How Do Insurance Firms Respond to Financial Risk Sharing Regulations? Evidence from the Affordable Care Act

52 Pages Posted: 19 Dec 2017

See all articles by Daniel W. Sacks

Daniel W. Sacks

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Khoa Vu

University of Minnesota - St. Paul - Department of Applied Economics

Tsan-Yao Huang

University of Minnesota - Minneapolis

Pinar Karaca-Mandic

University of Minnesota - Twin Cities - School of Public Health

Date Written: December 2017

Abstract

We investigate the effect of the Risk Corridors (RC) program on premiums and insurer participation in the Affordable Care Act (ACA)’s Health Insurance Marketplaces. The RC program, which was defunded ahead of coverage year 2016, and ended in 2017, is a risk sharing mechanism: it makes payments to insurers whose costs are high relative to their revenue, and collects payments from insurers whose costs are relatively low. We show theoretically that the RC program creates strong incentives to lower premiums for some insurers. Empirically, we find that insurers who claimed RC payments in 2015, before defunding, had greater premium increases in 2017, after the program ended. Insurance markets in which more insurers made RC claims experienced larger premium increases after the program ended, reflecting equilibrium effects. We do not find any evidence that insurers with larger RC claims in 2015 were less likely to participate in the ACA Marketplaces in 2016 and 2017. Overall we find that the end of the RC program significantly contributed to premium growth.

Suggested Citation

Sacks, Daniel W. and Vu, Khoa and Huang, Tsan-Yao and Karaca-Mandic, Pinar, How Do Insurance Firms Respond to Financial Risk Sharing Regulations? Evidence from the Affordable Care Act (December 2017). NBER Working Paper No. w24129, Available at SSRN: https://ssrn.com/abstract=3089525

Daniel W. Sacks (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States

Khoa Vu

University of Minnesota - St. Paul - Department of Applied Economics ( email )

1994 Bufford Avenue
Saint Paul, MN 55108
United States

Tsan-Yao Huang

University of Minnesota - Minneapolis

110 Wulling Hall, 86 Pleasant St, S.E.
308 Harvard Street SE
Minneapolis, MN 55455
United States

Pinar Karaca-Mandic

University of Minnesota - Twin Cities - School of Public Health ( email )

15-223 Phillips-Wangensteen Building
Box 729, 420 Delaware Street SE
Minneapolis, MN 55455-0392
United States

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