today we will take a number of items, including our first witness 

who will speak to one of the flaws in the system, which is in fact 

a guarantee of profit for the health care providers, one that may 

cause them to price their product in a way that is not in the best 

interest of competition. This program is called ‘‘reinsurance.’’ 

A key question we will ask today is what will trigger the bailout 

provisions and how will it take effect. Under ObamaCare’s risk corridor program, if an insurance company cannot cover the losses of 

its less successful plans, the Treasury will use taxpayer funds to 

cover up 80 percent of the loss. 

Yesterday, the Congressional Budget Office estimated ObamaCare’s risk corridor would give Government a gain of $8 billion in profits. It is important to note that that is based on another 

program in which every year the American people have found 

themselves overpriced relative to a shrinking cost of prescription 

drugs. It is not necessarily a valid model. It certainly has one critical difference, which is Medicare Part D was a program which, by 

definition, was new and did not have a large pool of history. In the 

case of the Affordable Care Act, most of the carriers are providing 

exactly the same type of insurance to the exact same pools as they 

always have. 

CBO’s projections also concluded that the Affordable Care Act 

will cost the economy 2.5 million job equivalents. The agency report 

found the negative impact effects of the law would be substantially 

larger than had been believed. When they say ‘‘substantially larger,’’ let us understand. According to the then-Speaker, Nancy 

Pelosi, the Affordable Care Act was going to create 4 million jobs. 

It is now going to cost us 2.5 million jobs. 

CBO is a respected, nonpartisan agency on which the ranking 

member, Mr. Cummings, and I rely daily. But even CBO can only 

make projections based on information available and on hand, and 

in fact, the Affordable Care Act continues to migrate. It is well 

known that at the time the Affordable Care Act was being projected, CBO was much more optimistic as to what would occur. In 

2011, CBO estimated, as the law was being implemented, that it 

could cost 800,000 full-time job equivalents. Again, today they now 

estimate 2.5. CBO’s revised estimate is based on a better understanding of the law. Remember, this is a law that we had to pass 

before we could find out what was in it. More importantly, out of 

the 2,400 pages of the original law, we have now mushroomed into 

over 70,000 pages of regulations and they are still being made. 

The law’s reinsurance program levels a fee on health insurance 

consumers to subsidize plans in the exchange, meaning people who 

already had a plan that they wanted to keep that they may or may 

not be able to keep are being taxed as part of the Affordable Care 

Act. Most, if not all, Americans were unaware that they would be 

taxed for a program even if they had a program they liked, meaning that the programs they are in cost more because of an 

ObamaCare tax. 

The noble aspirations are not enough to make ObamaCare costeffective or fair, and it is driving up the cost of insurance and driving up the cost of providing health care. Its implementation has 

4 

been marked by arbitrary and unilateral delays made by the White 

House, many of them beyond any fair interpretation of the four 

squares of the law. 

In closing, I think my colleagues are aware that no one on my 

side of the aisle voted for the Affordable Care Act. We did not believe in element after element after element of it, even though we 

would have liked to have done a few of the elements of this law. 

Therefore, we are not neutral observers. 

But CBO is a neutral observer, and I believe that the testimony 

that is going to be given today by our distinguished Senator from 

Florida, Senator Rubio, who has proposed a bill to repeal the risk 

corridors in the President’s health care law, comes both with a 

timely proposal and with the recognition that after you guarantee 

that insurance companies cannot lose money, it is little surprise 

that when the President makes changes, which will adversely affect the profit projections of insurance companies, you hear not a 

word. You hear not a word because, in fact, the taxpayer is paying 

for the arbitrary decisions of the President and, in fact, not the 

health care providers. 

And with that, I recognize the ranking member, Mr. Cummings, 

for his opening statement. 

Mr. CUMMINGS. Thank you very much, Mr. Chairman. 

I welcome you, Senator Rubio, to this hearing, and it is certainly 

good to have you here. 

Today’s hearing is our committee’s 24th—2, 4—24th—on the Affordable Care Act. And after this hearing ends, we will be holding 

our 25th this afternoon. I am not sure what the line is between 

oversight and obsession, but our committee has obviously crossed 

it. 

I will begin, as I do, at all of our ACA hearings by highlighting 

the single most important fact before us today. Millions of Americans are now receiving critical medical care they did not have before. I know that is important to you, Senator Rubio, and it should 

be important to all of us. People who are sick, trying to get well, 

people who are well trying to stay well are getting care that they 

could not receive before. 

No more discrimination against people with cancer, diabetes, and 

other preexisting conditions. That is so important. No more discrimination against women. Free preventative care for millions of 

people. Billions of dollars in rebate checks sent to consumers across 

the country in all of our districts and in Florida. And the lowest 

growth in health care costs in 50 years. 

These amazing results are not happening because of Republican 

efforts. They are happening in spite of them. Republicans have 

done every single thing they could do in their power to repeal, 

defund, and eviscerate the Affordable Care Act. And sadly, so 

sadly, today’s hearing is just the latest example. 

According to press reports, while House Republicans were at 

their retreat last week they were desperately searching for something, anything to attach to the debt ceiling legislation. They could 

not simply pay our Nation’s debts. They had to come up with something, anything to politicize the issue. 

At first they discussed the Keystone Pipeline, but then they settled on the issue before us today, the so-called Affordable Care Act 

5 

bailout of insurance companies. They seized on several provisions 

in the ACA designed to distribute risk across insurance companies 

and prevent the artificial inflation of premiums for consumers. 

Under one of these provisions called the ‘‘risk corridor program,’’ 

the Government collects funds from insurers with large financial 

gains and uses those funds to make payments to insurers with 

large losses. 

The irony of this Republican attack is that the Republicans first 

proposed these measures as part of the 2003 law to create the 

Medicare Part D drug benefit. It was a Republican idea. 

Senate Minority Leader Mitch McConnell and House Speaker 

John Boehner both voted in favor of these provisions, and so did 

Paul Ryan, the chairman of the Budget Committee, as well as our 

chairman, Chairman Issa. And at the time, Republican Senator 

Chuck Grassley described the risk corridor program as one of the, 

‘‘incentives that the Secretary can use,’’ to get new plans started, 

‘‘in a strong way.’’ He said ‘‘these plans are enabling many beneficiaries to lower their out-of-pocket costs substantially, and that is 

particularly true for beneficiaries with chronic illnesses.’’ I did not 

say that. Senator Grassley said that. 

The risk corridor program was a good idea during the Bush administration, and it worked. Rather than a bailout for insurance 

companies, the program has resulted in $7 billion in net gains to 

taxpayers. But now since these same mechanisms are part of the 

Affordable Care Act, Republicans argue that they are a bailout for 

insurance companies. 

Senator Rubio, who I have great respect for, calls them—and I 

‘‘Government favoritism and corporate cronyism at its worst.’’ He 

claims that we are getting, closer to the reality that billions of dollars in taxpayer money is going to be used to bail out these exchanges.’’ And he introduced legislation to repeal this program. 

Just this week, however, the nonpartisan Congressional Budget 

Office issued a new report that completely obliterates this argument. CBO projects that the ACA risk corridor program will result 

in net gains to taxpayers of $8 billion over the next 10 years. So 

where is the bailout? There isn’t one. 

Just as in the Medicare Part D program, the Affordable Care Act 

risk corridor program will save taxpayers money, and if we were 

to adopt legislation to eliminate this program, billions of dollars in 

savings would simply disappear. 

I ask unanimous consent, Mr. Chairman, that the CBO report be 

entered into the official hearing record. 

Chairman ISSA. Without objection, so ordered. 

Mr. CUMMINGS. Thank you, Mr. Chairman. 

Finally in conclusion, I am surely no advisor to the Republican 

Party, but if you are trying to create a new image for yourselves, 

one of truly caring for people facing hardship, why in the world 

would you eliminate a program that you invented that has been 

working for nearly a decade and that saves taxpayers billions of 

dollars? And why would you increase premiums for Americans 

across the country in the process? This approach makes no sense 

unless you are putting politics ahead of people. 

So for the next week, I would like to make a suggestion. Rather 

than holding our 26th hearing on yet another false criticism of the 

6 

Affordable Care Act, I ask that we turn to more constructive efforts. Let us hold a hearing to help our constituents, not just the 

constituents from my district, from all of our districts. Let’s get 

ourselves involved in constructive efforts to help our constituents 

learn about the health care coverage they can now obtain and let 

us help them enroll. That would benefit them more than anything 

we will do today. 

And with that, Mr. Chairman, I yield back. 

Chairman ISSA. I thank the gentleman. 

Members may have 7 days to submit opening statements for the 

record. 

Chairman ISSA. We now go to our first panel. After Senator 

Rubio, we will immediately go to a second panel. 

And I would advise all witnesses that it is not customary to 

interview Members of the House or the Senate afterwards. And I 

say this because we did have our counterparts from the Senate for 

a very long back and forth just a few weeks ago, but that was an 

exception. 

Senator Rubio comes today to give testimony specifically on his 

proposal but, more broadly, on his study of the ongoing implementation of the Affordable Care Act. Senator Rubio, we appreciate 

your being here. You will be welcomed back for the 26th and the 

27th and the 28th hearing, if it becomes necessary, in order to do 

appropriate oversight of this new law. Senator, you are recognized. 

STATEMENT OF HON. MARCO RUBIO, UNITED STATES 

SENATOR, FLORIDA 

Senator RUBIO. Thank you, Chairman Issa and the ranking 

member, Mr. Cummings, for holding this hearing and for inviting 

me here today. I am a frequent watcher. I am a loyal viewer of this 

committee on C–SPAN. So I appreciate the invitation to be here 

with you today. 

My focus of my remarks this morning is going to be on section 

1342 of ObamaCare, which I, in partnership with your colleague, 

Tim Griffin of Arkansas, have introduced legislation to repeal. 

Now, section 1342 deals with what has already been described as 

risk corridors. Now, under normal circumstances, risk corridors are 

a valid program. They provide insurers insurance against unanticipated major losses caused by anomalies that may occur in a competitive insurance market. This prevents disruption in services, for 

example, for patients and for customers. 

They are budget-neutral, by the way. These risk corridors can actually protect taxpayers from assuming too much of the risk. 

The problem with the risk corridor in ObamaCare is that this is 

not a normal circumstance. First of all, its failures are not anomalies. They are across the board. It is not one or two companies that 

are miscalculating on ObamaCare’s long-term prospects; it is the 

entire industry that is being affected by its failures. 

And, by the way, ObamaCare and its exchanges are not a true 

competitive insurance market. In fact, it has increasingly become 

more like a high-risk pool. 

The risk of a bailout has always been high. As many of us predicted, these exchanges have not attracted enough young and 

healthy people to sign up, but the chances of the bailout have inVerDate Aug 31 2005 13:15 Mar 28, 2014 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 C:\DOCS\87202.TXT APRIL
7 

creased significantly in the last few months due to several unilateral actions taken by the President and by his administration. 

For example, this past November, in response to a public backlash from people who were losing their health plans and providers, 

President Obama delivered a speech in which he announced his 

unilateral action to, quote, fix his broken promise that if you like 

your plan, you can keep your plan. That same day, however, the 

Department of Health and Human Services issued a press release 

to go with the President’s speech. And in that press release, they 

added a critical detail that was missing in the President’s remarks. 

And here is what the press release said. ‘‘Though this transitional 

policy was not anticipated by health insurance issuers when ratesetting for 2014, the risk corridor program should help ameliorate 

unanticipated changes and premium revenue.’’ 

Now, what this means is pretty straightforward. The rates being 

charged by the insurance companies in the exchanges were based 

on a certain number of young and healthy people signing up, but 

because that is not happening, companies in the exchange will not 

be able to offset the costs of insuring older and less healthy individuals. And as a result, the risk corridor will be needed to bail out 

the companies for their losses. 

Now, the administration and the law’s supporters deny that this 

is where we are headed, but the proof already exists that a bailout 

will be required. 

For example, earlier this year, health insurance companies had 

to file their key disclosure documents with the Securities and Exchange Commission. In it, they had to explain to their shareholders 

what ObamaCare will mean for their bottom line in the coming 

year, and here is what it said. It will mean losses. That is why, 

based on these filings, the credit rating agency Moody’s has downgraded the outlook for American health insurers to negative status. 

So health insurers are leveling with their shareholders about 

how ObamaCare’s failures will affect their bottom lines, and credit 

rating agencies are leveling with investors about how ObamaCare’s 

failures affect the health insurance industry. 

Now it is time for the President, for Secretary Sebelius, and for 

ObamaCare supporters to level with taxpayers about the fact that 

their hard-earned tax dollars will soon be needed to bail out the 

ObamaCare exchanges. 

The supporters of ObamaCare have defended the risk corridors 

by citing how it has worked for Medicare Part D, but these are two 

fundamentally different programs. Medicare Part D deals with a 

defined, a limited and a predictable population of seniors. Insurers 

knew who was going to sign up, and they had a pretty good idea 

of how much they were going to cost to insure, and so they could 

price for it accordingly. But ObamaCare exchanges deal with an 

open-ended, broad, and unpredictable group of enrollees. No one 

knew who was going to sign up, how many would sign up, and how 

much they would cost. But what they are now finding out is that 

the pool of enrollees that is signing up is smaller, older, and unfortunately sicker than what they had priced for. And soon they will 

be coming to Washington for their bailout to cover their losses as 

a result. 

8 

Now, the law has a host of other problems. For example, as the 

chairman has already pointed out, just yesterday the Congressional 

Budget Office found that ObamaCare will cost millions of Americans their jobs, and it will add trillions in additional deficits. That, 

by the way, is why a growing number of Americans have come to 

realize that this law has so many flaws that it cannot be fixed. 

Now, I respect the fact that there are some who still hold out 

hope that ObamaCare will work, just like there were some in Denver this Sunday still holding out hope that the Broncos could come 

back and win in the fourth quarter. But no matter how you may 

feel about the law, we should all be able to agree that the American people should not have to pay for another taxpayer-funded 

bailout. 

Refusing to take that possibility off the table is like basically telling the American people that some are so devoted to protecting 

ObamaCare that they do not care how much it will cost taxpayers. 

The bottom line is that it is not right to allow a powerful industry to use its influence here in Washington to protect itself from 

the consequences of ObamaCare, and it is not right that hard-working Americans are forced to pay for it. 

So, Mr. Chairman, Ranking Member, I appreciate the opportunity to testify before you today, and I look forward to coming 

back. Thank you. 

Chairman ISSA. Senator, we thank you for your input. We thank 

you for your insight in this area, and we thank you for being a 

loyal watcher. 

We will take a short recess and set up for the next panel. 

[Recess.] 

Chairman ISSA. We now welcome our second panel of witnesses. 

Mr. John Goodman is President and CEO of the National Center 

for Policy Analysis and Senior Research Fellow at the Independent 

Institute. Mr. Douglas Badger is a former Senior White House Adviser for Health Policy to George W. Bush, and Mr. Timothy Jost, 

is Professor of Law at Washington and Lee University. I want to 

thank all of you for being here and, pursuant to the committee 

rules, would ask that you please rise to take the oath and raise 

your right hands. 

[Witnesses sworn.] 

Chairman ISSA. Please be seated. Let the record reflect that all 

individuals answered in the affirmative. 

Since we have a full panel and the committee rules call for 5 

minutes for opening testimony, I would ask that you observe the 

lights and stay as close to the 5 minutes, recognizing that your entire opening statements will be placed in the record, along with additional, extraneous materials, should you choose to add it. 

And with that, we go to Mr. Goodman. 

WITNESS STATEMENTS 

STATEMENT OF JOHN C. GOODMAN, PH.D. 

Mr. GOODMAN. Mr. Chairman, members of the committee, the 

people who created the health insurance exchanges were apparently of good intention, but they created perverse incentives for 

9 

those at the bottom. And when people act on those perverse incentives, they are doing things that create perverse outcomes. 

The insurers are prevented from pricing risk accurately in the 

health insurance marketplace. As a consequence, people who are 

relatively healthy are overcharged at the point of enrollment and 

people who are relatively sick are undercharged. This gives every 

insurer an incentive to attract the healthy and avoid the sick because they make profits on the healthy and they make losses on 

the sick. 

The way they behave, in the face of this incentive, contrasts 

markedly with insurers in other markets. All of you have seen casualty insurers advertising on TV. You have seen the actor in front 

of the town that was wiped out in 2 minutes telling you with Allstate you will be in good hands. You have seen advertisements with 

car accidents. You have seen the Aflac ads, the Chubb ads. And 

every one of these ads pictures some bad thing that could happen 

to you, and the message in these ads is if the bad thing happens, 

the insurer will be there for you. You are never, ever going to see 

an ad like this by insurers selling insurance in the exchange. You 

are never going to see an ad that says if you get cancer, we are 

going to be the health plan for you, or if you get heart disease, 

come to us because they are running away from the sick instead 

of trying to attract them. 

Now, the insurers have their benefits regulated down to the 

smallest items. Yet, they are free to choose their own networks and 

their own premiums. What they are doing is they are selecting premiums and networks in order to attract the healthy and avoid the 

sick. They have become convinced that the healthy buy on price 

and that only sick people look really closely at networks. And so 

we are getting a race to the bottom on the networks. Blue Cross, 

for example, of California has only about a third as many doctors 

in its exchange network as it does in its normal network. We are 

seeing these networks leave out the best hospitals and the best doctors. 

Now, on the buyer side, it makes sense if insurance is guaranteed issue. If it has nothing to do with health condition, why would 

I not buy on price? And then if I get sick, if I get heart disease, 

I will look around for a better plan. If I get cancer, I will look 

around for a better plan. And what we all forget is that if everybody is chasing the healthy person, when I do get cancer, there 

may not be a plan there that provides decent cancer care. 

In the exchange, people who are overcharged will tend to underinsure. People who are undercharged will be inclined to over-insure. People with serious health problems will choose to go on platinum plans. People who are healthy will chose the bronze plan, or 

more likely, they will simply stay uninsured and wait until they 

get sick to enroll at all. 

To make these conditions even worse, we have outside groups 

who are allowed to do things that I regard as unconscionable. The 

Federal risk pool is about to dump all the enrollees in the risk pool 

into the State exchanges. All of the State-level exchanges are about 

to end their risk pools and dump high-cost enrollees into the exchange. We have cities and towns throughout the country that 

have unfunded post-retirement promises, and they are getting 

10 

ready to unload on the exchanges. The City of Detroit is sending 

10,000 retirees, who are older and therefore more costly, to the exchange. We have businesses thinking about doing the same thing, 

ending their post-retirement health care plans. We have all the 

people who are characterized as job lock employees who are working only because of the health insurance, and they will leave their 

jobs and enter the exchange. And then, as I understand it, hospitals now are allowed under the Affordable Care Act to actually 

sign people up in the hospital bed with the hospital paying the premium. 

In my written testimony, I do not talk about all the things that 

employers might do, but if you would for me to get into it, I think 

that there are many things they can do to game the system and 

we are going to see it happen. 

In summary, I think that we have underestimated the costs that 

are being piled onto the exchange, not overestimating. I think that 

this is a potential large strain on the taxpayer, and the remarkable 

thing is this is a small market, less than 10 percent of the private 

insurance population. It was working reasonably well. And what 

we have done is unconscionable, bad policy, and bad ethics. 

[Prepared statement of Mr. Goodman follows:] 

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The 
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Mr. Chairman and members of the Committee, I am John Goodman, President and CEO of the National 

Center for Policy Analysis (NCPAI, a nonprofit, nonpartisan public policy research organization dedicated 

to developing and promoting private alternatiVes to government regulation and control, solving 

problems by relying on the strength of the competitive, entrepreneurial private sector. My testimony 

today is based on work I've done with John R. Graham and Greg Scandlen, both colleagues of mine at 

the NCPA. I welcome the opportunity to share my views and look forward to your questions. 

With fewer glitches to deter them, millions of Americans are successfully logging on to the (Obamacare) 

health insurance exchange websites. 

When they get there, many are discovering some unpleasant surprises: the deduetibles are higher than 

what most people are used to, the networks of doctors and hospitals are skimpier (in some cases much 

skimpier), lifesaving drugs are often not on the Insurers' formularies and, even after the highly touted 

subsidies are taken into account, the premiums are often higher than what they previously paid. 

Why is this happening? Because of perverse incentives faced by buyers and sellers in the exchanges. 

Matters are made worse by other aspects of the Affordable care Act (ACA). Insurance pools outside the 

exchange are being allowed to dump their oldest, sickest enrollees Into the exchanges, virtually 

guaranteeing that costs for the participating insurers are higher than they need to be. In anticipation of 

significant losses - at least initially - the ACA provides for federal government subsidies for the next 

three years, in addition to the types of risk adjustment one would normally expect. 

This puts taxpayers at risk for the cost of serious mistakes in the design of the exchanges. 

Perverse Incentives for Sellers. Under the health reform law, the benefItS insurers must offer are strictly 

regulated - right down to free contraceptives and inexpensive preventive care. At the same time 

insurers have been given enormous freedom to set their own premiums and choose their own networks. 

The result has been a race to the bottom. In order to keep premiums as low as pOSSible, the insurers are 

offering very narrow networks, often leaving out the best doctors and the best hospitals. BlueCross of 

California, for example, only includes one-third the number of doctors in the exchange plan that it 

includes in the normal BlueCross plan. An exchange plan in Denver includes only one hospital, the one 

that usually treats Medicaid patients. 

Note: Narrow networks can be good or bad. Walmart has selected half a dozen centers of excellence 

around the country for its employees. These are places carefully chosen for their high quality and low 

costs. The exchange health plans, by contrast, appear to care only about cost. They are offering low fees 

- sometimes even lower than what Medicaid pays - and accepting only those providers who will take 

whatever fee is offered. 

Under health reform, insurers are required to charge the same premium, regardless of the applicants' 

health status; and they are required to accept anyone who applies. This means they must overcharge 

the healthy and undercharge the sick. It also means they have strong incentives to attract the healthy 

(on whom they make a profit) and avoid the sick (on whom they incur a loss). Evidence so far suggests 

that risk corridors, reinsurance and risk adjustment are not compensating for this incentive. 
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Perverse Incentives for Buyers. In the Obamacare exchanges, insurers apparently believe that the 

healthy buy on price - ignoring other features of the plan. By contrast, only people who plan to spend a 

lot of health care dollars pay close attention to deductibles and which doctors and hospitals are in the 

insurer's network. Thus, by keeping deductibles high and fees so low that only a minority of physicians 

will agree to treat the patients, insurers are able to lower their premiums. 

A race to the bottom doesn't happen in normal markets. What makes the ObamaCare exchanges 

different? Answer: the Incentives of buyers. 

If I am healthy why wouldn't I buy on price? If I later develop cancer, I'll move to a plan that has the best 

cancer care. If I develop heart disease, I'll find a plan with the best heart doctors. And by law, these 

plans will be prohibited from charging me more than the premium paid by a healthy enrollee. 

Perverse Incentives Outside the Market. If insurers are acting in perverse ways to keep premiums low, 

why are so many shoppers shocked by how high they are? Answer: no matter how narrow the provider 

network is, health plans are going to cost more if the entire market enrolls more people with aboveaverage health care costs. And that is what is about to happen. 

