Harbinger or Hiccup?

Earlier this week, the health insurance giant Aetna announced that it would exit the Affordable Care Act exchange market in at least 11 states.  This follows similar announcements from more than a dozen health insurance companies, including large multi-state insurers like Humana and United Health.  The Kaiser Family Foundation has estimated that, for 2017, there will be 664 counties where only a single carrier will be offered through the exchanges, up from 225 in 2016.

These kinds of announcements tend to trigger the usual round of partisan news analysis, where Obamacare’s critics predict--yet again--the law’s imminent demise and the law’s defenders insist that it remains on a solid footing.  So far, the ACA’s defenders have had the better of the argument.  But does the fact that so many insurers are on their way out suggest that a rush for the exits is imminent?

Probably not, although there is no question that Obamacare is on shakier ground than it was a year ago.  There are real risks facing the exchanges and continued political polarization over the ACA is going to make it harder to fix them.

Some of the problems the insurers are facing are of their own making.  Many priced very aggressively to gain market share and did not anticipate how much pent up demand for health services there would be among the newly insured.  This was particularly true for large insurers whose primary experience was in the large group market rather than the individual market. The well known words of Emperor Palpatine may be relevant here.

The short term solution, of course, is for insurers to raise rates to cover their costs, which many are doing.  Most Obamacare enrollees will be facing double-digit premium increases next year.  To be fair, this is not a new phenomenon in the individual market, which often experienced double-digit increases in the years prior to the ACA.

The danger is in how enrollees will react to the higher prices. Many will be heavily insulated by the federal subsidies that allow them to purchase coverage at reduced cost.  But there are a significant number middle and higher-income consumers who receive little or no subsidies.  Those consumers are going to be taking a hard look at the cost of their coverage versus the cost of the tax penalty the will have to pay if they forgo insurance.  

This raises the spectre of the so-called “death spiral,” where healthy consumers decide to forgo coverage.  The pool of the insured becomes progressively sicker and more costly, leading to higher premiums and more exits until a particular insurance pool simply collapses

We’re not there yet, but one of the real challenges the ACA currently faces is that the insurance pool is much smaller than expected.  Originally, the projections were that about 20 million people would purchase through the exchanges.  At this point, the population seems likely to stabilize in the low teens.  Divide that up among 50 states and hundreds of counties and you have some pretty small risk pools in some places.

This is unlikely to change quickly because employer-based health insurance has turned out to be much more resilient than some expected.  Although a few companies (e.g. Trader Joe’s) made headlines by giving their employees incentives to purchase insurance through the exchange, it’s looking like most employers who currently offer insurance want to keep doing so, particularly as the labor market continues to tighten.

The Obama administration is exploring options for stabilizing the exchanges.  They are planning a large push to get more young people to enroll in the exchange, particularly people turning 26 and moving off their parents’ policies.  An infusion of low-risk youth into the exchanges would certainly be helpful, although since young people are more clustered in urban areas it’s not clear that this will do much to solve the problems facing rural counties.  

Long term solutions, however, will probably require action by Congress.  President Obama himself made a pitch in the pages of JAMA this summer for the revival of a “public option,” particularly in counties where there are few (or no) insurance options in the exchange.  That would give consumers more choices, but its potential impact on the risk profile of the exchanges is less clear.  

Another approach would be extending and reworking the ACA’s various risk adjustment programs that transfer money between insurers who enroll sicker patients and those that enroll healthier ones.  The Medicare Part D pharmacy benefit program still relies on similar mechanisms ten years after it was enacted in 2006, but the risk adjustment mechanisms in the ACA were scheduled to expire this year (and in one case were explicitly weakened by Congress).

It may be hard to imagine Republicans in Congress, who continue to support the repeal of the ACA, coming to the table to discuss options for stabilizing it.  House Speaker Paul Ryan, however, has long championed transforming Medicare into a “premium support” program in which enrollees would purchase private coverage in a manner very similar to those who use the ACA’s exchanges.  If such markets cannot be made to function, it is hard to imagine that Ryan could ever win broader support for his ideas.  Perhaps the passing of President Obama from the scene will allow both parties to discuss his signature achievement in a less polarizing way.  We can only hope.  

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