The federal (ObamaCare) risk pools will soon close their doors and send their enrollees to the state 

exchanges. This is the program that allows people who were "uninsurable" to purchase insurance for the 

same premium healthy people pay. All of the state risk pools are planning to do the same. These risk 

pools were spending billions of dollars subsidizing insurance for high cost patients. Now those subsidies 

will have to be implicitly borne by the private sector plans through higher premiums charged to 

everyone else. 

To make matters worse, cities and towns across the country with unfunded health care commitments 

are readying to dump their retirees on the exchanges, nationalizing the costs. Since retirees are aboveaverage age, they have above-average expected costs. The city of Detroit, for example, is planning to 

unload the costs of 10,000 retirees on the Michigan exchange. Many private employers face the same 

temptation. 

Then there are the "job-lock" employees - people who are working only to get health insurance 

because they are uninsurable in the individual market. Under ObamaCare, their incentive will be to quit 

their jobs and head to the exchange. 

To add to this burden, the Obama administration has decided hospitals, AIDS clinics and other providers 

will be able to enroll uninsured patients in the exchange and pay premiums for them in order to get 

private insurance to pay the bills. 

Bottom line: a lot of high-cost patients are about to enroll through the exchanges, causing overall costs 

for participating plans to be much higher. 

Insurance Company Risks. Because health insurers are no longer allowed to ask any questions about an 

applicant's health, they have no way of knowing whom they are enrolling in terms of past or present 

illnesses or health conditions. They might attract a group of pretty healthy people or a group of pretty 

sick people, but they won't know until people start filing claims. So it is impossible to accurately set 

premiums, at least for the first few years. 
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it 
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adjustment parameters is that an insurer can actually come out ahead by attracting a sicker-thanaverage population of enrollees. 

For example, carriers would expect to have an 8.8 percent loss on males age 60 and above, but the risk 

adjustments turn that into a gain of7.3 percent. For males age 25-29, an expected gain of 34.3 percent 

becomes a loss of 3.2 percent after the risk adjustments. So a company that wants to make money has 

every incentive to avoid young males and attract the oldest ones, at least as far as this adjustment is 

concerned. Overall, a Milliman report' says that people with "seven conditions would actually produce 

profit margins in excess of 1,000 percent of premiums." 

With this adjustment alone, insurers would be tempted to attract the sick and avoid the healthY. But 

there is more to the story. 

The Second R: Reinsurance. Each year, there will be a special premium tax levied on all insurers 

(whether participating in exchanges or not) as well as self-insured plans. This tax revenue is 

supplemented by a little extra from the U.S. Treasury. In total, the reinsurance sums are: $12 billion for 

2014, $8 billion for 2015, and $5 billion for 2016. (For more details, but in laypersons' language, see the 

analysis by the Wakely Consulting Group.'l 

For each of the three years, the U.s. Department of Health & Human Services (HHS) must publish a 

notice explaining how it will distribute this money. The notice must be published by the end of March 

the previous year. Last March, HH5 issued its notice of payment parameters' for 2014. The attachment 

point for reinsurance is $60,000, with a co-insurance rate of 80 percent capped at $250,000. 

For example, if a patient has medical claims of $200,000, the insurer will be compensated $112,000 

[($200,000-$60,000) X 80%] by the reinsurance fund. If the patient has medical claims of $500,000, the 

insurer will claim the maximum of $152,000 [($250,000-$60,000) X 80%J. If reinsurance claims are 

greater than $12 billion, HHS will prorate the claims. Of course, health insurers also have access to the 

commercial reinsurance market for claims above $250,000. 

Like risk adjustment, the reinsurance program is also revenue neutral - the amount paid in is equal to 

the amount paid out. 

The Third R: Risk Corridors. Under this program, insurers in the exchanges are subsidized for their losses 

in the following way. If medical costs for a plan are in excess of 103 percent of its target costs, the plan 

will receive a subsidy equal to 50 percent of its losses between 103 and 108 percent of target. For costs 

above 108 percent of target, the plan's subsidy will recoup 80 percent of the losses. The converse is that 

the insurers are taxed on their unexpected gains. Further, the tax thresholds are the mirror image of the 

subsidy thresholds. So there is a 50 percent tax on the gains for plans with costs below 103 percent and 

108 percent of target costs, etc. (See the chart.) 

I Jason Siegel, Jason Petroske, When Adverse Selection Isn't: Which Members are Likely to be profitable (Or Not) 

in Markets Regulated by the ACA, 2013. Milliman Healthcare Reform Briefing Paper. 

'Ross Winkelman, Julie Peper, Patrick Holland, Syed Mehmud, James Woolman, Analysis ofHHS Final Rules On 

Reinsurance. Risk Corridors and Risk Adjustment, 2012. Robert Wood Johnson Foundation, State Health Reform 

Assistance Network. 

'Center for Consumer Information and Insurance Oversight, Payment Notice Technical Summary. 2013, Centers for 

Medicare and Medicaid Services. 
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report7

; of those who selected plans from October through December, only one quarter are between 

the ages of 18 and 34, while one third are between S5 and 64; S5 percent are between the ages of 45 

and 54. Priority Health, a Michigan insurer, reported that the average age of new applicants is 518

, 

versus 41 in the previous individual market. 

It certainly looks like health insurers' ObamaCare exchange adventure will be very expensive. By 2015, 

they will likely ask the federal government for risk corridor subsidies and those subsidies will be 

characterized as a "bailout." The administration has no flexibility in this regard. It would be a mistake to 

blame the insurance industry, however. It would be unreasonable to expect them to lose money on 

ObamaCare. 

The Combined Effect of all Three Rs: A Case Study. Edie Sunbv' has a rare form of cancer that is almost 

always fatal. Yet she is alive, thanks to the efforts of doctors in San Diego, at Stanford University and in 

Texas. Overthe past year, UnitedHealthcare spent $1.2 million on her medical expenses. But at the end 

of last year she was informed that her insurance is being cancelled. 

Worse, in the new California exchange, the only plan that will allow her to continue seeing her San Diego 

doctors will not pay for the doctors at Stanford or in Texas. There is no reimbursement for out-ofnetwork services. 

For Edie Sunby, the rules governing the new health insurance exchanges amount to a potential death 

sentence. She is not alone. 

Here is our prediction: unless the Affordable Care Act is radically reformed, the kind of coverage Edie 

Sunby had will never again be seen in the individual market in this country. 

Needed Reform. Wharton school health economist Mark Pauly and his colleagues have studied the 

individual market in great detail and discovered that despite so much negative rhetoric in the public 

policy arena this is a market that worked and worked reasonablv well'O. Despite President Obama's 

repeated reference to insurance plans that cancel your coverage after you get sick, this practice has 

been illegal for almost 20 years and in most states it was illegal long before that. And despite repeated 

references to people denied coverage because of a pre-existing condition, estimates are that only 1 

percent of the population has this problem" persistently. (Remember: only 107,000 people enrolled'2 in 

the federal government's pre-existing condition risk pool - out of a popUlation of more than 300 million 

people!) At most, Pauly puts the pre-existing condition problem at 4% of the population.13 

7 Health Insurance Marketplace: JOJ1l/Gly Enrollment Repol"lfor the period: October I. 2013 December 28,2013. 

2014, Depa'1mentofHealth and Human Services. 

, Insurers: Early Pool of ACA Exchange Applicants Older than Expecled. 20/3, California Healthline. 

9 Edie Littlefield Sundby, YOII Also Can'l Keep YOllr Dacia/". 2013, The Wall Street Joumal. 

10 Mark Pauly, Heallil Reform wilhoUl Side £jJecIs: Making Markels Work/or Individual Health Insurance, 2010, 

The Hoover Institution. 

" Paul Roderick Gregory, Obama's Pre-existing Condiliol7s Whopper. 2013, Forbes. 

" John C. Goodman, ObamaCare Was Sold To American VOlers On Deceplive Terms. 2013. Forbes. 

" Mark Pauly, Health Reform withoul Side Ejfecls: Making Markets Work for Individual Heallh Insurance. 2010, 

The Hoover Institution. 
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So we started with a market that was working and working well for 96 to 99 percent of those who 

entered it and we have completely destroyed that market - ostensibly to help the few people for 

whom it did not work, We suspect that after the next election members of both parties will want a 

major return to normalcy, How can that work? 

There is a principle that must never be violated, An insurance pool should never be allowed to dump its 

high cost patients on another pool. Suppose an individual has been paying premiums to insurer A for 

many years; then he gets sick and transfers to insurer B, Is it fair to let A put all those premium checks in 

the bank and force B to pay all the medical bills? Of course not But even more important, if we do that 

we will create all of the perverse incentives discussed above - plus many more we might have added 

had time permitted, 

The alternative is something we call "health status insurance,14~ In the above example, the individual 

would continue paying the same premium to B that he paid to A and B would pay an additional amount 

to bring the total premium up to a level that equaled the expected cost of the individual's medical care, 

Compare this idea to the Medicare Advantage market Enrollees all pay the same premiums, but when a 

senior enters an MA plan, Medicare makes an additional payment to make the total amount paid reflect 

the true expected cost the senior brings to the plan, Because of this system, MA plans do not run away 

from the sick. In fact, there are special needs plans that specialize in attracting enrollees with high costs 

(about $60,000 per person on average), 

Risk adjustment in Medicare does not work perfectly, however, and because the government runs the 

procedure, political pressures often interfere, So we recommend risk adjustment within the market 

rather than by an external government bureau, On this approach, insurer A and insurer B would have to 

agree among themselves on an appropriate transfer price, Only if they could not agree would the 

problem be left to an insurance commissioner to resolve, 

John C Goodmon is president of the National Center for Policy Analysis, a research fellow with The 

Independent Institute and author of Priceless: Curing the Healthcare Crisis,15 

John R. Graham is a Senior Fellow with the National Center for Policy Analysis and with The Independent 

institute, 

Greg Scandlen is a Senior Fellow with the National Center for Policy Analysis and with the Heartland 

Institute, 

" John C. Goodman. Rational Heall" Insurance. 2009, John Goodman's Health Policy Blog, 

" John C. Goodman, Priceless: Curing the Healtheare Crisis, 2012, The Independent Institute, 
19 

Chairman ISSA. Mr. Badger? 

STATEMENT OF DOUG BADGER 

Mr. BADGER. Thank you, Mr. Chairman, Ranking Member 

Cummings, and distinguished members of the committee. Thank 

you for inviting me to appear today to discuss the provisions of the 

health care law that have been characterized as insurance company 

bailouts. 

People generally understand that the health care law includes 

subsidies for individuals who buy insurance. It should not provide 

subsidies to corporations that sell it. It has been argued that insurers cannot make a profit without such subsidies. CBO’s most recent 

estimate on risk corridors suggest that in the aggregate issuers in 

the exchanges will realize premium revenue that substantially exceeds their projected costs. Their expected profitability is attributable to powerful tools contained in the law. These provisions help 

companies that sells through the exchanges prosper without the 

need for various corporate welfare provisions. 

The law has handed such insurers enormous opportunities to increase their revenues and attract more customers, including 

healthy ones. It subsidizes the cost of their product. It penalizes 

people who do not buy their product. 

Regulators have required the cancellation of non-grandfathered 

individual and small group policies and will cancel more later this 

year, leaving these people with little choice but to obtain insurance 

coverage through the exchange. It is an enormous Government effort that involves driving business to that segment of health insurers that sells through the exchanges. 

Collectively, these provisions should be sufficient to induce millions of people into plans sold through the exchanges without the 

need for additional Government intervention. 

The law’s premium stabilization provisions raise concerns because they create the possibility of back-door assistance from taxpayers to insurance companies and the moral hazards that result. 

The law’s risk corridors are among these provisions. CMS’s decision 

to permit risk corridor disbursements in excess of receipts is what 

I find troubling. It creates the possibility that Government will use 

public money to mitigate losses incurred by insurers who improperly price their products. CBO’s estimate that risk corridors will save the Government $8 

billion over 3 years offers some comfort, but CBO, as we all know, 

is often wrong and its new estimate is accompanied by a number 

of caveats. There is simply too much uncertainty surrounding the 

law’s implementation for Congress to rely exclusively on this latest 

CBO estimate, which is subject to change without notice. 

Instead, I believe we should amend the act either to repeal risk 

corridors or, in the alternative, to stipulate that aggregate risk corridor disbursements cannot exceed receipts. If CBO is correct, then 

the Government will get its $8 billion in deficit reduction. If it is 

wrong, taxpayers will be protected against unforeseen spending. 

Now, some might argue that even a change this small and, in my 

view, this prudent should not be taken because insurers were not 

expecting the change when they established their 2014 premiums 

last spring. That is not a line of argument that Government has 

20 

found terribly persuasive when applied to individuals and small 

firms. Millions of individuals and small businesses were expecting 

to renew their coverage. They did not expect to have it canceled, 

but that did not stop the Government from ordering the cancellations. 

More cancellations will come later this year, according to CBO, 

meaning that people will lose their coverage. That is not their 

choice but it is their fate. Put on a personal note, my mother-inlaw expected to continue to receive care from the area’s largest 

health system. She did not expect her Medicare Advantage plan to 

drop the system from its network, but that is one consequence of 

the Medicare cuts in the law. 

Millions of Americans have been asked to adjust, adapt, evolve, 

to endure adverse consequences without complaint and without relief. They are dealing with the unexpected. Congress should ask no 

less of insurance companies. Insurers should be able to make a 

profit in Government marketplaces even if Government repeals 

risk corridors or prohibits expenditures to exceed receipts. The 

law’s combination of mandates, subsidies, cancellations, and tax 

penalties can be expected to induce or compel millions of people in 

relatively good health to buy their product. Individual competitors 

will suffer losses if their costs exceed their revenues. That is not 

the taxpayers’ problem. The Government has established its marketplaces. Let the insurers compete. 

[Prepared statement of Mr. Badger follows:] 

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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM 

U.S. HOUSE OF REPRESENTATIVES 

"OBAMACARE: WHY THE NEED FOR AN INSURANCE COMPANY BAILOUT?" 

FEBRUARY 5, 2014, 9:30'AM 

TESTIMONY OF DOUG BADGER 

RETIRED HEALTH POLICY ANALYST 

Chairman Issa, Ranking Member Cummings and distinguished Members of the Committee: 

Thank you for inviting me to appear today to discuss provisions of the health care law that have 

been characterized as "insurance company bailouts" -- specifically, those that establish 

reinsurance and risk corridors. 

People generally understand that the health law includes subsidies for individuals who buy 

insurance. It should not subsidize companies that sell it. 

Some of these subsidies are written into the law; others are the result of regulatory interpretation. 

I will not discuss the legitimacy of those interpretations, in part because you've invited a 

professor of law to speak to that point and in part because such discussion is academic. The 

rules have been issued. No one who might object has standing to sue. So the subsidies will go 

forward unless Congress acts. 

I urge Congress to act by repealing the health care law's risk corridor provision, or at least 

requiring that CMS not disburse more in payments to insurers than it receives from them. 

Before proceeding further, I want to make it clear that, while I am taking a position contrary to 

that advocated by many in the insurance industry, I bear no animus against insurance companies. 

On the contrary, I believe that they playa vital and essential role in the health care system. On a 

personal level, I know that when you face large medical bills, only the insurance companies have 

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your back. My objection is not to the enterprise of private health insurance, but to the 

reinsurance and risk corridor provisions that inappropriately provide them subsidies at the 

expense of taxpayers and group health plans. 

The law extends numerous competitive advantages to insurers that sell through the exchanges. It 

creates carrots and sticks. The biggest carrot: the government will subsidize premiums only for 

those who enroll in qualified health plans sold through the exchanges. The biggest stick: the IRS 

will impose a tax penalty on people who refuse to buy insurance. 

The two work together for the benefit of insurance companies that participate in the exchanges. 

The subsidies amount to a government payment of $949 billion over the next 10 years to such 

companies. That's how much CBO estimates they will receive directly from the federal 

government. 

It's a bit harder to estimate how much benefit insurers derive from the tax penalty on the 

uninsured. CBO estimates that delaying the so-called individual mandate by a year would result 

in 2 million fewer people buying coverage sold through the exchanges. To state that slightly 

differently, the tax will induce 2 million people who don't want health insurance - even ifit is 

subsidized - to buy it anyway. An admittedly rough estimate that assumes annual premiums of 

$4,000 for a mid-level "silver" plan would mean that those companies would collect $8 billion 

more next year in premiums than they would in the absence of the so-called individual mandate. 

Assuming that the 2 million figure is constant and t11at average premiums increase by 5 percent 

per year, that would add up to $100 billion in premiums that insurers are collecting only because 

of the tax penalty. 

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Policy cancelations are the other stick. Millions of individuals and small finns have been told 

that it is illegal for them to renew their "non-grandfathered" coverage. Both parties have 

expressed sympathy for such people, but most were not provided relief. The Administration 

adopted an aggressive stance on cancelations in order to force millions of people who liked the 

coverage they had into the exchanges. I won't hazard even a rough estimate of the monetary 

effect of this policy, but it clearly inures to the benefit of insurers that sell through the exchanges. 

Most people think the special arrangements for such companies stop there. They don't. Some 

very valuable corporate welfare is concealed deep within the law's plumbing. 

Known collectively as "premium stabilization" in the rules, the combination of reinsurance 

payments, risk adjustment and risk corridors together provide backdoor assistance from 

taxpayers to insurance companies. Unlike the carrots and sticks, their purpose isn't to induce or 

compel people to buy insurance but to help insurers turn a profit or, failing that, to limit their 

losses. 

I will not speak this moming to risk adjustment. So far as I have been able to detennine, the 

agency plans to implement this provision in a budget-neutral way, which is appropriate. I would, 

however, encourage Congress to take a close look at this program to assure that it does not put 

taxpayers on the hook should insurers end up attracting enrollees that are, on the whole, less 

healthy than the general population. 

Reinsurance is pure corporate welfare, a govenunent-compelled transfer of$20 billion over three 

years to insurers that participate in the exchanges. Under this provision, these insurers can get 

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out from under the costliest medical claims. TIle govenunent will pay 80 percent of medical 

bills that exceed $45.000 but are less than $250,000 out of a "reinsurance fund." 

And where does this reinsurance fund get the money to pay these very expensive bills? From 

an assessment on each of the roughly 158 million people who do not get their coverage from the 

exchanges: some through union-backed plans, others through plans sponsored by employers. The 

government is assessing such plans $63 for each member -- which adds to $10 billion -- then 

giving that money to insurers that sell through the exchanges. And what if the claims eligible for 

reinsurance payments don't total $10 billion? HHS has aunounced that it will not rebate that 

money to those who paid into the fund. Instead, the government will give insurers that sell 

through the exchanges the full $10 billion anyway. [I'm not entirely clear on what eMS intends 

to do if eligible claims exceed $10 billion.] 

The second form of "premium stabilization" is more subtle. It establishes "risk corridors." 

eMS's understanding of this provision is that "the Federal government and participating plans 

[will] share in profits or losses resulting from inaccurate rate setting." That is a short-harld, of 

course, and not strictly true. Technically, the risk corridor program is governed by the ratio of 

actual allowable costs (which must be at least 80 percent of premium) to the "target amount," 

which is the amount that the insurer expects its allowable costs to be. This target amount 

includes profits. So an insurer could. for example. make a profit of. say, 5 percent and not have 

to "share" arlY of it with eMS. It should also be borne in mind that there are complex 

interactions among the risk adjustment, risk corridor, reinsurance, and medical loss ratio 

provisions. The sequence of calculations is: 1) reinsurance; 2) risk adjustment; 3) risk corridor; 

4) medical loss ratio. For this reason, insurers don't actually submit their risk corridor 

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infonnation until July 31 of the year following the benefit year, meaning that companies won't 

file their 2014 risk corridor paperwork until July 31,2015. That should temper concems about 

Congress changing the rules at the eleventh hour. 

The risk corridor calculation involves the ratio of allowable costs actually incurred to its target 

amount. If that ratio exceeds 103 percent, it is eligible to receive a payment from the 

govemment; if below 97 percent, it must pay the govemment. If a plan's ratio is between 103 

and 108 percent, the govemment will assume half that "loss." TIle govemment will pay a plan 

80 percent of its "losses" that exceed 108 percent of the target amount. Since the risk corridors 

are theoretically symmetrical, payments work exactly in reverse. 

I say "theoretically" because on its face, one would assume that risk corridor payments could 

never exceed risk corridor receipts. The "excess profits" of successful insurers are transfel1'ed to 

insurers that suffered "excess losses." The government does not directly limit those losses; it 

mcrely administers a transfer of funds from successful insurers to unsuccessful ones in a budgetneutral way. 

That's how risk corridors are supposed to work and if you read the statute, how you would 

assume they work. They don't. The risk corridors, as defined in a series of regulations, put 

taxpayers on the hook to protect insurers that sell through the exchanges against "losses." 

CMS has made it clear that it will make risk corridor payments even if the aggregate amount of 

losses in which the govenunent "shares" exceeds the profits in which it "shares." CMS has not 

provided estimates on just how much this "loss-sharing" might cost. An article that appeared in 

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the October 2013 issue of Health Watch, a publication of the Society of Actuaries, says that the 

costs "could be substantial." 

In the [March 2013] final rule HHS states that '[the Congressional 

Budget Office] did not separately estimate the program costs of 

risk corridors, but assumed aggregate collections from some 

issuers would offset payments made to other issuers.' However, if 

all of the plans in a market (or even just the most popular ones) end 

up pricing their products too low and so suffer losses, the 

government will end up needing to fund this program, and the 

required funds could be substantial ... HHS has clarified that it is 

conscious of the risk corridor program's non-symmetric nature, 

and states in the March regulations that funds will be paid out 

regardless of the balance between payments and receipts. 

In its November 2013 rulemaking, written after that article was published, the agency proposed 

to further increase those corporate welfare payments in light of the President's decision to delay 

enforcement of certain federal standards that require insurers to cancel "non-grandfathered" 

policies. The new policy did not require insurers to renew policies, but it did create the 

possibility that they might, so long as their state insurance commissioner decided to allow such 

renewals. This "transition policy," CMS feared, would adversely affect insurers selling through 

the exchanges, since fewer cancelations would compel fewer people to seek coverage there. So 

the agency decided to use the risk corridor rules to increase payments to celiain plans. The 

preamble to its November 2013 rule states: 

6 
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Weare proposing an adjustment to the risk corridors formula that 

would help to further mitigate potential QHP [qualified health 

plan] issuers' unexpected losses that are attributable to the effects 

of the transition policy. This proposed adjustment may increase the 

total amount of risk corridors payments that the Federal 

govemment will make to QHP issuers, and reduce the amount of 

risk corridors receipts .. , We cannot estimate the magnitude of this 

impact on aggregate risk corridors payments and charges at this 

time. 

So risk corridors will cost more than previously estimated, though their costs have not previously 

been estimated. At least with subsidies and reinsurance, we have a rough idea of how much 

taxpayers will be tuming over to insurers. With risk corridors, we have none. The Administration 

refuses even to hazard a guess. 

In effect, the agency has turned the risk corridor prOh'fam, which should be budget-neutral like 

the risk adjustment program, into a form of corporate welfare. CBO has recently estimated that, 

on net, insurer payments into the risk corridor program will exceed disbursements by $8 billion 

over 3 years. CBO's estimate is accompanied by a number of caveats. There simply is too much 

uncertainty surrounding the law's implementation to rely exclusively on this latest CBO 

estimate. Instead, Congress should amend the Act to stipulate that aggregate risk conidor 

disbursements cannot exceed receipts. 

7 
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Arguments Against Repealing or Changing The Reinsurance and Risk Corridor Provisions 

Those who defend retention of these provisions argue that Part D contains reinsurance and risk 

corridor provisions and that it's not fair to remove these corporate welfare provisions from 

insurers at this time. 

1. Part D includes reinsurance and risk corridors_ 

Reinsurance_ The analogy between the reinsurance program in Part D and in the health care law 

is inapt. The two have little to do with each other, beyond the fact that the two laws use the same 

term to describe two very different things. 

The reinsurance program in Part D is embedded in the basic benefit. The law stipulates that 

government will bear 80 percent of the cost of drug expenses above the out-of-pocket limit 

($4,550 in 2014). Private prescription drug plans cover 75 percent of the cost between the 

deductible ($310 in 2014) and the initial coverage limit ($2,850 in 2014) and 15 percent of the 

cost above the out-of-pocket limit. These rules are clearly spelled out in the statute. They 

change somewhat from year to year, but are not subject to agency whim. 

Compare these hard and fast rules to those in the health care law. Reinsurance is not embedded 

in the basic benefit. The statute requires participating plans to go at risk for all of the costs 

associated with the essential health benefits package. The "reinsurance" program is overlaid on 

top of this in a ham-handed way, providing insurers who sell through the exchanges with $10 

billion in money this year and a total of $20 billion over 3 years. The point at which 

"reinsurance coverage" kicks in has varied wildly. Initially, CMS said that it would pay 80 

percent of claims between $60,000 and $250,000. Then last November, they reduced the 

attachment point to $45,000. They then added that if insurers didn't submit enough claims to 

8 
29 


Insert offset folio 17 here 87202.017

exhaust the $10 billion, they would pay it out to the plans anyway by tinkering with the 80 

percent number. In other words, the program's parameters still are not finally determined. 

These regulatory improvisations suggest that what the law calls reinsurance is instead a subsidy 

amateurishly disguised as reinsurance the direct transfer of money from group health plans to 

exchange plans. There is no plausible comparison to the Part D program and it should be 

repealed. 

Risk corridors. The risk corridors in the health care law at least bear a superficial resemblance 

to those in Part D. But that superficial resemblance breaks down on closer examination. The 

two programs differ so dramatically from one another that it is impossible to equate the two risk 

corridor provisions. 

The Part D program is voluntary, while the coverage under the health care law is mandatory. 

This is an immense difference that cannot be overstated. No senior is required to have 

prescription drug coverage of any kind, much less to enroll in a Part D plan. The IRS does not 

assess tax penalties against seniors who choose to go without drug coverage. This creates the 

potential for a massive selection problem, one that is exacerbated by certain features of 

prescription drug-only plans, which will be discussed below. These selection problems make 

risk corridors more necessary in the Part D program than under the health care law. 

The mandatory nature of coverage under the health care law creates significant advantages for 

companies that sell through the exchanges, particularly since governrnent subsidies can be 

obtained only there. 

Cancelations. The Part D program did not require cancelation of anyone's prescription drug 

coverage. Indeed, the law provided subsidies to employers to continue their existing coverage, 

9 
30 


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thus denying prescription drug plans access to millions of potential customers. In addition to the 

choice of remaining uninsured, seniors could keep the coverage they already had. The lone 

exception was Medicaid, a change that was made because Congress believed that Medicare 

should be the primary source of medical and prescription drug coverage for all seniors. Given 

the frail state of many Medicaid-eligible seniors, including those in nursing homes, this wasn't 

necessarily a net positive for prescription drug plans. 

The health care law, of course, has required the cancelation of millions of individual and small 

group policies with many more yet to come. These cancelations, as noted above, benefit insurers 

that sell through the exchanges. 

Nature ofthe product. Prior to enactment of the MMA, stand-alone prescription drug plans did 

not exist in nature. The potential for adverse selection was considerable, particularly because the 

Part D program is voluntary. The health care law, by contrast, merely requires insurers to issue 

a product that's already quite commonly sold in the individual and small group market in the 

various states. They are not being asked to create a new product subject to adverse selection and 

offer it to people who are under no obligation to obtain coverage. 

Predictability of drug costs. Unlike medical costs, prescription costs are relatively easy for a 

consumer to predict. Most seniors are on medication that they take daily and they know what 

their medicines cost. Moreover, CMS designed what can fairly be described as an "adverse 

selection tool," a website where a senior could enter the drugs they've been prescribed and the 

pharmacy where they preferred to shop and be told which plans offered them the best value - not 

merely the lowest premium, but the best combination of premium and cost-sharing for their 

prescriptions at their favorite pharmacy. 

10 
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Medical costs, by contrast, are more difficult to predict and vary much more from year to year. 

The healthcare.gov website provides only the most general information about premiums and 

cost-sharing and virtually no reliable information about which providers participate in a plan's 

network. All of that gives insurance companies decisive advantages over against consumers 

Cost. Perhaps the most dramatic difference between risk corridors in Part D and in the health 

care law is their cost. The Part D risk corridors were designed to be budget neutral. The 

Medicare Trustees report suggests that they actually have saved the government a small amount 

of money. The risk corridors in the health care law, by contrast, will cost an amount that CMS 

hasn't bothered to estimate. While CBO assumed they will be cost-neutral, they will not be, as 

I've discussed above. This is perhaps the biggest practical difference between the two programs 

- Part D risk corridors have been neutral to mildly positive for taxpayers, while the health care 

law's risk corridors could be quite expensive. 

It is unclear to me why Congress would insist that these two very different laws should maintain 

superficially similar risk corridors. But if Congress insists on such conformity, a better way to 

achieve it would be to repeal the risk corridor provisions from both laws. Part D plans are 

months away from submitting bids for Year 10 of the program. If risk corridors served a useful 

purpose early on, it is unclear what that purpose might be now. Repealing them in the health 

care law would eliminate a costly corporate welfare subsidy, saving taxpayers unspecified 

billions of dollars. 

11 
32 


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2. It's Unfair to Take Corporate Welfare Subsidies Away From Insurers 

Defenders of the health care law's reinsurance and risk corridor provisions advance another line 

of argument: that insurers are entitled to corporate welfare payments because they've been 

promised them by regulators. It would be unfair for Congress to take them away now. 

It is odd to argue that it is unfair for the government to change its rules governing these 

provisions. The agency has been changing the rules on these programs repeatedly and they're 

still not entirely settled. With each regulatory iteration, the provisions become more generous to 

insurers - there are lower attachment points for reinsurance and a promise to distribute the entire 

$10 billion even if insurers don't submit enough claims to justifY that sum; the agency will 

"adjust" risk corridor payments to account for the fact that fewer people will have their insurance 

canceled than previously anticipated. 

The argument that changing the rules to benefit insurers is good, while changing them to their 

detriment is bad is really little more than special pleading. Congress needs to get the policy 

right, irrespective of what insurers think they are entitled to. Congress should require the 

industry to price its products without the distortions of corporate welfare and to accept losses if 

their projections prove wrong. 

Others argue that premiums will rise if these provisions are repealed. That is not a terribly 

compelling argument. With respect to reinsurance, it is fair to ask, "Whose premiums?" While 

some have implausibly suggested that taking $10 billion out of group health plans has no effect 

on their premiums, that is a practical impossibility. Under the health care law, their premiums 

have to be sufficient to pay, not only the medical claims of their members, but the most costly 

medical claims of those the plan doesn't cover - people who buy policies through the exchanges. 

12 
33 


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Clearly, if that $10 billion were returned to the group health plans and additional assessments 

scheduled for 2015 and 2016 were repealed, premiums for those enrolled in such plans would be 

lower than under current law. 

The argument that repealing risk corridors would raise premiums is really quite curious. 

Complexities aside - and the interactions between reinsurance, risk adjustment payments, 

medical loss ratio requirements and risk corridors are extremely complex -- symmetric risk 

corridors should be budget neutral. Plans set their premiums to cover anticipated medical claims, 

administrative costs and profits. Once the government has made its series of calculations, 

revenues should more or less randomly come in "too" high or "too" low. That is why CBO 

assumed that risk corridors wouldn't cost the taxpayers money and why the Part D risk corridors 

have actually marginally reduced the program's costs. 

It is true that some plans may have badly underestimated their costs. If risk corridors were 

repealed, such plans may have to raise their premiums next year to recover their losses. But that 

doesn't mean that every plan will have to raise its premiums, only those that botched their 

estimates. As in any line of business, if revenues don't cover costs, there are losses. What's 

troubling about risk corridors in the health care law is that losses may in the aggregate far 

outweigh gains in the exchanges and insurers want to pass a substantial chunk of these losses 

onto the taxpayers. That's not how a marketplace is supposed to work. 

Indeed, risk corridors that payout more than they take in present a moral hazard. The previously 

referenced Health Watch article observed that risk corridors "could provide an incentive for an 

issuer to price its plans competitively (with reasonable but aggressive assumptions), and if its 

price ends up being too low to cover costs, it will share that burden with HHS, while at the same 

time gaining market share." 

13 
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Those who defend these programs are, in essence, arguing that plans may have behaved 

differently because government created a moral hazard and that it is therefore wrong for 

Congress to remove the moral hazard. Hardly compelling. 

Some also have argued that, if the repeal of risk corridors were to result in a health plan raising 

its premiums, the government will have to pay bigger subsidies to people who enroll in that plan. 

That's not entirely true. The most recent report I've seen out of CMS indicates that around 20 

percent of those who had selected a plan as of the end of December will not receive subsidies at 

all. So these premium increases will be passed through to consumers, who can avoid the 

increase by selecting another plan during open season. 

But even if every plan were to raise its premiums as a result of the repeal of risk corridors (which 

would be very disturbing, since it would mean that every plan suffered unusually large "losses," 

suggesting that the effect of the moral hazard was powerful), there is an important policy 

difference between subsidizing individuals who buy coverage and subsidizing corporations that 

sell it. Most people would likely be sympathetic to the former; few would find the latter to be 

appropriate policy. 

Then there is the argument that insurers plauned on receiving this money and it would therefore 

be wrong for Congress to take it away. That is not a line of argument that lawmakers have found 

terribly persuasive when applied to individuals. Millions of individuals and small business 

owners planned to renew their coverage; they didn't plan to have it canceled, but that didn't stop 

the government from ordering the cancelations. Many workers were planning to stay in their 

employer-sponsored plans; they didn't plan to have their employers drop coverage, but that is 

one indirect result of the health care law. My mother-in-law planned to continue to receive care 

from the area's largest health system; she didn't plan on having that system dropped from her 

14 
35 


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Medicare Advantage network, but that is one consequence of the Medicare cuts in the health care 

law. 

Millions of Americans have been asked to adjust, adapt and evolve, to endure adverse 

consequences without complaint and without relief. Congress has not, to this point, chosen to 

intervene on their behalf. Indeed, the most important lesson one can draw from last fall's 

controversy over policy cancelations is that the government believes that individuals and small 

firms can adjust to cancelations better than insurers can adjust to renewals. 

Lawmakers may make the same decision here, effectively deciding that the interests of insurance 

companies outweigh those of taxpayers. But I would urge you to effect a different result by 

repealing the reinsurance and risk corridor programs. 

The health care law has handed insurers that agree to sell through the exchanges enormous 

opportunities to increase their revenues by selling their products to more people. It subsidizes 

the cost of their product. It penalizes people who don't buy their product. Regulators have 

required the cancelation of "non-grandfathered" individual and small group policies and will 

cancel many more later this year, leaving these people with little choice but to obtain insurance 

through an exchange. It is a trillion dollar government effort to drive business to those insurers 

who agree to assist in the implementation of the health care law. 

This combination of mandates, subsidies, cancelations and tax penalties is advantage enough, 

without the addition of corporate welfare that reinsurance and risk corridors provide. The 

government has laid out its playing field and established its rules. Let the insurers compete. 

15 
36 

Chairman ISSA. Mr. Jost? 

STATEMENT OF TIMOTHY S. JOST 

Mr. JOST. Thank you, Mr. Chairman, Ranking Member, members 

of the committee. 

The Affordable Care Act’s risk corridor program is not a bailout. 

It is a rational approach to risk sharing in a public/private insurance partnership. 

The ACA’s premium stabilization programs have arguably already saved consumers and the Federal Government billions of dollars, and as we have heard several times today, the CBO is now 

projecting that the program will produce $8 billion in revenue for 

the Federal Government over the next 3 years. A very strange bailout. 

But the risk corridor program is moreover a commitment of the 

Federal Government to private businesses, and breaking this commitment would not only be a breach of contract, it could possibly 

be an unconstitutional taking. The Federal Government must 

honor its debts and it must honor its contracts. 

The ACA’s risk corridors are modeled after the risk corridor program in the Bush administration’s Medicare Part D drug plan. The 

Bush administration used risk corridors and reinsurance to get private insurers to offer a product that they had not offered before 

and did not know how to price. Insurers that offered Medicare Part 

D drug plans would price their premiums based on actuarial estimates of what providing the coverage would cost. If actual costs 

were higher than expected spending, the Government would absorb 

part of the loss. Conversely, if actual expenses fell below expected 

spending, the Government would recover excess gains. Additionally, the Bush prescription drug legislation reinsured 80 percent of 

all drug costs above a catastrophic threshold. These provisions, still 

in effect today, have been a key to the success of the Part D drug 

plan. Moreover, the Part D risk corridor program has turned out 

to be a net moneymaker for the Federal Government in every year 

it has been in effect. 

There is a long history of the Federal Government sharing risks 

with private insurers. Federal subsidies to the national flood insurance program, which Senator Rubio voted to extend last week, have 

for 35 years enabled private individuals to purchase flood insurance through the Federal Government. The farm bill passed by this 

body last week included Federal reinsurance for crop insurance. 

The ACA encourages private insurers to offer individual market 

coverage without underwriting for preexisting conditions through 

the exchanges. Congress built on the experience of the Medicare 

drug plan, creating a permanent risk adjustment program and temporary reinsurance and risk corridor programs. The Affordable 

Care Act risk corridors are, in fact, less generous than the Bush 

administration’s programs, even though the risk that these companies are taking on is much greater, but they are intended for the 

same reason: to achieve stability for insurers and lower premiums 

for enrollees. In fact, because insurers did not have to charge a risk 

premium for this new product, premiums for 2014 came in 16 percent below CBO projections, saving the Federal Government billions of dollars. 

37 

A bailout occurs when the Government intervenes to save a business from its own unwise decisions without a legal obligation to do 

so. With the risk corridor program, however, the Government has 

encouraged insurers to take a risk by sharing, not assuming the 

risk. The Federal Government has entered into a contract with insurers to provide coverage through the exchange. Insurers relied on 

the premium stabilization program in setting their premiums. 

But most importantly, removing the backstop of the risk corridor 

program would put private insurers at higher risk, possibly leading 

to insolvencies that would need to be covered at great expense by 

the State and Federal governments. It would lead to fewer participants and higher premiums in 2015. Since the full cost of premiums in the exchange is borne by the Federal Government, once 

lower and middle income enrollees pay a set percentage of their income, the cost of this program to the Federal Government would 

increase dramatically. 

The risk corridor program is a commitment of the United States 

Government to private businesses, which it has partnered with to 

offer a public service. It is modeled after a successful program created by the Bush administration. Just, again, as the United States 

must not default on its debts for narrow political purposes, it must 

not breach its promises. Doing so is not only a breach of trust, it 

is also a foolish and short-sighted public policy. 

Thank you. 

[Prepared statement of Mr. Jost follows:] 

38 


Insert offset folio 24 here 87202.024

House Committee on Oversight and Government Reform 

The Operation of the Affordable Care Act's Risk Corridor Program 

Timothy Stoltzfus Jost 

Professor of Law, Washington and Lee University 

The Affordable Care Act's risk corridor program is a reasonable approach to risk sharing 

in a pUblic-private insurance partnership. It is not a bailout. The ACA's premium 

stabilization programs, including its risk corridor provisions, have helped reduce 

premiums for qualified health plans, saving American consumers and the federal 

government billions of dollars. The CBO, moreover, estimates that the risk corridor 

program alone will result in $8 billion in revenues for the federal government. 1 The 

premium stabilization programs are, moreover, at this point a commitment of the federal 

government to private businesses. Breaking this commitment would be a breach of 

contract and possibly an unconstitutional taking. Just as the United States must honor its 

debts, it must honor its contracts. 

The Risk Corridor Concept was an Innovation of the Bush Administration 

First, a little history. In 2003, the George W. Bush administration faced a quandary. The 

administration was under tremendous political pressure to create an outpatient 

prescription drug benefit in the Medicare program, but was ideologically opposed to 

doing so through a public insurance program like the existing Medicare Parts A and B. 

The administration instead wanted to extend coverage through a government-subsidized 

private insurance program. But prescription drug-only private plans did not exist, 

therefore private insurers would have to create a new product. Insurers had no actuarial 

experience in pricing such a product, and the risk would be considerable. Private insurers 

would be reluctant to take on this risk. 

The administration devised a solution that was at the same time both innovative and 

based on a long-tradition of public-private partnerships in insurance matters-risk 

corridors. Insurers that decided to offer a Medicare Part D drug plan would price their 

premiums based on their best actuarial estimates of what providing the coverage would 

cost. If actual costs exceeded 2.5 percent of expected spending, the government would 

absorb 75 percent ofthe excess 10ss.2 If actual costs exceeded expected spending by 

more than 5 percent, the government would cover 80 percent of the excess loss. 

Conversely, if actual expenses fell below expected spending by more than 2.5 percent, 

the government would recover 75 percent of excess gains. The government would 

recover 80 percent of excess gains if actual costs fell more than 5 percent below expected 

costs. Additionally, the Bush prescription drug legislation offered to reinsure 80 percent 

of all drug costs above a catastrophic threshold. Since enrollees paid 5 percent of 

catastrophic costs, insurers were actually only responsible for 15 percent of catastrophic 

costs. 
39 


Insert offset folio 25 here 87202.025

The rest is history. A Republican Congress created the Part D drug program. 3 With risk 

corridor and reinsurance protection, private insurers showed up to participate in the Part 

D program, and they offered initial premiums below those that had been expected. The 

risk corridors are still in place a decade later, and the program has been widely seen as a 

success. 

Although the risk corridor solution to sharing risk was innovative, there is a long history 

of the federal government covering risks that private insurers will not assume to make 

private insurance viable. The National Flood Insurance Program has for 35 years 

enabled private individuals to purchase flood insurance through the federal government, 

allowing private insurers to offer homeowners insurance at reasonable rates by excluding 

the costly risk of flooding. 4 Senator Rubio voted with two thirds of the Senate last week 

for bipartisan legislation to continue federal subsidies for flood insurance. 5 Similarly, the 

Terrorism Risk Insurance Act of 2002 allowed cornmercial insurers to continue to offer 

coverage for businesses at reasonable rates by reinsuring the risk of terrorist attacks. 6 

The farm bill recently passed by this body reaffirms the provision of federal reinsurance 

for crop insurers. 7 Cost-plus contracts in the defense industry are also similar in 

nature--the government assumes the risk of cost overruns to incentives private 

businesses to perform a necessary task for the government. 

The Affordable Care Act Premium Stabilization Programs 

In 2009 and 2010, a new Congress faced a similar quandary to that presented by 

Medicare drug coverage. Congress was proposing to create a national program through 

which private insurers would offer coverage in the individual market without pre-existing 

condition underwriting through marketplaces known as exchanges. Insurers had little 

experience with offering health insurance in the individual market without health status 

underwriting, and were understandably reluctant, as they were with flood, crop, and 

terrorism coverage and outpatient drug coverage for seniors, to take on the risk by 

themselves. 

The Affordable Care Act, therefore, contained three premium stabilization programs, two 

temporary and one permanent. The permanent program, risk adjustment, was intended to 

move revenue from insurers who ended up with a disproportionate share oflow cost 

insureds to insurers who ended up with high cost insureds. 8 This is a zero-sum program 

that does not receive any federal funding. A three-year reinsurance program, like that in 

the Part D drug program, provided a backstop for all insurers in the individual market for 

high-cost cases, funded entirely by a fee imposed on all insurers and self-insured plans. 9 

Finally, a three-year temporary risk corridor program program, would, much like that 

created by Medicare Part D, assure insurers that offered qualified health plans through the 

exchanges that the risk that they took on by entering the program would be shared by the 

federal government. 10 The Affordable Care Act risk corridor program is less generous 

than the Bush administration's Part D program was in its first years. Risk sharing 

payments from the federal government do not kick in until expenses exceed expected 

revenues by 3 percent rather than 2.5 percent, and then only cover halfthe losses rather 
40 


Insert offset folio 26 here 87202.026

than 75 percent. Risk sharing payments do not increase to 80 percent oflosses until costs 

exceeded expected revenues by 8 percent rather than 5 percent. Conversely, insurers 

whose actual spending is less than expected spending will contribute less to the program. 

Regulations specifying the parameters of the premium stabilization programs were 

finalized in the spring of 2013, and were relied on by insurers in setting their premiums 

and entering into contracts with the government for marketing their policies for 2014. 

The ACA Premium Stabilization Programs Reduce Premiums 

The combined premium stabilization programs achieved their goal. In the 36 states 

served by the federal exchange, the marketplaces are served by an average of 8 insurers 

offering 53 plans. 11 In part because insurers did not have to charge a risk premium for 

the risk of underwriting a new product, premiums came in 16 percent below previous 

Congressional Budget Office projections, saving enrollees an average of $11 00 per 

year.12 This in turn will save the federal government $190 billion over ten years in 

premium tax credits. 13 A study released last week by Price Waterhouse Cooper found 

that ACA exchange premiums cost the same or less than comparable employer 

coverage. 14 

The CBO did not originally assign a cost to the ACA risk corridor program, presumably 

because it expected contributions from insurers with below projected costs would balance 

out pay-outs to insurers with above projected expenses. In fact, however, the Part D drug 

plan risk corridor program has turned out to be a net money maker for the federal 

government. In every year since 2006, the federal government has received more from 

the program than it has paid out, with annual receipts ranging from $100 million to $2.6 

billion. IS For the first two years, at least, far more insurers paid in that received 

payments. Simulations developed by actuaries for discussion by a National Association 

of Insurance Commissioner actuarial group last year suggested that the same thing might 

happen with the ACA risk corridor program. 

Whether this will turn out to be true for ACA insurers remains to be seen. The 

Congressional Budget Office currently projects that the risk corridor program will over 

three years result in $16 billion in revenue for the federal government, with $8 billion in 

expenditures, for a revenue gain of$8 billion. It is possible, however, that at least in the 

first year, the risk corridor program will end up costing more than it brings in. Problems 

with the website in the first two months of its operation, which continue to exist in some 

states, have led to below expected early enrollments and stalled enrollment campaigns. 

Determined efforts to discourage enrollment by opponents of the ACA, including state 

efforts to imPtede the work of navigators and assisters, recently declared unconstitutional 

in Missouri; 6 direct campaigns to persuade young people not to enroll; and continuing 

efforts by ACA opponents to spread unfounded rumors about insecurity of personal 

information submitted to the exchange have depressed enrollment. Misinformation and 

confusion about the program are rampant. 

Although enrollment through the exchanges is currently strong, and open enrollment lasts 

for another two months, it is possible that enrollment will come in below expectations. 
41 


Insert offset folio 27 here 87202.027

Since those most likely to sign up for coverage early are those who need it most, it is 

possible that the risk pool will be more costly than the pool insurers anticipated, although 

no one, including insurers, expected a normal risk pool for the first year of the program. 

Moreover, the political controversy surrounding the non-renewal of non-conforming 

individual insurance policies for 2014 forced the administration to allow the continuation 

of2013 individual policies for another year, changing the composition ofthe expected 

risk pool in those states that allowed renewal of2013 policies. 

The Risk Corridor Program is not a Bailout 

If risk corridor payments do exceed contributions, this still would not be a bailout by any 

stretch ofthe imagination. A bailout occurs when the government intervenes to save a 

business from financial distress--often caused by the business' own unwise decisionswithout a legal obligation to do so. When private businesses run into financial distress 

because of risky behavior of their own, and the government rescues them, that is a 

bailout. The problem with bailouts is that they create a moral hazard problem-private 

businesses are incentivized to take unreasonable risks with the potential for private gain, 

trusting government to rescue them if they lose instead. The Wall Street bailouts resulted 

in huge losses for investors, consumers, and the taxpayers, but often rewarded those who 

took the risks. 

This is not how the risk corridor program operates. The government is encouraging 

insurers to take a risk, but is sharing, not assuming, that risk. The government has by law 

prospectively encouraged insurers to take a risk by assuming a contractual obligation to 

share that risk. 

The necessity of such a program, and impliedly the hypocrisy of trying to make an 

election issue out of it, has been recognized by conservatives such as Christopher Holt of 

the American Action Forum,17 Yevgeniy Feyman in Avik Roy's column at Forbes,I8 and 

Avik Roy himself. 19 Feyman recognizes that opposition to these programs is shortsighted, since such programs will no doubt be necessary if Republican premium support 

proposals ever succeed. Feyman states: 

... any conservative reform plan for universal coverage will have to use similar 

methods of risk adjustment. The point here is simple - if you want insurers to 

participate more broadly in the individual market, you'll need to offer a carrot to 

offset the unavoidable uncertainties. And railing against risk corridors now will 

make them a hard sell further down the road. Risk adjustment mechanisms get 

you the buy-in of insurers, but they also helps keep premiums at manageable 

levels while insurers develop enough experience to properly price plans on their 

own. This helps encourage people to enroll in these plans, which in tum helps 

insurers develop the necessary pricing experience - resulting in a virtuous cycle. 

The direct beneficiaries of the premium stabilization programs are American consumers, 

who are paying lower insurance premiums because of the program. Taxpayers also 

benefit because premium tax credit payments are lower if premiums are lower. Indeed, 
42 


Insert offset folio 28 here 87202.028

whatever happens in 2014, in the end the taxpayer will likely come out ahead under the 

risk corridor program alone, as was true under the Part D program, but time will tell. 

Repealing the Risk Corridor Program would be Illegal, Unwise, and Possibly 

Unconstitutional 

Repeal of the risk corridors also would raise questions about the trustworthiness of the 

federal government. The federal government has entered into a contract with insurers 

that provide coverage through the exchanges. That contract incorporates the federal laws 

and regulations governing the exchanges, including the risk corridor program. Insurers 

relied on the tenus of the ACA, including the risk corridor program, in setting their 

premiums. The government, like a private party, is bound by its contracts. 

Indeed, the failure of the United States to honor its commitment to private insurers under 

the risk corridor program could be an unconstitutional taking, prohibited by the Fifth 

Amendment, as contractual rights are property rights for purposes of the Fifth 

Amendmeneo even though the federal courts prefer to find a breach of contract rather 

than a taking when both are possible claims. Moreover, the Supreme Court has 

recognized, honoring its contracts is in the "Government's own long-run interest as a 

reliable contracting partner in the myriad workaday transaction of its agencies.,,21 This 

includes a general im~lied covenant of good faith and fair dealing as well as the express 

tenus of the contract. 2 

But most importantly, refusing to honor its obligations would be foolish. Removing the 

back-stop of the risk corridor program would put private insurers at much higher risk, 

possibly leading to insolvencies that would need to be covered at great expense by the 

state and federal governments. It would certainly lead to fewer insurers participating in 

the exchange in 2015, and to higher premiums. Since the full cost of premiums in 

exchange coverage is borne by the federal government once lower- and middle-income 

enrollees pay a set percentage of their income, the cost of the program to the federal 

government would increase dramatically. These are, no doubt, results desired by 

opponents of the ACA, but are they good for the nation? Moreover, consider the 

consequences for all federal programs if the United States cannot be trusted to honor its 

commitments when it contracts with private businesses. 

Conclusion 

The risk corridor program is not a bailout. It is a contractual commitment of the United 

States government to private businesses with which it has partnered to offer a public 

service. It is modeled after a successful program created by the Bush administration. 

Just as the United States must not default on its debts for narrow political purposes, it 

must not breach its contracts. Doing so is not only a possible violation ofthe 

Constitution, but also foolish and short-sighted public policy. 
43 


Insert offset folio 29 here 87202.029

1 CBO, The Budget and Economic Outlooks, 2014 to 2024 (2014). 

2 42 U .S.C. § l395w-115( d). 

3 42 U.S.C. §§ 1395w-lll et seq. 

442 U.S.C.§§ 4001 et seq. 

5 http://politics.nytimes.comlcongress/votes/113/senate/2119 

6 Pub. L. 107-297, 116 Stat. 2322 as amended by Pub. L. 109-144, 119 Stat. 2660, and 

Pub. L. 110-160, 121 Stat. 1839. 

77 U.S.C. § 1508. 

842 U.S.C. § 18063 

9 42 U.S.C. § 1806l. 

10 42 U.S.C. § 18062. 

11 ASPE, Health Insurance Marketplace Premiums for 2014 (2013) 

http://aspe.hhs.gov/healthireports/20 13/MarketplacePremiums/ib _marketplace "premiums 

.din 

12lbid. 

13 Topher Spiro and Jonathan Gruber, The Affordable Care Act's Lower than Projected 

Premiums will Save $190 billion (2013) 

http://www.americanprogress.org/issues/healthcare/reportl2013/10123177537/theaffordable-care-acts-lower-than-projected-premiums-will-save-190-billionl 

14 PWC, Health Insurance Premiums: Comparing ACA Exchange Rates to the Employer 

Market, pwchealth.com/cgi-locallhregister.cgilreg/pwc-hri-health-insurance-premium.pdf 

IS http://cms.hhs.govlMedicarelMedicare-AdvantagelPlan-PaymentlPlan-PaymentData.html ?DLSort=O&D LPage= 1 &DLSortDir=ascending 

16 St. Louis Effort for Aids v. Huff(W.D. Mo. January 23,2014), 

http://media.npr.org/documents/20 14/janlmissouriorder.pdf 

17 Reinsurance, Risk Corridors and Bailouts, Oh My! 

http://www.realclearpolicy.comlarticles/2014/01/23/reinsurance_ risk_corridors _ and_bail 

outs_ oh _ my-81 O.html 

18 Obamacare's Risk Corridors Won't be a Bailout ofInsurers (2014) 

http://www.forbes.comlsites/theapothecary/2014/01/22/obamacares-risk-corridors-wontbe-a-bailout-of-insurersl 

19 http://www.forbes.comlsites/theapothecary/20 14/0 III O/humana-obamacare-exchangeenrollment-more-adverse-than-previously-expectedl 

20 Lynch v. United States, 292 U.S. 571,579 (1934). 

21 Robert Meltz, When Congressional Legislation Interferes with Existing Contracts: 

Legal Issues (CRS 2012); United States v Winstar Corporation, 518 U.S. 839, 883 

(1996). 

22 Centex Corp. v. United States, 395 F.3d 1283 (Fed.Cir. 2005). 
44 

Chairman ISSA. Thank you. 

I will now recognize myself for a series of questions, and I have 

a lot of questions. 

Mr. Jost, just so you understand—and you can comment back for 

the record, but I read the elements of the bill. The insurance companies are entitled to absolutely nothing unless Appropriations appropriates money. So technically we can take the tax, take all $16 

billion of the tax, and pay none of the $8 billion. Statutorily we say 

we do it, but it is subject to appropriations. So I know the President is a constitutional scholar. I would appreciate it if you would 

answer for the record on your view of it after researching it. 

Chairman ISSA. Mr. Goodman, I want to —— 

Mr. JOST. Can I respond to that or will I have time later? 

Chairman ISSA. No. You helped write the bill. So the fact is that 

is what the bill says. 

Mr. Badger and Goodman, I have got a bunch of questions and 

very little time. Let me just understand a couple of things that the 

public needs to understand that are tangential but are part of this. 

There is an estimate of $16 billion to be gotten from overpayments, meaning I pay too much because I am in ObamaCare. I pay 

too much. The Government does not get it rebated when, in fact, 

I paid too much for my—I think it is a gold plan that we are required to buy. I pay too much. The Government takes that money. 

They do not let me get the discount for overpayment. Is that correct? 

Mr. GOODMAN. I think that is right. 

Chairman ISSA. They then—let us just say the Blues, United 

Health, any of them. They have another one that is a loss leader 

that they charge too little on. They get my money for the one when 

they were trying to buy market share. Is that right? 

Mr. GOODMAN. That is right. 

Chairman ISSA. Now, it could be the reverse. I could be getting 

the loss leader and somebody else could be paying. 

So this whole balancing act includes the assertion that you take 

from one group of people who pay too much and give it to another, 

give it back to the companies. 

Additionally, are they not taking $63 from every insurer in the 

way of a tax so that every American is paying $63 to fund exchanges? 

Mr. GOODMAN. For the next 3 years, yes. 

Chairman ISSA. For the next 3 years. So Americans who are losing the health care plan they wanted, the doctor they wanted, and 

so on, but have a private plan are paying $63 to run these exchanges. It is just another tax, a hidden tax. 

Is there not another $100 billion or so in health insurance taxes 

that are also being paid that are funding ObamaCare? 

Mr. GOODMAN. Yes. Everybody is being taxed, even the Medicare 

Advantage plans, the Medicaid managed care plans. They are all 

being taxed. 

Chairman ISSA. Okay. So Americans are seeing part of their 

health care costs going up, in fact, for taxes that are being paid for 

subsidies like the underwriting here in this bill. 

Mr. GOODMAN. Yes. 

45 

Chairman ISSA. It is amazing that they passed a bill that could 

hurt so many people, including the people who already were paying 

out of their own pocket for their insurance. 

Mr. Badger, you were active in Medicare Part D and you saw it. 

Is it true that Medicare Part D has a substantial difference in what 

we did or did not know about Medicare Part D versus what we did 

or did not know about these plans? 

Mr. BADGER. Yes. 

Chairman ISSA. And in the case of Medicare Part D, it has been 

giving us revenue. Is that correct? 

Mr. BADGER. That is correct. 

Chairman ISSA. And is that revenue not essentially from overcharging for Medicare Part D? 

Mr. BADGER. It is revenue that derives from the fact that insurers’ actual revenues exceeded their costs by more than they expected. 

Chairman ISSA. So the source that CBO was scoring—and I am 

not going to get into as many things as some other members might, 

but the source of this revenue that we are talking about coming to 

the Government as a good thing is, in fact, taxing our senior citizens. Whenever there is an overpayment, too much for the insurance, instead of rebating it back to the senior, we are taking it as 

tax revenue. Right? 

Mr. BADGER. The revenue is collected and it is not distributed 

—— 

Chairman ISSA. So our seniors are being taxed on their paying 

too much for Medicare Part D. Right? 

Mr. BADGER. It has to calculate that way. 

Chairman ISSA. So it is not all that good a program when it goes 

on in perpetuity. Is it? 

Mr. BADGER. A risk corridor program? I would agree. It is not 

one that goes on in perpetuity. 

Chairman ISSA. So if we were going to do a risk corridor program, would it not be fair to make sure that at least the excesses 

in the reductions are fairly distributed back to the insured rather 

than going to the Federal Government as just another tax on people trying to buy necessary health insurance? 

Mr. BADGER. I had not thought about that approach, Mr. Chairman, but at the very least, I would say that the Government 

should not pay out more in disbursements to insurance companies 

than it collects. 

Chairman ISSA. You know, being a bleeding heart conservative I 

guess here, I am trying to figure out why people’s necessary health 

care should be increased in price, called a revenue, so that if CBO 

is right, what we are really doing is taxing their health care and 

making it more expensive. And if they are wrong, what we are 

doing is taking the American people’s hard-earned tax dollars to 

bail out insurance companies. We really lose either way as buyers 

of insurance. Is that not true, Mr. Goodman? 

Mr. GOODMAN. I would say so, yes. 

Chairman ISSA. Mr. Jost, the one item I wanted to have you respond for the record. But any of the questions I ask now if you 

could briefly comment on them. I am certainly happy to hear it. 

46 

Mr. JOST. Well, the purpose of the Affordable Care Act was to 

cover people in —— 

Chairman ISSA. No. My questions, please, were all about are we 

not causing seniors to pay too much, are we not taxing health care. 

I mean, you helped write this thing, and I am seeing a series of 

taxes on hard-working Americans to pay for this that hard-working 

Americans did not know about. If you want to comment on that, 

that was my question. 

Mr. JOST. I actually had nothing to do with writing this legislation. 

Chairman ISSA. You have previously testified on a number—I 

thought you were more involved. 

With that, I yield to the gentleman from Maryland for his questions. 

Mr. CUMMINGS. Mr. Jost, please—first of all, thank you for clearing up that you did not write the legislation, you were not involved 

in that. And I want to thank you for your scholarly work. 

Now, would you now respond? I think you wanted to respond to 

something that you did not get a chance to respond to that was 

asked by the chairman. 

Mr. JOST. Yeah. An issue that I thought would come up today— 

and the chairman just raised it obliquely—was a CRS report that 

was made public yesterday that was actually passed on to the majority 10 days ago, but it was leaked to the press yesterday and 

first seen by minority staff and myself, claiming that appropriations are necessary before the risk corridor program can be 

operationalized. And I would just refer this committee to the case 

of Salazar v. Ramah Navajo Chapter from the Supreme Court in 

2012 in which the Supreme Court said the United States are as 

much bound by their contracts as are individuals. Although the 

agency itself cannot disburse funds beyond those appropriated to it, 

the Government’s valid obligations will remain enforceable in the 

courts. 

For better or for worse, the Federal Government—Congress 

through this statute has made a commitment to the insurers that 

if you enter this risky market, we will share the risk. We will not 

free you from the risk because the risk remains shared. Companies 

that under-price their products will not make a profit, but the Government is sharing the risk to draw them into this market. And at 

this point, after the insurers have set their rates after they have 

gone into the market, to turn around and tell them that we are not 

going to honor the obligation set out in the law I think would be 

unconscionable. 

Mr. CUMMINGS. Let me just ask you a few questions to follow up 

on that. 

Medicare Part D was one of President Bush’s signature legislative initiatives. It was supported by Senator Mitch McConnell, 

John Boehner, Speaker Boehner, Majority Leader Cantor, Budget 

Chairman Ryan, and Chairman Issa, all of whom voted for the bill. 

Medicare Part D included risk adjustment, reinsurance, and risk 

corridor programs. Is that right, Professor? 

Mr. JOST. That is correct. 

Mr. CUMMINGS. Those are the same programs that Republicans 

are now calling a bailout now that they are part of the Affordable 

47 

Care Act. I do not understand why Republicans were for these provisions before they were against them. 

But one real difference is clear. They are obsessed with destroying the Affordable Care Act, and this is just a new proposal to do 

just that. 

Professor Jost, can you explain why these risk mitigation programs were included in Medicare Part D? How did these risk mitigation programs impact the participation of insurers in the cost of 

premiums? And finally, do the Affordable Care Act risk mitigation 

programs work in the same way to increase participation of insurers and stabilize the cost of premiums? You got those three questions? 

Mr. JOST. Yes. 

The problem that the Bush administration faced in 2003 is that 

it was asking insurers to create a product that they had not previously marketed, a prescription drug plan for senior citizens. The 

three R’s in the Bush drug plan served exactly the same purpose 

that they do here. They provided reinsurance for catastrophic costs. 

They provided risk corridors so that if insurers who priced their 

products inappropriately to begin with could have some comfort 

that they would not suffer great losses, although they did it differently, but risk adjustment to move profits from the insurers who 

ended up cherry-picking to those who did not deal with the problem 

that Dr. Goodman raised. Exactly the same thing happens under 

the Affordable Care Act. 

As the chairman pointed out, there are fees that are imposed on 

insurers throughout the group market and the individual market 

to move funds not just to the exchanges but to all individual insurers to reinsure high-cost cases to try to make the individual market 

work, which it has not in the past. There is risk adjustment so that 

if insurers cherry-pick, they will have to pay the ones who take on 

the high losses. And then there are these risk corridors which 

again are there as kind of a flywheel to stabilize the program. 

It was mentioned that risk is going to be higher because of the 

transition policy announced by the Obama administration. The 

GAO factored that into account. It said that would decrease the 

revenue of the Federal Government from the program from $8.5 

billion to $8 billion. 

Mr. CUMMINGS. And the risk corridor program for the Affordable 

Care Act is 3 years. Is that right? It has a limit of 3 years? 

Mr. JOST. That is correct. It is only 3 years. So is the reinsurance 

program. 

Mr. CUMMINGS. And what about the prescription drug program? 

Mr. JOST. That has turned out to be indefinite. 

Mr. CUMMINGS. Indefinite? 

Mr. JOST. Yes. I mean, it is still in effect. It is actually still making money for the Federal Government. 

Mr. CUMMINGS. Very well. That is the same one that Senator 

Grassley applauded as being so great. 

Mr. JOST. That is correct. 

Mr. CUMMINGS. Very well. 

Mr. FARENTHOLD. [Presiding] Thank you, Mr. Cummings. 

Mr. Jost, I was informed by the majority staff Mr. Jost made a 

comment that they had had this for quite some time, and they indiVerDate Aug 31 2005 13:15 Mar 28, 2014 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 C:\DOCS\87202.TXT APRIL
48 

cate our staff just got that yesterday as well. It was originally requested by the Energy and Commerce Committee. Without objection, I would like to enter the report into the record so everyone 

has access to it. 

Mr. JOST. I was informed that no minority staff of any committee 

had heard it or seen it heretofore. 

Mr. FARENTHOLD. Thank you. 

At this point we will go to the gentleman from Florida, Mr. Mica. 

Mr. MICA. Well, thank you, Mr. Chairman and members of the 

committee. 

First of all, you know, I have the greatest respect. We have had 

a great working relationship with the ranking member, Mr. 

Cummings. But I really have to disagree with him on some of his 

opening comments. I made a few notes. 

You know, he gave the soliloquy about how we are covering all 

of these people. Actually if you look at the facts of the impact of 

ObamaCare, I have to say this that the facts differ with what the 

ranking member said in fact. Even if you took the best estimates 

of 2 million sign up, you have got about 40 million people who we 

have left behind with health care. Republicans want to find a way 

to provide health care in a cost-effective manner in which we make 

affordable health care available, and that was the intent of this. 

The 2 million they have signed up—Mr. Badger just testified—did 

you not, Mr. Badger—about how many people—it is just a big costshifting scheme that we have got here. You told me Detroit—was 

it you or Goodman? You said, Detroit, 10,000. 

Mr. GOODMAN. Yes. 

Mr. MICA. Yes. I am a victim. I did not want to sign up for that. 

The chairman had—he has got the gold plan. I think I got the 

bronze plan. I am getting screwed. Excuse the terminology before 

the committee. I am paying more. My deductibles are three times 

as much. I am forced on it. 

But you are telling me here in the testimony we have heard 

today we have got cities shifting pension plans. We have got States 

dumping into the exchange. That is the great success, shifting the 

cost? Is that what you testified to, Mr. Goodman? 

Mr. GOODMAN. Yes, it is. 

Mr. MICA. This was predicted to be a train wreck. This is a massive train wreck. You know, you can only put so much—even at 

Thanksgiving, you can only put so much parsley around the turkey, 

and you have still got a turkey. This is sinful that we are spending 

billions of dollars to set up this mess. The Government is the worst 

in setting anything up, and we have seen that from a technological 

standpoint. But from a coverage standpoint, of signing up people. 

Okay, here is CBO. The chairman started out today—this is the 

great success. We have displaced 2.5 billion people in work. Did 

you see this, Mr. Goodman? 

Mr. GOODMAN. Yes. 

Mr. MICA. I think that is an underestimate because if I was in 

business—I was in the private sector. The first thing you do—the 

29 hours. He has forced already millions of people into part-time 

employment. Would you agree with that? 

Mr. GOODMAN. I would. 

49 

Mr. MICA. Yes. They have been doing it. They did it in anticipation. These are full-time jobs—CBO. 

Here. I want to put this in the record too. In 2024, there will be 

31 million people still uncovered in a decade. That is sinful. That 

is a shame. And we are trying to cover people in a decade. Did you 

agree with this, Mr. Goodman or Mr. Badger? Did you see this? 

Mr. GOODMAN. Yes. 

Mr. MICA. Here is another point. Surprise. Millions of people who 

liked their insurance plan will lose their plan. They predict—and 

I have heard it is 5 to 6. They are predicting 6 to 7 fewer million 

people will have employment-based coverage. This is, again, CBO, 

not mine. This is not my estimate. 

And then a fourth point. I am going to make five of them out of 

this report. ObamaCare reduces the incentive to find and keep a 

job. Not my comment. Boy, this is great getting people productive, 

employed, self-reliant, contributing to society and they are being 

able to support their family. This is a shame. 

And then finally, here people are struggling to put gas in their 

car, pay their fuel bills, keep their kids in school, trying to make 

it, and the CBO says their paycheck—wait, listen—will be borne 

primarily by workers in the form of smaller, after-tax compensation. Do you agree with that, Mr. Goodman, Mr. Badger? 

Mr. GOODMAN. I do. 

Mr. MICA. This is a disaster for the working people of America 

and people without health care who need health care who should 

be covered by health care and then shifting the burden. This is just 

a big scheme to shift costs that has failed. Is that right, Mr. Goodman? 

Mr. GOODMAN. Well, I do not know if I would use those exact 

words. 

Mr. MICA. I would. I did. 

Well, you said insurance is a business game. Somebody has to 

cover the costs. Right now we are shifting the costs. We are dumping the costs on the taxpayers, and it is going to be a lot to pay. 

And we are shifting the costs on people who had insurance who 

will lose insurance or see higher premiums. Gentlemen, Mr. Badger, Mr. Goodman, is that not the case? 

Mr. GOODMAN. I believe it is. 

Mr. BADGER. Yes. 

Mr. MICA. Thank you. 

I yield back the balance of my time. 

Mr. FARENTHOLD. Thank you, Mr. Mica. 

We will now go to the gentlelady from the District of Columbia, 

Ms. Holmes Norton. 

Ms. NORTON. Thank you very much, Mr. Chairman. 

Just to make it clear about the so-called 2 million jobs being lost, 

the Affordable Health Care Act has apparently freed 2 million who 

wanted to retire, wanted to leave the workforce, or perhaps get 

part-time work or to start their own businesses, but did not do so 

because there was no other way to keep their health care except 

to keep the jobs they did not want to hold. 

Now, I want to ask about this risk corridor, Mr. Jost. Actually 

I was totally unfamiliar with the risk corridor until this hearing, 

and given the way in which it was framed, it seems strange for me 

50 

to hear that Democrats were protecting the insurance companies. 

So I had to look further into it, and I said to staff, go get me how 

conservatives would justify these risk corridors that they are responsible for getting into Part D. And so they came back with some 

remarkable commentary that I would like to ask you about. I told 

them I wanted only to hear about how Republicans, who after all 

authored this notion, would justify this. And here is one they came 

back with. 

Christopher Holt of the American Action Forum. The risk corridor and reinsurance provisions in the Affordable Health Care Act 

made policy sense at the time the law was drafted, made policy 

sense today, and protect consumers. They do not constitute a bailout. It is a refutation of the total theme of this hearing. 

Do you agree with that, Mr. Jost? 

Mr. JOST. Yes. A number of conservatives —— 

Ms. NORTON. If you could withhold statements, Mr. Jost. I just 

want to clarify where this came from and whether it is still justified by the conservatives who were responsible for it in the first 

place. 

Go ahead, sir. 

Mr. JOST. I would just say I assume you are going on, but this 

has been said by quite a number of conservative commentators, 

that this makes business sense. 

Ms. NORTON. Let us take the consumers. Democrats have not 

been known for protecting insurance companies. They have been 

known for beating up—forgive me—on insurance companies for not 

protecting consumers. How do these provisions protect consumers? 

Mr. JOST. Well, the way in which they protect consumers is that 

if I were an insurer—and I am a consumer representative to the 

National Association of Insurance Commissioners. I have been on 

a lot of calls with insurance actuaries discussing the Affordable 

Care Act. This is a risk that is very hard to price. If I were an insurance company without any of this backstop that was put into 

the law, I would have priced premiums very high to make sure that 

I covered my risk. But insurers could look at it now and price their 

policies at a reasonable rate, in fact 16 percent less than what the 

CBO had projected, because they knew that if they were off the 

first year, there was a backstop. Now, second year, third year, we 

are going to have better estimates, and as in the Medicare Part D 

plan, premiums are going to be closer to pricing as to what the actual actuarial risk is. But these programs are very important for 

consumers to make sure that premiums are priced without charging a fortune to cover the risk that is there. 

Ms. NORTON. So the ultimate benefit is to the consumer. 

Mr. JOST. Absolutely. 

Ms. NORTON. So could these risk corridors in your view be characterized as a bailout in any sense of the word? 

Mr. JOST. No, not any more than the flood insurance program is 

a bailout, the crop insurance program is a bailout, the terrorism 

risk insurance—they are all programs where there are very high 

risks and actuarial uncertainties that the —— 

Ms. NORTON. Let me just quote another. I just cannot get over 

what conservative commentators have said. 

51 

Here is another from the Manhattan Institute. Risk adjustment 

mechanisms get you the buy-in of insurers, but they also keep premiums at manageable levels while insurers develop experience to 

properly price on their own. This helps encourage people to enroll 

in these plans which, in turn, helps insurers develop the necessary 

pricing experience, resulting in a virtuous cycle. 

Professor Jost, do you agree with the Manhattan Institute statements? 

Mr. JOST. I think for once they are right. 

Ms. NORTON. You said what? 

Mr. JOST. For once they are right. 

Ms. NORTON. You know, it is interesting, Mr. Chairman, where 

Republicans and Democrats have adopted the same mechanism 

and there are things about this bill that I think both Republicans 

and Democrats need to be fixed, but the very last thing I would 

focus on is something that Republicans and Democrats have agreed 

about in the first place. 

And I thank you very much, Mr. Chairman, and I yield back the 

remainder of my time. 

Mr. FARENTHOLD. Thank you very much. 

We will now recognize the gentleman from Tennessee, Mr. Duncan, for 5 minutes. 

Mr. DUNCAN. Well, thank you very much, Mr. Chairman. 

Mr. Mica referred to the train wreck quote, and as almost everyone here knows, that quote about ObamaCare being a giant train 

wreck came not from a Republican, but from Senator Baucus, the 

chairman of the Senate Finance Committee and one of the health 

care leaders for the Democratic Party. 

And then, of course, Speaker Pelosi famously said we would have 

to pass this legislation before we could find out what was in it. And 

every week, the more we find out, the worse it gets including, as 

the chairman mentioned briefly, the estimate by the Congressional 

Budget Office that this is going to destroy 2 million jobs over the 

next 3 years. 

But this was sold as being a law to get medical insurance or 

health care for those who were uninsured. I heard a program last 

night in which they said that the original estimates of 30 million 

or a little more maybe being uninsured was really incorrect, that 

the number was more like 9 million or 10 million who actually did 

not have it, and some of those were people who were between plans 

and were choosing not to have coverage. 

Dr. Goodman, I would be interested to know if you know what 

was the accurate figure then. And also, I have two articles in front 

of me that say that at least two-thirds of the people who have 

signed up now already had coverage. I did not get to hear your testimony. I was at another committee. Is it accurate that at least 

two-thirds of the people who have signed up so far already had coverage before this legislation was passed? 

Mr. GOODMAN. There are estimates even higher than that, estimates that only 11 percent in one survey were previously uninsured. So that means 89 percent had previous insurance. So we appear not to be doing a very good job at insuring the uninsured. 

Mr. DUNCAN. Would not the best way to get people—to get our 

health care costs under control would be to give individuals more 

52 

control over their own medical spending either through the vouchers or tax incentives or other ways? 

Mr. GOODMAN. Well, the Affordable Care Act does some of that. 

The problem is that it does a lot of things that should not be done 

that I described in my testimony. It is allowing pools with a lot of 

high-cost sick people to dump into the exchange, to dump into the 

individual market which previously was a market that worked 

pretty well, and now it is going to be a very high-cost market. 

Mr. DUNCAN. So I am told that Detroit and Chicago and possibly 

other cities are considering or are in the process of dumping their 

older, sicker retirees onto ObamaCare. Is that correct? 

Mr. BADGER. I believe Detroit has done the deal. That is about 

10,000 retirees, and because they are older, they are going to be 

higher-cost. Chicago is considering it. 

But there are lots and lots of cities around the country that have 

made unfunded promises about post-retirement health care. So 

there are a lot of potential costs that could be going toward the exchanges. 

Mr. DUNCAN. Charles Krauthammer wrote this. He said the 

whole scheme was risky enough to begin with, but things have gotten worse. The administration has been changing the rules repeatedly. First, it postponed the employer mandate. Then it exempted 

from the individual mandate people whose policies were canceled 

by ObamaCare. And for those who did join the exchanges, Health 

and Human Services Secretary Kathleen Sebelius is strongly encouraging insurers to, during the transition, cover doctors and 

drugs not included in their clients’ plans. The insurers were 

stunned, told to give free coverage, deprived of their best customers, forced off or stripped down catastrophic plans to over 30 

clients contrary to the law. These dictates, complained their 

spokesman, could destabilize the insurance market. Translation: 

how are we going to survive this? End result: insolvency. 

And I think most of us feel that he is one of the most accurate 

and intelligent people on the scene today. 

Mr. Badger, I was asked by the staff to ask—they think that you 

may have some disagreement with Mr. Jost about the necessity of 

these risk corridors or a little different view. 

Mr. BADGER. I have a different view. My concern has been regulatory issuances and pronouncements from CMS that had been repeated now throughout the time period that they could make payments to insurance companies out of the risk corridor plan that exceed the amount of money that other insurers have paid in. If the 

risk corridors are merely, as they are in Part D, and in the risk 

adjustment program both in Part D and in this law, simply moving 

money from insurers that are doing well to insurers that are struggling—I have no problem with that. 

The problem I have with the way the risk corridors are being applied by CMS is that it allows insurance companies to say to the 

taxpayer we have a problem, I lost money. And that is the behavior 

that I think should be of concern to Congress and that it should 

correct. 

Mr. DUNCAN. All right. Thank you. Unfortunately, I have run out 

of time. Thank you. 

Mr. FARENTHOLD. The gentleman’s time has expired. 

53 

We will now recognize the gentlelady from California, Ms. Speier. 

Ms. SPEIER. Mr. Chairman, thank you. 

You know, I have a fantasy that I would like to share with you, 

and it is a fantasy that we would have a new House rule that 

would require members to wear Pinocchio noses every time they 

make a statement that is not true because if they had to walk 

around with Pinocchio noses on, they would be careful about the 

kinds of statements they make. 

Now, the statement that has been made by the leadership of both 

houses in the last 24 hours is that we knew it was true, it is true. 

The CBO now says it is true. 2 million jobs will be lost as a result 

of the Affordable Care Act. And that statement is just false. 

The ‘‘Washington Post’’ fact checker gave the claim three 

Pinocchio noses with a headline that read: ‘‘No. CBO Did Not Say 

ObamaCare Will Kill 2 Million Jobs.’’ The fact checker explains it 

like this. 

First, this is not about jobs. It is about workers and the choices 

they make. 

He further explains, look at it this way. If someone says that 

they have decided to leave their job for personal reasons—they just 

decided they wanted to retire early—we would not put them in the 

category of having lost their jobs. 

The ‘‘New York Times’’ editorial board called this a liberating result of the law. 

So in other words, the report is about the choices workers can 

make when they are no longer tethered to an employer because of 

their health insurance. And there are so many Americans that stay 

in jobs just because they have to keep their health insurance. 

So my question is to you, Professor Jost. Please do your best to 

clear this up. Can you explain how the Affordable Care Act frees 

individuals and how it does not kill jobs in this country, but has 

actually the reverse effect? 

Mr. JOST. Like you, I run into people all the time who tell me 

I would love to quit this job, but I cannot because I have to be here 

for health insurance. 

About 15 years ago, my brother-in-law basically quit his job. He 

had health insurance through his wife, fortunately, but he went out 

on his own and started a company that is now a household name 

that is worth billions of dollars. My wife and her family all were 

part of that startup. 

Ms. SPEIER. What is the name of it? 

Mr. JOST. Rosetta Stone. 

But he was able to do that because he did not have to worry 

about health insurance, or at least he was able to go out there on 

his own without it. There are many, many Americans like that 

today who would like to go out and fulfill their dream, but they are 

stuck in their job because of health insurance. 

What the Affordable Care Act says, if you are making less than 

400 percent of poverty, which includes a lot of entrepreneurs in 

this country, you can go out and you can fulfill your dream or you 

can just stop working at 60 because you are tired and you can get 

health insurance regardless of your health status. That is a very 

liberating thing, and that is what the CBO recognized yesterday. 

54 

In fact, they did say there are concerns about employers cutting 

back on employment and cutting back on hours. That did not figure 

into their calculation because they said there are just too many unknowns there. There are reasons why employers might expand 

their workforce. There are reasons they might cut back. 

But the 2.5 million full-time equivalents is people who are stopping work because they have the freedom to do so or reducing their 

hours. 

Ms. SPEIER. Let me ask you a further follow-up question on risk 

corridors. The risk corridors and reinsurance provisions in the ACA 

are really the same McConnell-Boehner provisions that were included in the Medicare Prescription Drug Improvement and Modernization Act. I know Mr. Badger is shaking his head no, but the 

truth is there is reinsurance in both programs. And this reinsurance, unlike the reinsurance in the Part D, is one that exists only 

to 2017, and there really is no Federal dollars involved. 

So my question, Professor Jost, is it is my understanding that 

the Congressional Budget Office just this week released its revised 

budget outlook for 2014 to 2024, and it scored the reinsurance program as budget-neutral. Is that correct? 

Mr. JOST. It is because under the statute, only the money can be 

spent that is brought in under the program. 

Ms. SPEIER. And is it not also true that in essence there is a 

transfer of funds between insurers, and thus it has no impact on 

the Federal budget? 

Mr. JOST. That is technically correct, yes. I mean, it is a tax that 

it has imposed on insurers in the group market primarily to subsidize the individual market for 3 years, in part because of these 

transfers from the group market to the individual market that 

have already been discussed. 

Ms. SPEIER. And when we talk about Medicare Part D, was there 

not also reinsurance involved in that program? 

Mr. JOST. Yes, there was. 

Ms. SPEIER. And how did that work? 

Mr. JOST. Well, there still is reinsurance. In fact, the risks borne 

by Medicare Part D insurers is very, very small, and up until recently it was very small because it was only up to the point you 

hit the donut hole. At that point, there was essentially reinsurance 

from Medicare beneficiaries who covered the full cost up until you 

got to the catastrophic. When you got to catastrophic, the Government picks up 80 percent of the risk. The insurers only picked up 

15 percent, and the beneficiary picked up 5. 

Ms. SPEIER. Mr. Chairman, thank you. I see my time has expired. 

Mr. FARENTHOLD. Thank you very much. 

I am up next. One of my least favorite times when I was in the 

private sector was the time I had to redo the insurance for my employees. I want to kind of step back a little bit and take an overview about this. I will start with you, Dr. Goodman. 

The way insurance works is they sell policies to a bunch of people, and hopefully the money that comes in from that covers the 

losses for the people in that group. So it ends up the healthy people 

end up subsidizing the 52-year-old, overweight Congressman with 

55 

high blood pressure in a high-stress job. Is that basically how insurance works? 

Mr. GOODMAN. Well, that is true in every market. But in most 

insurance markets, the premium that was charged at the point of 

entry reflects the expected cost then. 

Mr. FARENTHOLD. Right. What we had in ObamaCare then was 

the idea we have got a whole new market and the insurance companies are concerned that they do not know how to price this and 

what the actuarial risk is, how many unhealthy people versus 

healthy people. Is that an accurate statement of part of the problem? 

Mr. GOODMAN. Yes, and we could be stronger than that. We have 

built perverse incentives into the structure of the market, and I 

think that is totally unnecessary. 

Mr. FARENTHOLD. All right. So as a result of this, part of the deal 

that was struck in ObamaCare is we put these risk corridors in so 

that taxpayers are potentially on the hook in the event that the 

loss ratio is out of whack. Is that a fair assessment of ObamaCare 

and what we are talking about today? 

Mr. GOODMAN. Sure. 

Mr. FARENTHOLD. All right. So let me ask you a question. The 

President has been under a lot of fire for his statement, if you like 

your health insurance, you can keep it, and there have actually 

been some changes made to ObamaCare as a result of that. As a 

result, the policy offerings have changed. Is that going to run up 

the cost potentially to insurance companies and increase the 

amount taxpayers may be on the hook under these corridors? 

Mr. GOODMAN. Well, I think the way they have changed some of 

the rules of the game within the last month or so has increased the 

riskiness of the products in the market. 

Mr. FARENTHOLD. All right. Now, assuming you owned an insurance company, would you have jumped into ObamaCare but for 

these risk corridors? I mean, would you have said, all right, I am 

out of the health insurance game or this is too risky, or would you 

maybe have run your prices way up? 

Mr. GOODMAN. Well, you got to understand I do not have a problem with the risk corridor. What I have a problem with are the 

poor design of the exchange which is then going to put taxpayers 

at great risk to pay for those design mistakes. It is not insurance 

company mistakes. 

Mr. FARENTHOLD. Mr. Badger, do you want to weigh in? 

Mr. BADGER. Yes. Again, I do have concerns with the way risk 

corridors work in this law as opposed to Part D and particularly 

with the way CMS said they would work, and that is to say that 

because of the problems that are created for insurance companies, 

CMS is going to give them direct subsidies out of taxpayer funds, 

not out of revenues that come in. 

Mr. FARENTHOLD. All right. So let us go to this scenario. Suppose 

we decide we are not going to do these corridors and we pull them 

out. The insurance companies are going to be on the hook for these 

losses. Is there a way they are going to be able to reinvent their 

policies and stay in business? How do we get out of this without 

bankrupting the insurance companies and have no insurance marVerDate Aug 31 2005 13:15 Mar 28, 2014 Jkt 000000 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 C:\DOCS\87202.TXT APRIL
56 

ket at all left and potentially end up with the Government being 

the only insurer of last resort? 

Mr. BADGER. Well, that raises other questions about the law’s design that Dr. Goodman has raised. 

But I guess the principle I would like to lay out is this. If you 

cannot make a profit without corporate welfare, you cannot make 

a profit, and we should not be putting taxpayers in the position of 

having —— 

Mr. FARENTHOLD. But were insurance companies not making a 

profit before ObamaCare? 

Mr. BADGER. Yes, they are. And they may well make a profit in 

ObamaCare. CBO’s announcement yesterday suggests that they 

will do very well. If they are paying $16 billion in and only taking 

$8 billion out of the risk corridors—I do not think they are right 

about that, but if they are, CBO thinks they are going to make a 

profit. 

Mr. FARENTHOLD. Dr. Goodman? 

Mr. GOODMAN. There is a better way of doing this. We call it 

change of health status insurance. But the fundamental principle 

is the insurance pools do not get to dump their sick people on other 

insurance pools. If we would just follow that principle, the taxpayer 

would be far less at risk than they are right now. 

Mr. FARENTHOLD. And you think this could be done as a tweak 

to ObamaCare somewhere? We got such a big, massive law. Our 

side, I think, wants to be done with it and start over. Can this be 

done short of starting over and maybe get some of our colleagues 

on the other side of the aisle to help? 

Mr. GOODMAN. Yes, but I would not call it a tweak. It would require a fundamental restructuring of the exchanges, and they 

would probably, at the State level, have to be instructed to move 

over time to a rational form of insurance. 

Mr. FARENTHOLD. We could talk about this a good bit longer, but 

I see that my time has expired. Just because I am in the chair does 

not mean I get to break the rules. So I will move along and recognize Mr. Massie for 5 minutes. 

Mr. MASSIE. Thank you, Mr. Chairman. 

The chairman makes a good point. I would like to look into it a 

little bit more. 

Senator Rubio made the observation that when the President 

tried to retroactively make good on his broken promise, his empty 

promise that if you like your health care plan, you can keep it, by 

unilaterally forcing insurance companies to grandfather insurance 

policies that were not included in the Affordable Care Act, he actually increased the likelihood that the bailout provisions of the risk 

corridor program would be invoked. 

And I would like to give everybody on the panel here a chance 

to answer this. Do you agree with Senator Rubio’s assertion that 

by changing the rules midstream that the President actually increased the probability that the risk corridor would have to be invoked? 

Mr. GOODMAN. Well, if all the insurers price their products on 

the assumption, let us say, by the end of this year, 80 percent of 

the people in the individual market would be in the exchange and 

then we change the rules and say, no, if you are healthy and you 

57 

are in a plan that you like, you can stay there, yes, of course that 

increases the cost and the riskiness of the exchange. 

Mr. MASSIE. Thank you. 

Mr. Badger? 

Mr. BADGER. My understanding is that CBO quantified that at 

about half a billion dollars in payments that would come out of the 

risk corridor program to insurers. 

Mr. MASSIE. Mr. Jost? 

Mr. JOST. Yes, and therefore, it reduced the surplus to the Federal Government from $8.5 billion to $8 billion, but yes, that did 

increase the risk. It was, of course, a response to a political 

firestorm over the cancellation issue, which I think was largely a 

bogus issue, but that was the administration’s response. 

Mr. MASSIE. Well, I am glad to hear that all the witnesses agree 

that the President actually, by trying to change this law midstream 

unilaterally without Congress, has increased the risk that taxpayers will be on the hook for the insurance companies’ losses. 

Mr. Badger, you have stated that—I think you have stated in the 

past that the reinsurance provision and risk corridor provisions 

limit insurer competition. Does the risk corridor program, even if 

it worked as some people say it does by taking a pool of money and 

distributing it among the insurance companies, even if it worked 

that way and did not take taxpayer money—does it not just reward 

unsuccessful competitors with money it confiscates from successful 

ones? 

Mr. BADGER. Well, there is no question that the formula, in effect, works that way so that if your losses exceed your target 

amount by more than 3 percent, that you would be entitled to payments out of the pool. So if it functions properly, it is a redistribution from insurers who were successful to those who were less successful. 

Mr. MASSIE. Let me ask you another question. You have argued 

that the individual mandate was put into place actually to benefit 

insurance companies, I believe. Is that correct? 

Mr. BADGER. Yes. My point was, unlike Part D where we did not 

have the IRS penalize seniors who did not sign up for drug coverage, the argument here was that insurers could not succeed unless there were, in addition to subsidies, both penalties on people 

who did not buy and as well canceling policies that people would 

have liked to renew. So, yes, the idea is these were all provisions 

designed to help insurance companies succeed despite some of the 

distortions that Dr. Goodman has talked about. 

Mr. MASSIE. Speaking of distortions, does this risk corridor provision not incentivize the insurance companies to offer artificially low 

sort of introductory rates because they have a backstop? Would 

their first rates not be higher without this risk corridor provision? 

Mr. BADGER. There is moral hazard. And understand again, unlike Part D, everybody is offering the same benefit package. So the 

only way to distinguish yourself really in the marketplace, aside 

from provider networks, is by price. So if we are both selling silver 

plans, chances are the person with the lower price will get the most 

enrollees. So, obviously, if you believe that the Government will 

share in your losses, there is a moral hazard that you will price too 

58 

aggressively in order to drive competitors out and gain market 

share. 

Mr. MASSIE. Thank you. 

Mr. Goodman, in my remaining time, you mentioned in your 

opening statements that employers could game the system, I believe. Could you elaborate on that? 

Mr. GOODMAN. Well, one of the techniques that they are going 

to use is they are going to cover preventive care with no lifetime 

cap, and that gets them out from under the $2,000 fine. But these 

could be mini-med plans. So if a worker gets sick and goes to the 

exchange, then the company can be fined $3,000. But if a worker 

goes to that length, his medical expenses will probably be way in 

excess of $3,000. So this is a way, just one—and we could talk 

about others—for employers to move their sickest, most costly employees over to that exchange when they have a health problem. 

Mr. MASSIE. And this is one reason that the way this program 

is set up it is just not going to work. Is it not? 

Mr. GOODMAN. Well, there are many, many ways to game the 

system, and if we do not deal with all of that, we are going to have 

huge problems in the future. 

Mr. MASSIE. Thank you. My time has expired. 

Mr. FARENTHOLD. Thank you very much. 

We will now recognize the gentleman from Georgia, Mr. Collins. 

Mr. COLLINS. Thank you, Mr. Chairman. 

I think one of the things that we get lost in many times here is 

we lose—and I have tried to bring this to light over time—is we 

lose the human face of what we are talking about. It is easy to 

come up here and talk about bailouts, risk corridors. Frankly, that 

does not mean anything. 

And frankly, Mr. Jost, just a moment ago, you said that you felt 

like that the dropping of insurance coverage was a bogus issue. If 

you would like to come to the 9th District of Georgia, I will be 

happy to show you people who have lost their coverage who are 

dealing with this right now. I think that was one of the most callous statements that I have heard today in this hearing, and I 

think to say a bogus issue on people who are actually losing insurance and having trouble with this plan is not—there has been at 

least acknowledgement on both sides of the aisle that there is a 

problem here. And I mean, to say that is just, frankly, to me is just 

very callous to those who are having to deal with the results of 

what has become a very bad law. 

Mr. JOST. I would be happy to explain the response, if you want 

me to. 

Mr. COLLINS. At this point, I think your response was clear 

enough, Mr. Jost. 

Reclaiming my time. One of the issues that I have seen and one 

of the issues here dealing with insurance—and again, I think the 

insurance companies—we can deal with that in this risk corridor 

issue. We can deal with it from how the system was set up. Mr. 

Massie made a great point on how we are actually making it worse 

in some ways. 

But mine is overall and dealing with a system in which people 

are having to deal with. And one is a constituent of mine I talked 

to yesterday, Rebecca Lambert. She is from Stephens County. It is 

59 

a little place up in northeast Georgia, Martin. She runs a small 

business, Calico Country Store. It is one of those one-stop shops. 

Up in my part of the world, you get a lot of these. You can buy 

groceries. You can buy plumbing equipment all in the same place. 

She is recently widowed and she is struggling to run the store. 

And in doing so, all of this for the first time, she pays her bills, 

she pays her taxes, she works hard. And she was not real thrilled 

to find out she was going to have to go through ObamaCare and 

do this to start with. She did not want the dictate of how she had 

to do it and went ahead. But being a good citizen, she said, okay, 

I will do it. This is the way I have got to do it because I do not 

want the penalty. She went ahead and bought insurance because 

that was the law. She signed up under healthcare.gov. She got a 

plan, she thought. She received a bill, paid her premium, but has 

not received any proof of insurance. 5 and a half hours on hold on 

Friday, 2 and a half hours on hold on Monday, and has not been 

able to talk to a soul. She is all paid up to her knowledge. She cannot even get someone on the line to confirm she is covered. That 

means she spent 8 hours over the course of the day trying to figure 

this out through a program she did not want to be a part of to start 

with, and at this moment, if she was to walk into a hospital or an 

emergency room anywhere, she has no proof of insurance that she 

has. And nobody can talk about it. 

With all due respect for what we are doing here—and the chairman has brought out—and there have been concerns on all sides— 

I am concerned more about the welfare of my constituents and how 

they are having to deal with this and how they are having to go 

through it than the bottom line of the insurance or anything else 

at this point. 

Why are we going through this in a way that puts people in positions of not understanding, of yes, losing the coverage that they 

had, trying to find other coverage, or in the case of many of the 

State employees in Georgia, paying more or equal for less coverage? 

I believe—and I will just say in a good-hearted effort—for those 

trying to work this, there was an effort to help, but many times in 

the rush to help, when you only have one, you get tunnel vision. 

And what is happening is people like my constituent Rebecca are 

the ones that get lost in the tunnel vision. To help X, we do not 

realize what we hurt on the outside. That is what is coming up 

here. And whether it is the risk corridors or covering profits or 

going back and saying this was capped or not, this is just the problem that we are dealing with when you cannot get confirmation, 

when you cannot get issues that are going on. 

As I have said earlier from the floor of the House, I had a lady 

who is going through cancer treatment, and she has issues. It is 

not covered under her new plan. Her cancer treatments were halted until proof could be provided. Are you kidding me? This is what 

we are dealing with. 

So I think really—and not personal to any witness, but to be in 

a position where we are talking about this and removing it from 

the people, that is the problem I have here. 

I could question you and grill all three of you on many things. 

My people just want to know why has such a bad system been put 

on me and forced me to pay higher for less or forced me to change 

60 

or forced me to look at insurance companies in a way that I had 

not looked at before or frustrated with before in a way that is very 

unreasonable and callous. 

With that, that is why we do these oversight hearings. It is time 

to fix this. It is now time to do it and it needs to be done away 

with. 

With that, Mr. Chairman, I yield back. 

Mr. CUMMINGS. Would the gentleman yield? 

Mr. COLLINS. Yes. 

Mr. CUMMINGS. I just want to give Mr. Jost a chance to just respond to what you said. 

Mr. JOST. Well, just very briefly, obviously there were many people and are many people who are losing the coverage that they had. 

They are all being offered alternative plans. Some of them are 

more expensive. Some of them have higher cost-sharing. Many of 

them are less expensive. Many of them have lower cost-sharing. 

Many of those people are having access to premium tax credits that 

are making their health care insurance substantially less expensive. 

I misspoke. I would have to say that. It is not a bogus political 

issue. But to call these things cancellations instead of what they 

were, which was non-renewals of the current policy offering and an 

offer of an alternative, which happens all the time in the individual 

insurance market—I think to make it sound like these are people 

who are suddenly uninsured and have no chance of getting insurance—every one of them can get insurance, and many of them can 

get it for less than before. 

Mr. COLLINS. Mr. Chairman, reclaiming my time on this. 

Your first statement basically just summed up your last statement. It was callous. It did happen. And to say that it did not and 

it happens all the time is again a perpetuation of what we are talking about here, of being very honest with people. And yes, they 

have cancellations not because the cancellations occurred and they 

could not get other insurance. It was because the Government told 

them because of the ACA that these were not going to be renewable policies, and they could not have what they had. They do not 

have what they had. And to really say that—with all due respect 

to the ranking member, I appreciate him allowing—this is the 

problem we are talking about. But your first statement was 

summed up by your last statement. 

And with that, I do yield back. 

Mr. FARENTHOLD. Thank you very much. 

We will now recognize the gentleman from Michigan, Mr. 

Walberg, for 5 minutes. 

Mr. WALBERG. I thank the chairman, and I thank Mr. Collins for 

following up on that and pressing that issue because that is a crucial issue that we are addressing here. We are talking about real 

live people, and certainly we want to meet needs of those, a frankly 

smaller number right now, that are having better opportunity, and 

those are the people we could have fixed with a far more simple 

system dealing with the issue of cost. 

Mr. Badger, just to make sure it is clear, is it correct that the 

reinsurance provision is financed by a fee or a tax on all non-exchange health insurance plans? 

61 

Mr. BADGER. Yes, on group health insurance plans. That is correct. 

Mr. WALBERG. Is it accurate that the vast majority of individuals 

with health insurance will be paying higher premiums to finance 

the reinsurance fund? 

Mr. BADGER. Yes. 

Mr. WALBERG. So essentially the reinsurance fund is a large 

transfer from the vast majority of Americans without an 

ObamaCare insurance plan to the few Americans with an 

ObamaCare plan. 

Mr. BADGER. To their insurers. That is correct. 

Mr. WALBERG. To their insurers. 

Moving on from that relative to cost, how do risk corridors, as 

implemented in ObamaCare, impact the pricing of health insurance, Mr. Badger? 

Mr. BADGER. Well, I think arguably they should induce insurers 

to be willing to take on more risk. They also, as I mentioned earlier, provide a moral hazard. If you know that the Government, the 

taxpayer, will share in your losses and the only way you are allowed to differentiate yourself is by price, you may price more aggressively to gain market share. So there are some perverse incentives that actually would hurt consumers over the longer run. 

Mr. WALBERG. So relative to that moral hazard, expand, if you 

would on the implications of companies under-pricing exchange 

plans versus non-exchange plans. 

Mr. BADGER. Well, you know, to be honest, as the professor has 

noted, basically non-exchange plans will soon be nonexistent for all 

intents and purposes. But for those who are selling compliant plans 

both inside the exchange and outside the exchange, those issuers 

would participate in the risk corridor program. They do not, however, outside the exchange get subsidies for the coverage. 

Mr. WALBERG. Do you think that companies did this in order to 

drive enrollment into the exchanges and the generous subsidies 

that are there? 

Mr. BADGER. I do believe that the purpose of the policy that required the cancellations, yes, was to move more people into insurance policies sold through the exchanges. 

Mr. WALBERG. How do risk corridors, as implemented in 

ObamaCare, impact the pricing of health insurance? 

Mr. BADGER. Well, again, as we talked earlier, there is —— 

Mr. WALBERG. I am sorry. I missed it. 

Mr. BADGER. No. That is quite all right. 

The issue there that we are concerned about is that insurers 

would price so aggressively to gain market share because of the 

fact they knew that the taxpayers would be on the hook for some 

of their losses. And so there could be a price effect in the near term 

that would be favorable, but it could have long-term negative implications. 

Mr. WALBERG. So the longer it goes on, the more negative the implications for the price for the consumer. 

Mr. BADGER. Potentially if it affects market share substantially. 

Mr. WALBERG. And health care in general. 

Mr. BADGER. Yes. 

Mr. WALBERG. Thank you. 

62 

Mr. Chairman, I yield back. 

Mr. FARENTHOLD. Thank you very much. 

I see Ms. Maloney has just arrived. Do you have some questions? 

Mrs. MALONEY. I do, and I apologize to the chairman and ranking member. I had a conflict. 

Mr. FARENTHOLD. That is all right. We will be happy to give you 

your 5 minutes. We will give you a second to get settled, and we 

will start the clock as soon as you start. 

Mrs. MALONEY. I want to thank all the panelists for joining us 

today. 

And I guess my question is for Professor Jost. It is my understanding that the risk corridor program is a key element of the Affordable Care Act that helps keep premiums in the exchange affordable by reducing uncertainty to insurers. We know if there is 

uncertainty, the price goes up. Right? So can you explain why insurers face such uncertainty in new programs like the Affordable 

Care Act and Medicare Part D and how the risk corridors operate 

to reduce this uncertainty? 

Mr. JOST. Yes. Again, the idea here is that insurers have traditionally priced their products based on their assessment of the 

health of the people that they were insuring. So they charged low 

rates to healthy people and high rates—or totally excluded, as they 

do in many instances, people who are unhealthy or exclude their 

unhealthy conditions. Under the reform law that this body adopted 

in 2010, they cannot do that anymore. And so that puts them in 

a situation where it is much harder for them to price their products. So there is this temporary program for 3 years called the risk 

corridor program, another temporary program for 3 years called the 

reinsurance program that provides a backstop for them so that 

they can price their products in a way that is affordable to consumers. And that has been very successful. 

Mrs. MALONEY. That is wonderful. 

Were the risk corridors successful in getting insurance companies 

to participate in Part D? 

Mr. JOST. Yes. 

Mrs. MALONEY. That did work that way. Well, thank you. 

I would also like to ask about the effect of risk corridors on premiums. Did the Part D risk corridor help stabilize premiums in the 

opening years of the program? 

Mr. JOST. Yes, and the premiums in the Part D program came 

in under projections for the first year. 

Mrs. MALONEY. And what about the Affordable Care Act? I understand that premiums came in 16 percent below CBO projections. 

And is this in part attributable to the risk corridor program? 

Mr. JOST. Yes, and the CBO recognized that in its report yesterday and it is. 

Mrs. MALONEY. Can you explain how the risk corridor program 

protects enrollees who are signing up for health insurance using 

the exchanges? 

Mr. JOST. Well, the risk corridor program means that insurers 

projecting their premiums for 2015 and 2016 and deciding whether 

to enter the exchange or deciding to stay in the exchange understand that for the first 3 years of the program, there is this 

63 

flywheel. There is this backstop so that if their prices are off, they 

will get some help. 

Now, again, it is a risk-sharing program. It is not a risk-transfer 

program. If an insurer under-prices their product too much, they 

are going to have no profit at all and possibly become insolvent. So 

they have to be careful. But they can take a little bit of risk there. 

Mrs. MALONEY. I also understand that the risk corridor program 

reduces the risk for insurers participating in the exchanges from 

both extreme gains and losses. And is that accurate? And would 

that translate into saving taxpayer funds? 

Mr. JOST. That is correct. And also, if their gains are excessive, 

we still have the medical loss ratio program and there will still be 

rebates to consumers. So this is not just an open-ended profit for 

—— 

Mrs. MALONEY. Can you elaborate how this would benefit taxpayers? How do they benefit from these risk exchanges? 

Mr. JOST. Well, the CBO projected yesterday that the risk corridor program will benefit taxpayers to the tune of $8 billion. 

Mrs. MALONEY. $8 billion? 

Mr. JOST. $8 billion. 

Mrs. MALONEY. An $8 billion benefit to taxpayers? 

Mr. JOST. Yes. Some bailout. 

Mrs. MALONEY. Wow, wow. Well, I think you made a strong case. 

This in no way sounds like a bailout to me. And these are CBO 

numbers. Right? 

Mr. JOST. That is correct. 

Mrs. MALONEY. So these are independent numbers saying that 

there will be a benefit of $8 billion to taxpayers. 

Mr. JOST. That is correct. 

Mrs. MALONEY. Thank you very much. 

Chairman ISSA. [Presiding] Would the gentlelady yield just for a 

question? 

Mrs. MALONEY. Yes, I will yield to the chairman. 

Chairman ISSA. Thank you. I was quick on the draw. 

It is a benefit to taxpayers. What I am trying to understand is 

are not the people who pay the excesses that are then taken off— 

in other words, the excesses that are being gotten are excessed as 

payments by taxpayers. I appreciate the gentlelady’s point that it 

has a scored revenue, but in fact, as a taxpayer I am also a ratepayer, and as a ratepayer that is where the money is coming from. 

So we tax people’s health insurance in order to get this $8 billion. 

Is that not true? 

Mrs. MALONEY. I would like Mr. Jost—usually adhering—it is 

not the panelists that are answering the question, but I would like 

Mr. Jost to answer this question. 

Mr. JOST. Thank you. I would be happy to answer that. 

No. The risk corridor program is funded—well, the $8 billion in 

revenue will be excess profits of the insurers that are refunded to 

the Federal Government. There is also a second benefit to the Federal Government because the Federal Government is at risk for the 

premiums through the premium tax credit. So because the premiums came in 15 percent lower than expected, that is also going 

to save the Federal Government, one estimate, $190 billion over 10 

64 

years, although the CBO said that they could not determine the 

exact amount. 

Chairman ISSA. Does anyone else need to answer that for the 

gentlelady? 

Mr. BADGER. Well, just I know it is a very technical question. I 

am sorry. But, yes, what happens is, I think as Professor Jost has 

pointed out and I think as the chairman said, the money, that $8 

billion, ultimately comes from the people who bought insurance. So 

it was in their premiums. And under the formula in the law, the 

insurers’ actual cost relative to their premium was lower than they 

had anticipated, and as a consequence, they have to pay into the 

fund. What CBO is projecting is that more insurers will pay in 

than take out. I for one do not believe that, but I think Congress 

could, in fact, codify that to capture the savings by merely saying 

that CMS is not allowed to pay out any funds in excess of what 

they take in, and that would lock in your $8 billion. 

Chairman ISSA. Thank you. Thank you all. 

We now go to the gentleman —— 

Mrs. MALONEY. Mr. Goodman wanted to answer. 

Chairman ISSA. If the gentleman could hold for a second. If you 

need to quickly answer on the gentlelady. 

Mr. GOODMAN. Sure. I would just like to say that that estimate 

is not based on our recent experience, and it is very likely to be 

wrong. It is unlikely that taxpayers will gain and most likely that 

they will lose. 

Chairman ISSA. Thank you. 

The gentleman from North Carolina. 

So insurers that lose money will be bailed out to some degree by 

the taxpayers through the law’s premium stabilization program. 

Would you all agree? 

Mr. BADGER. I would agree, yes. 

Mr. JOST. Yes, I would agree. 

Mr. MCHENRY. Would you agree, Mr. Goodman? 

Mr. GOODMAN. Yes. 

Mr. JOST. That is the purpose of these programs, yes, to stabilize 

premiums. 

Mr. MCHENRY. But they will be bailed out to some degree—the 

insurance companies. Right? 

Mr. JOST. Well, the insurance companies are sharing risk with 

the Federal Government. 

Mr. MCHENRY. Right, but anyway, I am actually quoting you, 

Mr. Jost, from your November editorial about this. Insurers that 

lose money will be bailed out, to some degree, by the taxpayers 

through the law’s premium stabilization programs. I could not have 

said it better. So this is just another shameful part of ObamaCare. 

Look, I serve on the Financial Services Committee. 

Mr. Jost, you say that this risk corridor provision is very similar 

to flood insurance. Right? 

Mr. JOST. That is correct. 

Mr. MCHENRY. Do you know that the taxpayers are on the hook 

for over $50 billion in payouts? So the flood insurance program is 

under water to the tune of $50 billion for a taxpayer bailout. 

65 

The example, I think, is perhaps a good one unintentionally. It 

is again a very problematic feature when the Government gets into 

the marketplace. 

And, look, I understand if you are a health insurer, this is probably a very positive provision for you. So, thus, when the administration makes their—I do not know how many additional changes 

they have made in the last 2 years above and beyond what they 

are really able to do under the law. Health insurers are not complaining as much, though, about this ad hoc rulemaking as perhaps 

they would be if they did not have this bailout provision within the 

law. 

Mr. Badger, is that approximately right? Is that how you would 

see it? 

Mr. BADGER. Well, as I said before, when this announcement was 

made that at least the Federal Government would not enforce the 

law requiring cancellations, CMS responded with half a billion dollars in payments to insurance companies out of the risk pool, according to CBO’s estimates. 

Mr. MCHENRY. Where does the money come from in the risk 

pools? 

Mr. BADGER. Well, out of the risk corridors, it is supposed to 

come from payments from insurers who make, ‘‘excessive profits.’’ 

So it should be totally internally distributed. Unfortunately, CMS 

has indicated that they will throw taxpayer money on the table if 

the receipts are not enough to cover disbursements. 

Mr. MCHENRY. Okay. So that I understand this, if I pick a different policy in my exchange and that company is deemed to make 

excessive profits, where do those excessive profits come from? 

Mr. BADGER. Well, the excessive profits obviously come from the 

premiums. 

Mr. MCHENRY. The premiums. So, therefore, I made a bad choice 

and perhaps I am paying a higher rate than someone else who is 

in another company that is getting the bailout. Right? 

Mr. BADGER. Yes. It is certainly true that the money is supposed 

to come exclusively from the premiums, although sometimes taxpayers are implicated as well. 

Mr. MCHENRY. So if you have three providers in the exchange 

and you make a choice for one that is maybe the middle-priced one, 

you might be subsidizing the lower-priced one. 

Mr. BADGER. The so-called excess premiums or excess profit 

based on your premium may well be funneled through to that other 

insurer, yes. 

Mr. MCHENRY. Okay, interesting. So this could be a taxpayer 

bailout in execution or it could actually be a bailout funded by 

those that are obligated to buy insurance through the exchange. 

Mr. BADGER. Yes. The money either comes from the premiums 

that people pay or the taxes that people pay. 

Mr. MCHENRY. So this is not like the Federal Reserve printing 

money and making money from nowhere. Right? 

Mr. BADGER. No. 

Mr. MCHENRY. Now, I asked this because it is a very common 

question I have got at home from my constituents about this. 

Look, the reason why we are talking about this is because of this 

grave concern about the Government overreach. Look, if you are 

66 

health insurer, I see why this is a very positive—if you are in the 

business of health insurance, it is probably a pretty positive thing 

because it takes your risk away, and it also means you are a little 

more compliant with the administration when they make rules 

changes. So it benefits this administration’s ad hoc rulemaking. 

Right? 

Mr. BADGER. There are mutual interests there, yes. 

Mr. MCHENRY. Thank you, Mr. Chairman. 

Chairman ISSA. I thank you. 

We now go to the gentleman from Virginia, Mr. Connolly. 

Mr. CONNOLLY. Thank you, Mr. Chairman. 

Professor Jost—is it Jost? 

Mr. JOST. Jost actually. 

Mr. CONNOLLY. Jost, okay. 

I do not know if you are aware of the fact that the Chamber of 

Commerce actually issued a statement warning against the Rubio 

legislation, the repeal of the risk corridors. And it says—‘‘repeal 

would make it harder and less likely that companies will offer 

products to small businesses and individuals in the future and 

would certainly lead to significantly higher premiums for coverage 

offered next year without these protections. It would limit choice, 

increase premiums, and hinder the development of a robust private 

insurance market.’’ 

Mr. Chairman, I would ask that this letter from the Chamber of 

Commerce be entered into the record at this point. 

Chairman ISSA. Without objection, so ordered. 

Mr. CONNOLLY. I thank the chair. 

Professor Jost, do you agree with the Chamber of Commerce that 

repeal of the risk corridor might not only raise premiums but 

would reduce insurer participation in the exchanges? 

Mr. JOST. Yes, I think it would. 

Mr. CONNOLLY. Could you elaborate a little? 

Mr. JOST. Well, again, the purpose of the risk corridors is to stabilize premiums, to share risk between the insurers that agree to 

participate in the exchanges and the Federal Government so that 

insurers will be comfortable coming into the exchange and charging 

reasonable premiums rather than to have to charge a high premium for risk. I mean, this is a very reasonable business decision, 

which is why the Chamber of Commerce supports it. 

Mr. CONNOLLY. Speaking of that, the insurance companies themselves are helping to finance these risk corridors. Is that correct? 

Mr. JOST. That is correct. Some insurers chip in when they overprice their products and others receive subsidies when they underprice their products. It is exactly the same way as in Part D. 

And by the way, it has been said several times that the taxpayers are not on the hook for Part D. They are. Any overages in 

the Part D risk corridor program—so far there have not been any— 

would be paid out of the Medicare Trust Fund. 

Mr. CONNOLLY. So the ACA risk corridors actually are sort of 

modeled on an existing program, the Medicare Part D risk corridors. Is that correct? 

Mr. JOST. They are less generous and they are temporary rather 

than permanent, but they are modeled on that. 

Mr. CONNOLLY. But hardly a Government bailout. 

67 

Mr. JOST. Right. 

Mr. CONNOLLY. So one might even want—to sort of coin an expression Herman Kane made famous in the 2012 Republican primaries, I will do 16–8-8. The insurance companies, if I understand 

it correctly, Professor, are going to finance this to the tune of $16 

billion. The estimated cost by CBO over the next 10 years is half 

of that, $8 billion, and the Government gets to essentially pocket 

the remaining $8 billion, thus saving the Federal Government $8 

billion. Is that correct? 

Mr. JOST. That is correct according to the CBO. 

Mr. CONNOLLY. So other than that, these risk corridors seem a 

terrible idea. 

Mr. JOST. Well, once again, it is not only that. It is also the fact 

that they have helped to lower premiums for individuals which, in 

turn, has lowered the premium tax credits for the Government, 

saving billions of dollars in that way as well and billions of dollars 

to consumers. 

Mr. CONNOLLY. To consumers. 

Mr. JOST. Yes. 

Mr. CONNOLLY. What is the intellectual thinking behind establishing risk corridors? 

Mr. JOST. Well, the premium stabilization programs, all three of 

them—the idea behind them is that you create a market in which 

private businesses will participate because they know that their 

risk is going to be shared, at least initially until they can figure 

out how to price these products and until the market stabilizes. I 

mean, it has been said many times today that there are only 2 million. Well, there are at least 3 million, probably many more by now. 

There will probably be 6 million by the end of March. But the CBO 

still projects 3 years from now there are going to be 25 million. So 

it is going to take a little while for this market to develop. 

Mr. CONNOLLY. And again, not something unique to the ACA. We 

have done it before. 

Mr. JOST. Right. 

Mr. CONNOLLY. And it is certainly something welcome in the 

business community as something that can help smooth the bumps 

while we figure out, with experience, just how big and elastic the 

market is going to be. 

Mr. JOST. Correct. 

Mr. CONNOLLY. Thank you, Professor Jost. Thank you for your 

testimony. 

Chairman ISSA. The gentleman yields back. 

We now go to the gentleman from Nevada, Mr. Horsford. 

Mr. HORSFORD. Thank you, Mr. Chairman. 

I appreciate the panel this morning and this hearing, but one of 

the areas that I would like to focus on, since I am towards the end 

of this hearing, is on the significant changes within the Affordable 

Care Act dealing with preexisting conditions and the fact that insurance companies are no longer able to prohibit denying coverage 

to individuals with preexisting conditions. They are also prevented 

from discriminating against individuals with preexisting conditions 

by charging them higher prices for coverage. And I think that that 

is an important achievement in the underlying legislation. 

68 

But as, Professor Jost, you have talked about, this means that 

insurers need to be able to provide people with preexisting conditions, who are generally a sicker population, affordable insurance. 

And one of the purposes of the reinsurance program in the Affordable Care Act is to prevent insurers from pricing their premiums 

too high at the outset due to an influx of these new enrollees. 

And so I would like to read just a quote from the Association of 

Health Insurance Plans which stated that the reinsurance program 

will help health plans meet the needs of high-cost enrollees who 

previously have not had health insurance coverage, while making 

individual market premiums more affordable for consumers. It 

went on to say that the Department of Health and Human Services 

estimates that the reinsurance program will reduce premiums in 

the individual market in 2014 by 10 to 15 percent compared to 

what they would have been without this program. 

So, Mr. Chairman, without objection, I would like to enter the 

full statement on behalf of America’s health insurance plans into 

the record. 

Chairman ISSA. Without objection. 

Mr. HORSFORD. Thank you. 

Professor Jost, can you explain how the reinsurance program 

helps insurers provide affordable insurance to these sicker individuals? 

Mr. JOST. Yes. The reinsurance program is a program where if 

a person who has coverage under the Affordable Care Act in a 

qualified health plan—in or out of the exchange, but in a qualified 

health plan—presents claims of more than $45,000 in a particular 

year, the Federal Government bears 80 percent of the risk of those 

claims up to $250,000. The insurers is at risk above that amount 

and also below the $45,000 amount. But that provision was purposely put into the act, and it is projected to reduce the cost of insurance by 10 to 15 percent across the individual market because 

of the fact, as we are seeing now, many of the people who sign up 

the earliest are high-cost people. They are people who are coming 

from the State and Federal high-risk pools. They are people who 

retirees who have been without coverage. They are older people 

predominantly, just as in the individual market now. And so this 

reinsurance program was put there to make insurance affordable 

to those people. 

Mr. HORSFORD. And is the reinsurance program funded solely by 

contributions from insurance companies? 

Mr. JOST. That is correct. 

Mr. HORSFORD. So it is not funded by taxpayers. 

Mr. JOST. It is not funded by taxpayers. However, I think it 

would be fair to say that some of those costs are being passed on 

to consumers. 

Mr. HORSFORD. So can you explain briefly why the insurance premium reductions in the individual market in 2014 will decline compared to what they are currently? 

Mr. JOST. Because the reinsurance program is funded at $10 billion this year, I forget the exact amounts, but it is cut in about half 

the following year and then reduced further in the third year and 

then it goes away. It is basically a program for the first year to 

cover the costs of this migration to the individual market. 

69 

Mr. HORSFORD. Thank you for clarifying. 

And, Mr. Chairman, I know it is just you and Mr. Lankford here 

that are on the other side, and I listened to some of my other colleagues, one that spoke prior to my question. And I just find it remarkable that Republicans are calling this a bailout, a bailout 

which helps individuals with preexisting conditions, people who 

were previously unable to obtain coverage and purchase affordable 

health insurance. So I really think that we need to, again, get away 

from the rhetoric, look at the facts, and if you want to refer to this 

as a bailout, then I ask you is it a bailout for people with heart 

disease. Is it a bailout for those with cancer or diabetes? Is it a 

bailout to protect our constituents with preexisting conditions from 

being gouged? Is that what we refer to as a bailout? 

You know my circumstance, Mr. Chairman. Last year I had sixway open heart bypass surgery. It is only because of the grace of 

God that I am here and because I was able to access a health insurance plan similar to one that my constituents are being asked 

to enroll in. I am in the exchange as well, and it is only because 

of that that I am not bankrupt. 

And so this is important, and we continue to just have these 

hearings that want to demagogue the issue rather than work to repair it, to make it better or to implement it right. 

And I yield back my time. 

Chairman ISSA. Will the gentleman yield? 

Mr. HORSFORD. I yield back my time. My time has expired. 

Chairman ISSA. I thank the gentleman. 

We now go to the gentleman from Oklahoma. 

Mr. LANKFORD. Thank you, Mr. Chairman. 

Mr. Horsford, I do understand, and we are grateful for a very 

successful surgery for you. But also I have people in my district 

and in my State that had a cancer doctor last year that they can 

no longer access this year, and they are in the middle of treatments. I have people that are in my district that have to have two 

knee replacements, had one knee replaced, and then they go back 

this year to get the second knee replaced and find out, no, you cannot use this doctor because the plan has changed. And part of the 

issue that we are faced with seems to be extremely narrow provider 

networks to try to control the premium costs, and then we have 

less access to doctors. 

So I would ask Mr. Goodman or whoever maybe that wants to 

be able to address this. What are you seeing in the provider networks to be able to hit some of the target numbers? 

Mr. GOODMAN. That we are getting a race to the bottom and that 

the insurers are putting out fees that are very low and taking all 

the doctors who would accept the low fees and not taking any others. That often excludes the best doctors and best hospitals. 

Mr. LANKFORD. So the best care, the most experienced, the greatest insight as far as treating multiple patients—those individuals 

now have lost access to those doctors, and they are getting new, 

young—which, great. I am glad they have been well trained, but 

they are not getting access to maybe the doctor they had or the one 

that they prefer. 

Mr. GOODMAN. I do not know what all the profiles look like because it is still early. But it is clear that the networks are very narVerDate Aug 31 2005 13:15 Mar 28, 2014 Jkt 000000 PO 00000 Frm 00073 Fmt 6633 Sfmt 6633 C:\DOCS\87202.TXT APRIL
70 

row and you have to pay a lot more to have a network that looks 

like the old network you were in. 

Mr. LANKFORD. Mr. Badger, let me ask you about this concept of 

picking winners and losers and some of the change that has happened in some of the plans and grandfathering in health plans and 

some of the transitions and the rollouts and everything else. Do 

you have a perception that right now we are picking winners and 

losers as far as insurance companies as well? 

Mr. BADGER. Well, we are certainly preferring coverage in the exchange to coverage outside the exchange. 

And if I might, I know you are on the clock. 

Mr. LANKFORD. We both are. 

Mr. BADGER. But it was said earlier that, well, you know, if your 

plan is canceled, they just did not get it renewed. It happened all 

the time. Prior to enactment of this law, there was something 

called HIPPA that was passed by Congress in 1996 that guaranteed renewability in the individual and small group market. The effect of this law, coupled with the regulations, is it became illegal 

to renew that coverage, and the resulting cancellations were precisely to push people into exchanges. 

Mr. LANKFORD. So the question is on some of the rules and what 

we are dealing with today as well. There seems to be a preference 

to say if you played ball with the administration and got involved 

in the exchange, we will make sure you are taken care of. If you 

did not get involved in one of the exchanges, then you are kind of 

outside this loop. 

Mr. BADGER. Insurers in the exchanges definitely enjoy tremendous advantage under the law with respect to these provisions. 

Mr. LANKFORD. This is part of the struggle that we face as a Federal Government, the cronyism and the fact that if you are willing 

to come into the administration and play by the rules, do it their 

way, then we are going to make sure that we protect you. Otherwise then, no, you do not have those same protections. So that 

pushes industry to say, well, we better come to the table or else 

we will be on the table. And that is a problem in a free market system and in a system where we want there to be the greatest 

amount of transparency and the least amount of interference from 

Government. 

Mr. Goodman, do you want to comment anything on that? 

Mr. GOODMAN. Well, I think all of the sectors were pressured in 

that very same way. And what I heard was if you do not come to 

the table, you are going to be the lunch, but it is the same message. So here in this city, a lot of organizations did a poor job of 

representing people out in the hinterland and cooperated with 

something that now in retrospect looks like it is very poorly designed. 

Mr. LANKFORD. Mr. Badger, the insurance companies have argued that it is unfair to change the rules now, that they already 

have the parameters set. Please do not change the rules. Do you 

consider that a fair argument? 

Mr. BADGER. It is an understandable argument. The problem is, 

again, we have had a number of people, certainly people who have 

benefited by this law, but people who were hoping to renew their 

71 

coverage, people that perhaps were able before to see a particular 

doctor and no longer able—we changed the rules on them. 

Mr. LANKFORD. So how many times do you think CMS has 

changed the rules during this process? 

Mr. BADGER. They have changed considerably. In the reinsurance 

alone, as the professor said, they are still changing the rules. They 

are not solid as yet. 

Mr. LANKFORD. Which again goes back to our same issue. The 

rules seem to change consistently and there does not seem to be 

a consistent plan, and the consumer is very much out of control. 

And for the American people that they just want to be able to 

choose for themselves and be in control of their own health care, 

now suddenly even the health care provider that they go to is not 

in charge of their health care and is not making decisions for them. 

And they make another phone call, and they are not in charge of 

it either. And they are trying to find out who is controlling my 

health care. How far do I have to go to be able to find the person 

that is making the choice on where I can go, what I am going to 

pay, what doctor I am going to have access to, what treatment that 

I am going to have? And it is very distant in this process and it 

is continuing to frustrate Americans. Agree or disagree with the 

policy change, Americans just want to have control back of their 

own health care again and be able to make decisions. 

So with that, I yield back. 

Chairman ISSA. I thank the gentleman. 

Today we covered a number of subjects, some of which our first 

and second panel were very critical to. Many of the things that 

were covered were tangential to the hearing today. 

On the board, in closing, you have the original projection in 1967 

dollars of the cost of Medicare and the actual cost of Medicare. 

Again, these are 1967 dollars. They are very reduced. 

Just yesterday, the CBO similarly is adjusting by threefold the 

cost of jobs to America and, by seemingly double, another trillion 

dollars the cost of this plan. 

Today much of our discussion centered around a plus or minus 

$8 billion bailout. Mr. Horsford wanted to know who was being 

bailed out. The fact is that under this program, whether it was 

done in the past or not, it guarantees that the health insurance insurers will get their full 3 percent by over-billing, and if they make 

an error on one of maybe a dozen or two dozen policies and they 

lose, they will be covered out of the excesses. In no case will the 

ratepayer—and since ObamaCare has been ruled to be a tax, the 

taxpayer—who is paying excess monies in for health insurance—in 

no case does that health insurance payer get his or her money 

back. These are undeniable truths. ObamaCare is getting much 

more expensive both in jobs and in cost. ObamaCare’s excess monies paid in by people for their health care do not come back to the 

ratepayer, and in fact, there are a number of embedded taxes. 

As we continue to look at the Affordable Care Act, this chair, 

along with our ranking member, have an obligation to ensure that 

we do look at the cost drivers of health care and the areas that are, 

in fact, in need of consideration. This was a small area, although 

we touched on larger areas. 

I want to thank our panel of witnesses for coming prepared. 

72 

I will hold the record open for 3 days for additional thoughts that 

any of our witnesses may have and extraneous material by members on the dais. 

Chairman ISSA. Does the ranking member have any closing 

statements? The gentleman is recognized. 

Mr. CUMMINGS. Thank you, Mr. Chairman. 

I want to thank the witnesses for being here today. 

Clearly, as has been said earlier, it may seem like we are in disagreement today, but the fact is that these risk corridors were 

something that under Medicare Part D are still in existence and 

will continue to be and has been for 10 years. And under the Affordable Care Act, you are talking a 3-year limit. Very interesting. 

As I listened to Mr. Collins, I am concerned that—he said that 

he had some constituents who are not able to have the type of insurance policy that they had before. And I think that those kind 

of issues ought to be addressed. It should be addressed soon, and 

I am sure they will be. At the same time, I could give him story 

after story of people who were suffering from cancer, heart disease 

that had absolutely no way of getting any kind of treatment. Period. Or if they got treatment, it was an emergency room, and it 

was basically to save their life but there was no follow-up. And so 

they were basically out there on their own. 

You know, Emerson said we should not be pushed around by our 

problems and our fears, but we should be guided by our hopes and 

our dreams. And I think one of the major things that we need to 

concentrate on is how do we take care of all Americans. Why do 

we leave anybody behind? And when we are basing it on our hopes 

and dreams, our hopes and dreams should be that we keep people 

well, and if they get sick, we do everything in our power to help 

them get well. There are a lot of people who suffer. 

You know, it just seems to me that we need to move from just 

criticism to actually making the repairs that are necessary. Nobody 

said the law was perfect. This is a very complex law, and it took 

many, many years to bring this about. A lot of Presidents tried to 

do it. This President accomplished it. And so hopefully, moving forward, we will be able to do just that. 

One of the things that I did want to ask Senator Rubio and did 

not have a chance to—but I wanted to ask him, you know, you got 

850,000 people in Florida who have no insurance. And still, the 

Governor down there has made a decision that he would not open 

the door for them to enter into Medicaid, and those are people— 

many are sick and are in need. Automatically you put 850,000 people—give them insurance, provide them with insurance. That is 

significant. 

So, again, we have got work to do. I think all of us have to pull 

together and, again, move forward, not based on our fears, not 

based on our problems, but based on our hopes and our dreams. 

Thank you very much. 

Chairman ISSA. I thank the ranking member. I thank our witnesses. 

We stand adjourned. 

[Whereupon, at 11:55 a.m., the committee was adjourned.] 

(73) 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

74 


Insert offset folio 30 here 87202.030

Broncos who watched in horror 

Bowl on then have some idea Obamacare's Dn)t)cmems 

as read this report. 

Yes, it's that bad. 

It's bad that there's even a report section D"",,.,c,'" "How theACA 

Reduce in the Term?" 

its conservative opponents, Obamacare has indeed rl"'otr,,,,,,.rl 

UCCIICB"<:;. and made health care less accessible. 
75 


Insert offset folio 31 here 87202.031

Here are 5 facts from CBO's report that illustrate how the law's effects bear no 

resemblance whatsoever to its namesake's promises. 

From the report: 

The reduction in C80's afhours worked r"'~l'p'''''''nr'' II decline in the 

number 

million 

fuill-til:ne-,em~iv;dellt workers of about 2.0 millioll in 2017, rising to about 2.5 

nH"UI~"'H CBO that total """"''''''r""". 

will increase over the that increase will be 

smaller than it would have been the absence of the ACA. 

But what's 

Before the Affordable Care the 

"",,,rl,,,nt himself - made a 

of the uninsured. And 

deal about how the law would solve the 

before a 

session '(WI a!"""" President Obama lamented that "there are now more than 

30 million American citizens who cannot coverage." 

that number will be lower more than a decade after the law's passage 

Still, to estimates CBO and about :nmilliollnonelderly residents of 

tbe United States are likely to be without health insurance in 2024, one out of 

every nine such residents. 
76 


Insert offset folio 32 here 87202.032

There's a reason even Politi Fact was forced to 

like your health care was From the eBO report: 

eBO and that, as a result of the ACA, between 6 million lind 7 millioll fewer 

people will have employment-based insurallce coverage each year from 2016 

2024 than would be the case in the absence of the ACA. 

So oopses. 

Yes, incentives matter: 

incentives to work attributable to the Affordable Care Act 

with most of the from new subsidies for health insurance 

have a effect 

subsidies that decline with income 

better 

increase with 

and some the ACA will create 

for some to work less, 

than 2.5 million to reduce the amount of lahor 

choose to because of the ACA, many of them 

will not leave the labor force 
77 


Insert offset folio 33 here 87202.033

walks like a tax increase, and talks like a tax increase, it's 

increase, even if the 

tax increase: 

who voted for the tax increase 

a tax 

In addition, !lel,"'uu,!> in 2018, the ACA UHIJV;""'" an excise tax on certain 

cost health insurance CBO expects that the burden oHnat tax will, over 

time, be borne primarily by workers in the form of smaller after-tax cOl1t1pe'llS~ltio:!I. 

firms may seek to avoid or limit the amount of the excise tax 

to less health and in that case workers' wages should 

corTe~;pondltng amount. Those wages will be to income and 

taxes, however, so total those workers wm be 

would have been in the absence of the ACAAfter·tax will 

thus fall whether firms pay the excise tax or take steps to avoid it, and the 

increases in average and tax rates wm cause a decline in 

CBO estimates. 

But other than that the doc and the and the broken 

the law is awesome, you guys. 
78 


Insert offset folio 34 here 87202.034

AMERICAN ACADEMY of ACTUARIES 

Committee on Oversight and Government Reform 

U.S. House of Representatives 

Hearing on 

ObamaCare: 

Why the Need for an Insurance Company Bailout? 

Statement of 

Cori E. Uccello, MAAA, FSA, FCA, MPP 

Senior Health Fellow 

American Academy of Actuaries 

February 5, 2014 

The American Academy of Actuaries is an IS,OOO-member professional association whose mission is to 

serve the public and the U.S. actuarial profession. The Academy assists public policymakers on all levels 

by providing leadership, objective expertise, and actuarial advice on risk and fmancial security issues. The 

Academy also sets qualification, practice, and professionalism standards for actuaries in the United States. 
79 


Insert offset folio 35 here 87202.035

Chainnan Issa, Ranking Member Cummings, and distinguished members of the 

committee. My name is Cori Uccello, and [ am the Senior Health Fellow at the American 

Academy of Actuaries. I am providing this testimony on behalf of the Academy, which is 

the non-partisan professional association representing all actuaries in the United States. 

OUf mission is to serve the public by providing independent and objective actuarial 

infonnation, analysis, and education to help in the formulation of sOllnd public policy. 

The Affordable Care Act (ACA) is expanding access to health insurance coverage by 

prohibiting insurers from denying coverage, excluding pre-existing conditions, and 

varying premiums based on an individual'5 health status. To reduce the adverse selection 

arising from such requirements, the ACA includes other provisions, such as premium 

subsidies and an individual mandate, designed to increase overall participation in health 

insurance plans. 

The ACA does not necessarily establish universal participation, however, and therefore 

some degree of adverse selection is inevitable. And even with universal participation, 

some insurance plans could end up with a disproportionate share of individuals having 

greater health care needs, putting them at risk for large losses. 

The substantial influx of previously uninsured individuals into the new health insurance 

exchanges created by the ACA also could make it more difficult for insurers to price 

plans accurately, at least during the early years of the exchanges. Insurers generally do 

not have sufficiently detailed data and experience regarding health spending for the 

uninsured. In addition, future spending by the newly insured could increase once they 

obtain coverage, but it is unknown how large any such increase may be. Understating 

premiums could result in large losses to private insurers, threatening insurer solvency. 

Overstating premiums could result in large gains to the insurers and/or reduce 

participation in the plan. 

The ACA establishes three risk-sharing mechanisms to mitigate these risks-risk 

adjustment, reinsurance, and risk corridors. The following testimony will focus on risk 

corridors, which aim to mitigate pricing uncertainty; however, more information on each 

of the mechanisms can be found in the American Academy of Actuaries fact sheet on 

ACA risk-sharing mechanisms. l 

In general, risk corridors are used to mitigate the pricing risk that insurers face when their 

data on health spending for potential enrollees are limited. Risk corridors provide a 

payment to insurers if their losses exceed a certain threshold. They also are used to limit 

an insurer's gains-insurers would make payments if their gains exceed a certain 

threshold. 

The ACA provides for a temporary risk·corridor program that will be effective from 2014 

to 2016 for qualified health plans (QHPs) in the individual and small group markets. This 

program will mitigate the pricing risk introduced because of very limited data available to 

I See http://actuary.org/fileslACA Risk Share Fact Sheet FINALl20413.pdf. 

2 
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Illustration ACA Risk Corridors 

4 
81 


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Committee Insert - CBO Budget & Economic Outlook 2014-2024 - found here: 

http://www.cbo. gov/sites/defaultifiles/cbofiles/attachments/450 1 0-Outlook20 14 Feb.pdf 
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Insert offset folio 38 here 87202.038

Opening Statement of Ranking Member Gerald E. Connolly (V A-ll) 

Committee on Oversight and Government Reform 

ObamaCare: Wily tile Need for an Insurance Company Bailout? 

February 5, 2014 

Today's hearing represents yet another tired attack on the Affordable Care Act (ACA) by House 

Republicans who want to engage in political theater to the exclusion of serious, substantive, and 

bipartisan work aimed at refining and enhancing the ACA in order to most effectively provide 

every American with affordable, quality health insurance coverage. 

Frankly, this morning's hearing is occurring three days too late, as it would have been fitting to 

be held this past Sunday in honor of its similarity to the film Groundhog Day. I know that having 

been subject to an endless series of duplicative Republican efforts to repeal the ACA I am 

beginning to feel like Bill Murray's character who found himself stuck in a time loop that repeats 

over and over again. 

Perhaps it would be most effective to lead off by disposing of the banal question posed by 

today's very fair and balanced hearing title, "Obamacare: Why the Need for an Insurance 

Company Bailout?" To answer the majority, the simple answer is that there is absolutely no need 

for an insurance company bailout, and that is why one does not exist in the ACA. 

Based on legislation introduced by Senator Marco Rubio, who is testifying before the Committee 

today, it appears that my colleagues on the other side of the aisle have interpreted risk corridor 

programs as constituting a so-called "bailout." Putting aside questions over how an insurance 

industry funded risk mitigation fund could possibly constitute a "bailout" - I would simply note 

that to any actual health policy expert, risk corridors are hardly a novel invention. Rather they are 

a common feature of insurance design, and in fact, at the risk of shocking my Republican 

colleagues who support Medicare Part D - are used by that popular program to this day! 

It is telling that Republicans have hypocritically embraced these so-called "bailout" risk 

corridors in Medicare Part D, while simultaneously demeaning these risk management programs 

when used by the ACA. 

If one uses a reasonable understanding of the term "bailout," which law professor Cheryl Block 

defines as, " ... a form of government assistance or intervention specifically designed or intended 

to assist enterprises facing financial distress and to prevent enterprise failure," the notion of a 

health insurance company-funded risk corridor program that provides risk mitigation assistance 

to a subset of the very same health insurance companies that funded the program in the first place 

constituting a "bailout" of insurance companies is patently absurd. 

Of course, it may be possible that the majority is utilizing a special Republican definition of a 

bailout, which based on their strident and irrational OPPOSition to the President, appears to be any 

Federal program that President Obama supports. Either way, we have entered a twilight zone 

where Republicans are seeking to repeal a so-called bailout program that the Congressional 

Budget Office (CBO) projects will result in net savings of $8 billion for the Federal Government. 

(OVER) 
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Insert offset folio 39 here 87202.039

That point bears repeating. In analysis released yesterday, CSO projected that the ACA risk 

corridor program that Senator Rubio describes as a bailout and seeks to repeal, will save the 

Federal Government $8 billion, as a result of insurance companies paying $16 billion into the 

risk corridor fund, and only $8 billion needing to be paid out over the 20[5 to 2024 period. 

Now for those keeping score at home, if you are confused about how a so-called bailout could 

actually save the Federal Government billions of dollars in a given year, take solace that you are 

not alone. Of all the installments of anti-ACA political theater, today's hearing is simply the 

most astonishing and bizarre, as it focuses on what the Washington Post's health policy reporter 

coined, "Obamacare's magical, deficit-reducing bailout." Come to think of it, that would have 

been a more apt and accurate title for this morning's hearing. 

I would urge my colleagues to simply call a spade a spade. If you hate the ACA, if you care little 

about providing affordable, quality health insurance to all Americans, fine. But please spare us 

the misleading and manipUlative messaging that makes a mockery of measlired policy debate and 

as the Roosevelt Institute's Mike Konczal recently observed, appears to be just another effort by 

Republicans to "blur that definition [of bailout) into all government actions, which in tum is 

simply used to discredit the state. That easy temptation should be avoid[ ed)." 

I could not agree more. 

-END-
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MEMORANDUM 2014 

To: House Energy 

From: Edward C. Liu, L~!,I>I"tl"~ A.ttomeYlilllllillllllllll 

Subject: FUllding of Risl, CQrridor Payments tInder ACA § 1342 

-----

to qualitled 

be used to 

may he to to by other 
85 


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Congressional Research Service 

less than the total premiums received (less administrative costs), the plan is required to pay to the 

Secretary a comparable percentage of the excess premiums received. 

Is an appropriation required for payments to qualified 

health plans under ACA § 1342(b)(1)? 

As noted above, the risk corridor program directs payments to be made by the Secretary ofHHS to certain 

insurers that have underestimated their premiums for a given plan year through 2016. However, statutory 

and constitutional provisions prohibit federal agencies from making payments in the absence of a valid 

appropriation.3 Under longstanding GAO interpretations, an appropriation must consist of both a direction 

to pay and a specified source offunds.4 While the language of ACA § 1342(b)(1) establishes a directive to 

the Secretary to make such payments, it does not specify a source from which those payments are to be 

made. 5 Therefore, § 1342 would not appear to constitute an appropriation of funds for the purposes of risk 

corridor payments under that section.6 

It is possible that an appropriation that would cover these payments may arise elsewhere. One potential 

source would be an appropriation enacted as part of the annual appropriations process. Unfortunately, it is 

too early to be able to predict whether an annual appropriation exists that would cover these payments. 

This is because the payments under § 1342 would not be made until FY2015 for which we do not yet 

have a proposed budget from the President or any pending appropriations bills. 

Can the amounts received from qualified health plans 

under ACA § 1342(b)(2) be used to make payments 

under § 1342(b )(1)? 

In some cases, federal expenditures can be financed through a type of permanent, indefinite appropriation 

known as a revolving fund. Generally, such expenditures have revenue generating activities and the 

331 U.S.c. § 1342 ("An officer or employee of the United States Government or of the District of Columbia government may 

not ... make or authorize an expenditure or obligation exceeding an amount available in an appropriation or fund for the 

expenditure or obligation [or] involve either government in a contract or obligation for the payment of money before an 

appropriation is made unless authorized by law"); U.S. CONST. art. T, § 9, cl. 7 ("No Money shall be drawn from the Treasury, but 

in Consequence of Appropriations made by Law"). 

4 See GAO, 1 PRINCIPLES OF FEDERAL ApPROPRIATIONS LAW 2·17 (2004). 

'''[1)[ ... a participating plan's allowable costs for any plan year are more than [specified thresholds] the Secretary shall pay to the 

plan an amount equal to [the statutory fonnula]." 42 U.S.C. § 18062(b)(I). It should also be noted that the question of whether an 

appropriation is available to make these payments is separate from the question of whether insurance plans meet the eligibility 

requirements for a payment under § I342(b)(1). A qualified health plan may have a legal claim to the payments by operation of 

the statutory fonnula, but that alone does not constitute an appropriation from which that claim may be paid. See GAO, I 

PRINCIPLES OF FEDERAL APPROPRIATIONS LAW 2·17 (2004)( citing Comptroller General Decision B.114808, Aug. 7, 1979). 

6 In contrast, the risk corridor payments under the similar Medicare Part D program are fimded through a permanent 

appropriation from the Medicare Prescription Drug Account established in the Federal Supplementary Medical Insurance Trust 

Fund. 42 U.S.C. § 1860d·16(b)(1)(B). 
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Congressional Research Service 

revenue generated from those activities is placed in a revolving fund which can be used to pay for future 

revenue generating activities. 7 

An agency may not create a revolving fund absent specific authorizing legislation.8 In the absence of any 

specific directions, federal law requires such amounts to be deposited in the General Fund of the Treasury, 

from which they may be further appropriated by Congress.9 The necessary elements for a statute to create 

a revolving fund are: 

• It must specify the receipts or collections which the agency is' authorized to credit to the 

fund (user charges, for example). 

• It must define the fund's authorized uses, that is, the purpose or purposes for which the 

funds may be expended. 

• It must authorize the agency to use receipts for those purposes without fiscal year 

limitation. However, as explained above, only receipts and collections that the fund has 

earned through its operations are available without fiscal year limitation. to 

Notably for purposes of this memorandum, the amounts received by HHS from plans that have 

overestimated premiums for a given year are not explicitly designated to be deposited in a revolving 

account or otherwise made available for outgoing payments under § 1342(b)(I). Therefore, there does not 

appear to be sufficient statutory language creating a revolving fund that would make amounts received 

under § 1342(b)(2) available to pay amounts due to eligible plans under § 1342(b)(I). 

As with a non-revolving appropriation to cover payments under § J342(b)(I), a revolving fund can be 

created in standalone legislation, or in an annual appropriations act. II The lack of statutory language 

creating a revolving fund within § 1342 does not mean that such incoming payments may never be placed 

in a revolving fund to be used for outgoing payments. Such a revolving fund could be established by 

Congress at some point in the future, including before the first payments from qualified health plans are 

due for plan year 2014. Nevertheless, until such time as that legislation is enacted, it does not appear that 

a revolving fund exists for purposes of receipts and payments under § 1342. 

7 See GAO, 3 PRrNCIPLES OF FEDERAL ApPROPRIATIONS LAW 12-85 (2008). 

81d. at 12-89 ("[Ajgencies have no authority to administratively establish revolving funds."). 

931 U.S.C. § 3302(b). See GAO, 3 PRINCIPLES OF FEDERAL ApPROPRIATIONS LAW 12-93 (2008)(noting that creation of revolving 

fund is exception to general rule of31 U.S.C. § 3302(b)). 

10 See GAO, 3 PRINCIPLES OF FEDERAL ApPROPRIATIONS LAW 12-90 (2008). 

II See GAO, 3 PRINCIPLES OF FEDERAL ApPROPRIATIONS LAW 12-89 (2008). 
87 


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R. BRUCE JOSTEN 

EXECUTIVE VICE PRESlOENT 

OOVERNMtNT AffAIRS 

CHAMBER OF COMMERCE 

OF THE 

UNITED STATES OF AMERICA 

February 4,2014 

TO THE MEMBERS OF THE UNITED STATES CONGRESS: 

1615 H STREET. N.w. 

WASI-UNGTON. D.C. 2006.2-2000. 

202l463-S31(} 

Tbe U.s. Chamber of Commerce, the world's largest business federation representing the 

interests of more than three million businesses of all sizes, sectors, and regions, as well as state 

and local chambers and industry associations, and dedicated to promoting, protecting, and 

defending America's free enterprise system, urges you to consider the harm that would be caused 

by the repeal of the risk mitigation programs as contained in the Patient Protection and 

Affordable Care Act (PPACA). 

Recently, certain policymakers have been examining the purposes of the programs 

collectively known, as contained in the PPACA, as "the 3 Rs," that is, the risk corridor program, 

the transitional reinsurance program, and the risk adjustment program. As our business members 

continue to struggle with the market disruption associated with the implementation oftbe 

PP ACA, the Chamber urges you to carefully consider the wide-ranging ramifications that any 

changes to these market stabilization mechanisms may have. If the market is disrupted, it would 

lead to higher costs and fewer choices for small business owners and the self-employed. 

These risk mitigation programs were collectively created to mitigate the financial risk and 

uncertainty facing private sector businesses as they offer products in the newly restructured small 

group and individual markets. Facing a host of new rating limitations, mandated coverage 

requirements, and a likely influx of new consumers, these companies relied on the safeguards 

that the risk mitigation programs were designed to provide. Businesses chose to offer products 

in these markets based on the understanding that financial harm or benefit would be moderated 

both in circumstances where the prices tbey set far exceeded the costs they incurred and in 

circumstances where the prices they set fell far short of the costs they incurred. 

The purpose of these provisions is to help stabilize the new markets and provide some 

protection to consumers and businesses enrolled in and offering coverage for the first few years 

in particular. The provisions were deliberately included in the law to protect businesses offering 

products in these new markets with no valid historical data in the initial years to guide them in 

setting the price of products that consumers could buy regardless of pre-existing conditions. 

Without these provisions, consumers would have seen much higher premiums and far fewer 

products offered in the individual and small group markets. 

Beyond the practical importance of these risk stabilizing provisions, they have also 

successfully encouraged private sector engagement and participation in other new andlor high 

risk insurance programs. A little over a decade ago, the legislation enacting Medicare Part D 
88 


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included similar risk stabilization programs to encourage choice and competition for the first six 

years of the 2003 stand-alone prescription drug program. Other programs, such as flood 

insurance, crop insurance, and terrorism risk coverage, similarly rely on these types of mitigating 

provisions. 

Further, according to a newly released Congressional Budget Office (CBO) report, the 

government will in fact collect more money than it pays out under this program. In an estimate 

released today, CBO projects that under the new risk corridor program insurers will pay in $16 

billion while the government will payout only $8 billion, resulting in $8 billion in net 

government revenue, 

The problem with repealing these provisions is that it would effectively harpoon the rates 

that were established based on the very protections these provisions promised. It would change 

the rules of the game in the middle of the game and cause some private businesses to lose big 

and others to potentially win big. Repeal would make it harder and less likely that companies 

will offer products to small businesses and individuals in the future and would certainly lead to 

significantly higher premiums for coverage offered next year without these protections. It would 

limit choice, increase premiUms, and hinder the development of a robust private insurance 

market. And as the American Action Forum points out in its February 4,2014, backgrounder, 

"[I]t is worth noting that the provisions keeping premiums lower will also reduce federal 

spending on the exchange subsidies. In the absence of the risk mechanisms, higher health 

insurance premiums would result in more households qualifying for subsidies and increased cost 

for those who are subsidized." 

Therefore, to protect both consumers and business, the Chamber urges you to consider 

the extreme harm that eliminating these programs during the most critical phase of 

implementation would cause. It is crucial that additional reforms strengthen and protect 

individuals, business, and the health care system at large, not harm it further. Repealing the risk 

mitigation programs would clearly be a step in the wrong direction. 

Sincerely, 

,e~k- R. Bruce Josten 
89 


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-...J." 

AHIP 

FOR THE RECORD 

Statement 

on 

The Affordable Care Act's Premium Stabilization Programs: 

Promoting Competition and Affordability for Consumers 

America's Health Insurance Plans 

601 Pennsylvania Avenue, NW 

South Building, Suite 500 

Washington, DC 20004 

Submitted to the 

House Committee on Oversight and Government Reform 

February 5, 2014 
90 


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I. Introduction 

AHIP is the national association representing health insurance plans. Our members provide 

health and supplemental benefits to more than 200 million Americans through employersponsored coverage, the individual insurance market, and public programs such as Medicare and 

Medicaid. AHTP advocates for public policies that expand access to affordable health care 

coverage to all Americans through a competitive marketplace that fosters choice, quality, and 

innovation. 

We appreciate the committee's interest in the premium stabilization programs that were 

established by the Affordable Care Act (ACA) to promote competition and affordability for 

consumers during the early years of the law's implementation. OW" members strongly support 

these programs as essential tools for helping to create a stable and predictable environment for 

consumers who are seeking health insurance coverage in the new Exchanges. Similar programs 

are embedded in the Medicare Part D Prescription Drug Program and the National Flood 

Insurance Program. These initiatives - just like the ACA's premium stabilization programs are 

designed to protect consumers. 

Yesterday, the Congressional Budget Office (CBO) issued a report I outlining new projections 

that one of the premium stabilization programs - which establishes risk corridors - will yield net 

savings to the federal government of $8 billion over the three-year period of 2015-2017. 

Specifically, CBO projects that the government will collect $16 billion from insurers through the 

risk corridors, while paying out $8 billion in risk corridor payments. CBO indicates that these 

projections were infonned by an analysis of recent data from the Medicare Part D program and 

its experience with risk corridors. 

We strongly oppose legislative proposals that would repeal any of the ACA's premium 

stabilization programs. Last year, insW"ers submitted their qualified health plan (QHP) 

applications for 2014 based on rules and programs that were in place at the time of the May 3, 

2013 deadline, including the premium stabilization programs. Changing the rules in the middle 

of the year -long after premiums have been set based on rules that were in place nine months 

ago - would be disruptive for consumers. 

I "The Budget and Economic Outlook: 2014-2024," Congressional Budget Office, F.ebruary 2014. 
91 


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We believe it is particularly important to recognize that the availability of affordable coverage 

options, an issue of great importance to consumers, is directly supported by the premium 

stabilization programs. Many of the ACA's provisions - including the new health insurance tax, 

the Exchange user fees, the essential health benefits requirements, and the minimum actuarial' 

value requirements - are pushing premiums higher.2 But the premium stabilization programs, as 

we explain below in our statement, protect consumers by reducing potential short-teon volatility 

in premiums at a time when affordability of coverage is a critically important priority for 

families. 

Our statement focuses on the following topics: 

• The success that similar risk mitigation programs have demonstrated in promoting choices 

and competition in the Medicare Part D prescription drug program. 

• An overview of the ACA's premium stabilization programs, and why they are needed to 

protect consumers and promote competition in the refooned marketplace. 

• The specific roles of the risk corridor, reinsurance, and risk adjustment programs. 

II. The Precedent of Similar Risk Mitigation Programs in Medicare Part D 

The Medicare Part D Prescription Drug Program is an example of another federal health program 

in which similar risk mitigation strategies have been established by Congress to promote a stable 

and competitive market. The Medicare Part D program, which gives Medicare beneficiaries the 

option to enroll in prescription drug plans sponsored by private insurers, includes similar 

versions of the ACA's risk mitigation programs. 

The following are permanent features of the Part D program: 

• The Centers for Medicare & Medicaid Services (CMS) administers a risk corridor program in 

which Part D plan sponsors share risk above and below predetermined payment-to-cost ratio 

, "Comprehensive Assessment of ACA Factors That Will Affect Individual Market Premiums in 2014," Milliman, 

Inc., prepared at the request of AH1P, April 25, 2013. This report provides a comprehensive overview of ACA 

provisions that will impact individual market health insurance premiums. The report highlights how some 

provisions will increase premiums While others will make coverage more affordable. 

2 
92 


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thresholds established by law. The risk corridors have broadened over time, meaning that 

Part D sponsors are more likely to be at full risk than was true during the initial years of the 

program. 

• CMS provides reinsurance payments to Part D plan sponsors when a beneficiary'S 

prescription drug costs reach a catastrophic threshold, providing additional support to 

sponsors with high-cost enrollees. 

• CMS reimburses Part D plan sponsors on a risk-adjusted basis through a system that provides 

payments to Part D plans that enroll more individuals with complex conditions to more 

accurately reflect the costs of addressing these beneficiaries' health care needs. A similar 

system is used to risk-adjust payments to Medicare Advantage plans. 

Together, these risk mitigation strategies have been instrumental in creating a new insurance 

market that has a demonstrated track record of promoting competition, choice, and innovation 

through Medicare Part D plans that are providing beneficiaries with high quality, affordable 

prescription drug coverage. The success of the Part D program offers valuable lessons for 

policymakers about the importance of ensuring that the ACA's premium stabilization programs 

are permitted to playa similar role in making health insurance coverage affordable for the 

American people. 

III. Overview of the ACA's Premium Stabilization Programs 

The ACA established new marketplaces with entirely new market rules, creating uncertainty 

about who will purchase coverage and what their costs will be, palticu!arly during the initial 

years of enrollment. To protect consumers and promote competition during the early years of the 

program, the ACA established three premium stabilization programs, modeled after those in the 

Medicare Part D program, that include: (1) risk corridors; (2) reinsurance; and (3) risk 

adjustment. These programs - commonly known as the "3Rs" - are specifically designed to 

provide greater stability in the marketplace as the new insurance reforms are implemented and as 

consumers enroll in the new Exchanges. 

The "3Rs" include temporary risk corridor and reinsurance programs designed to reduce 

premium volatility during the first three years of enrollment and a permanent risk adjustment 

program that spreads costs among health plans to avoid penalizing insurers that enroll people 

3 
93 


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with higher-than-average costs. Similar premium stabilization programs have been used 

successfully in other government programs and are a permanent feature of the popular Medicare 

Part D program that is noted for its successful track record of providing market-based 

competition for consumers. 

The risk corridor program is a temporary risk-sharing arrangement between QHPs participating 

in the marketplace and the federal government that will help protect consumers from dramatic 

year-to-year changes in premiums if actual costs vary significantly from projections used in 

setting premiums. If the amount a health plan collects in premiums exceeds its targeted medical 

expenses by a certain amount, the plan will make a payment to the federal government. If 

premiums fall ShOlt of this target, the risk corridor program transfers a portion of this shortfall to 

the health plan. 

The temporary reinsurance program is a fully funded initiative that covers a portion of the costs 

of enrollees in the individual market with very high medical expenses. This program reduces 

uncertainty in the market and helps mitigate individual market rate increases that might 

otherwise occur due to enrollment of individuals with very high cost claims. 

While the "3Rs" are important programs that help protect consumers during the transition to the 

new marketplace, those programs will not fully offset the impact on the market if the Exchanges 

fail to achieve broad participation, particularly among the young and healthy. Health plans set 

their premiums for 2014 based on the rules and programs that were in place at the time, including 

premium stabilization programs that help mitigate the impact on consumers of unexpected 

enrollment in the market. Repealing these programs now - after premiums have been set and 

after millions of consumers are now enrolled - would cause disruptions in the market and higher 

premiums for consumers. 

IV. The Specific Roles of the Risk Corridor, Reinsurance, and Risk 

Adjustment Programs 

Each of the ACA's premium stabilization programs takes specific steps to address uncertainty in 

the marketplace and support the law's goals of providing coverage to the young and healthy, as 

well as the old and unhealthy, without regard to pre-existing conditions. The importance of these 

programs is reinforced by the following explanation in an issue brief published by the Kaiser 

4 
94 


Insert offset folio 50 here 87202.050

Family Foundation' in January 2014: "The ACA's risk adjustment, reinsurance, and risk 

corridors programs are intended to protect against the negative effects of adverse selection and 

risk selection, and also work to stabilize premiums, particularly during the initial years of ACA 

implementation." 

Risk Corridor Program 

New benefit mandates, regulatory requirements, and the ACA's broad insurance reforms have 

dramatically transformed the insurance marketplace in 2014. Although health plans have made 

assumptions about the cost of coverage in this new market, there is still substantial uncertainty 

about who is purchasing coverage. The risk corridor program will limit volatility in the 

individual and small group markets, resulting in a more stable marketplace and options for 

consumers that accurately reflect the cost of coverage. 

For each year of the risk corridor program, QHPs and the federal govenunent will share in the 

risk associated with the uncertainty of the new marketplace. If the amount a health plan collects 

in premiums exceeds its medical expenses by a certain amount, the health plan will make a 

payment to the federal government. If premiums fall short of this target, the risk corridor 

program transfers a portion of this shortfall to the health plan. 

Like the reinsurance program, the risk corridor program is a temporary measure designed to ease 

the transition between the old and new marketplace and help stabilize premiums for consumers. 

As risk pools in this new market become more predictable over time, the protections provided by 

risk corridors will become less critical for protecting market stability. 

A fact sheet recently published by the American Academy of Actuaries4 discusses the rationale 

behind the ACA's risk corridor program: 

"Under the ACA, risk corridors have been established to mitigate the pricing risk that 

insurers face because they have very limited data to use to estimate who will enroll in plans 

operating under the new 2014 ACA rules and what their health spending will be ... The risk 

corridors are temporary since they are most appropriate during the first few years of the new 

program, when less expenditure data are available. As more data become available on health 

J "Explaining Health Care Reform: Risk Adjustment, Reinsurance, and Risk Corridors," Issue Brief, Kaiser Family 

Foundation, Jan 22, 2014. 

4 "Fact Sheet: ACA Risk-Sharing Mechanisms," American Academy of Actuaries, 2013. 

5 
95 


Insert offset folio 51 here 87202.051

spending patterns of the newly insured, the ability to set premiums accurately should 

improve, thereby reducing the need for risk corridors." 

Reinsurance Program 

The ACA also establishes a temporary reinsurance fund that will be used to pay a portion of the 

costs for individuals with very high medical expenses. For the 2014 benefit year, the reinsurance 

program will pay 80 percent of the claims cost for non-grandfathered individual market enrollees 

between $60,000 and $250,000. All health plans providing major medical insurance will 

contribute a set amount of money to the reinsurance program for each year of its operation, 

totaling $10 billion in 2014, $6 bi11ion in 2015, and $4 billion in 2016. 

The reinsurance program will help health plans meet the needs of high-cost enrollees who 

previously have not had health insurance coverage, while making individual market premiums 

more affordable for consumers. The Department of Health and Human Services (HHS) 

estimates that the reinsurance program will reduce premiums in the individual market in 2014 by 

10 to 15 percent compared to what they would have been without this program$ 

The American Academy of Actuaries' fact sheet, mentioned in the previous section, provides the 

following explanation for the ACA's reinsurance program: 

"As the ACA was being drafted, it was recognized that high-cost individuals would have the 

greatest incentives to enroll in coverage. Therefore, during the first years of the law's 

implementation, this popUlation could make up a greater share of enrollment than in 

subsequent years when the individual market risk pool is anticipated to be larger and more 

representative of the population as a whole ... The reinsurance program will offset a portion 

of the costs of high-cost enrollees in the individual market." 

Risk Adjustment Program 

The ACA's risk adjustment program is designed to spread risk among health plans to prevent 

problems associated with adverse selection. Under this program, health plans that enroll 

disproportionately higher-risk populations (such as individuals with chronic conditions) will 

receive payments from plans that enroll lower-risk populations. Payments and transfers are only 

between health plans, and apply only to individual and small group plans both inside and outside 

of the Exchange. 

5 77 FR 73199, December 7. 2012. 

6 
96 

Æ 


Insert offset folio 52 here 87202.052

By spreading risk across all health plans in a state, risk adjustment promotes market stability 

while also protecting consumers with complex medical conditions. Preventing adverse selection 

will lead to a more robust marketplace and more affordable coverage options for consumers. 

The importance of the ACA's risk adjustment program is discussed in a health policy brief 

published by Health Affairs6. The author of this brief explains: 

"Because the exchanges will feature standardized benefit options and restrict insurers' ability 

to base premiums on their enrollees' health statlls, plans that enroll a sicker-than-average 

enrollee population will be in danger of losing money, while plans that enroll relatively 

healthier enrollees will probably be overpaid. Ultimately, if too many plans lose money, 

some could go out of business, and the overall system could be seriously destabilized. To 

prevent this from happening, the law requires the use of risk adjustment to reallocate 

premium income among plans to account for differences in their enrollees' aggregate health 

conditions, and therefore the likely cost of paying for their care." 

V. Conclusion 

Thank you for considering our perspectives on the value of the ACA's premium stabilization 

programs as strategies for promoting competition and affordability for consumers. Our members 

are strongly committed to continuing to work with Congress, the Administration, and other 

stakeholders to expand access to high quality, affordable coverage options. 

'''Risk Adjustment in Health Insurance," Rob Cunningham, Health Policy Brief, Health Affairs, August 30, 2012. 

7