As Congressional budget negotiations came down to the wire this week, Senator Marco Rubio (R-FL) was once again successful in inserting a provision aimed at destabilizing key elements of the Affordable Care Act. At Rubio’s insistence, last year’s budget agreement included language restricting the ACA’s payments to insurance companies that enrolled less healthy patients. The change has disrupted insurance markets, leading some new plans to declare bankruptcy and even industry giants like United Healthcare to wonder whether participating in the ACA’s exchanges is a good idea.
One might think that disrupting insurance coverage for hundreds of thousands of Americans would not be something a legislator would want to take credit for. Rubio’s supporters, however, are crowing that while other presidential candidates have talked about killing Obamacare, he is the only one who has actually drawn blood.
The ACA’s critics have been trying to destroy it for so long that it is understandable that they would cling to every bit of what they see as good news. Nevertheless, like Charlie Brown, they are likely to find that the ACA’s underlying resilience has once again pulled the football away.
The architects of the ACA were keenly aware that they were bringing millions of new individuals into the insurance market whose health status was largely unknown. Under the new “guaranteed issue” requirements, insurance companies could no longer deny coverage to people with pre-existing conditions nor could it charge them higher premiums to cover their higher costs. This created a real risk that insurance companies might avoid the new exchanges entirely or, if they participated, would charge premiums that were too high for new enrollees to afford.
To address this problem, the ACA set up three separate “risk adjustment” programs that transfer funds from insurers with healthier enrollees to those with sicker enrollees. These programs were aimed at reassuring insurance carriers than they would not risk economic disaster by participating in the exchanges. It was important to get as many insurers as possible to participate so competition would help keep premiums under control.
Rubio’s budget provision affects one of these programs, the “risk corridor” program, which is a temporary program slated to run through 2016. This program, which only applies to plans participating in the exchanges, allows insurers to request payments if their losses for exchange enrollees exceed a certain amount. Insurers whose profits on their ACA enrollees are above a certain threshold must pay into the program.
The provision that Rubio inserted into last year’s budget bill required that the risk corridor program essentially be self-financing, i.e. that payments to insurers with losses had to come from the pool of funds contributed by profitable insurers. The federal government would not be able to dip into general funds if requests for payment exceeded contributions.
In 2015, that’s exactly what happened. Insurers submitted $2.7 billion in requests for risk corridor payments but the federal government only collected $362 million in contributions. The federal government will only be able to pay out roughly 13% of the requested amount for payments. This has roiled the balance sheets of a number of insurance companies, some of whom wondered publicly whether they should continue to participate in the exchanges. It was also the principal reason for closure of more than half of the 23 new non-profit “cooperative” health plans set up under rules established by the ACA.
Insurers who take the long view, however, are unlikely to make radical changes in their business plans solely because risk corridor payments are lower than expected. The program was slated to expire after 2016 and there are two other risk adjustment programs built into the ACA, one of which is permanent.
The real issue is what the shortfall in the risk corridor program reveals, which is that many insurers appear to be losing money on their ACA enrollees. This may be due to higher than expected utilization or because insurers set their premiums too low (the risk adjustment programs may have inadvertently encouraged insurers to price more aggressively than they otherwise would have).
The fear is that the exchanges could enter a “death spiral” where insurers raise premiums to cover their losses, leading healthy individuals to decide they would rather pay a penalty than buy insurance. The exit of healthier customers would drive premiums still higher, leading to the ultimate collapse of the exchange system.
There are a number of things built into the ACA, however, that make this outcome less likely. The first, of course, is the individual mandate. The penalties for non-compliance have been rising, with the minimum penalty in 2016 now at $695 per person or 2.5% of taxable income, whichever is larger. The experience of Massachusetts suggests that penalties in this range begin get the attention of those who have yet to enroll. The federal government recently had to extend the deadline for ACA enrollment through the federal exchange because “unprecedented demand” overwhelmed the system. This suggests that the exchanges are still going to see the kind of growth in enrollment that will make them attractive to insurers.
Secondly, the availability of federal subsidies provides some cushion should insurers need to raise their rates. Here where I live in California, for example, the going rate for a Silver plan for a family of four is about $1,000 a month. About 75% of that is covered by federal subsidies. If the insurer increased their premiums 10% next year, it would add $25 to the family’s monthly premium. For many moderate income families, that’s not inconsequential, but it’s unlikely to lead to them running for the hills either.
Finally, of course, there is the possibility that insurers and the health care delivery system will actually be able to improve the health status of these new enrollees over time. Many of those who had not had health insurance previously had unmet health needs, which probably accounts for at least some of their utilization. Now that they are (hopefully) under the ongoing care of health care professionals, it’s likely those professionals will be able to intervene to help these patients manage their chronic conditions and head off small health problems before they become more serious. Obviously there are factors that move in the opposite direction, such as the aging of the population and the growing problem of obesity. But risks that grow gradually year by year are easier for insurers to manage than unexpected spikes in utilization.
There is no question that many insurers are worried about the impact of exchange customers on their bottom line and may be more cautious about what kinds of products they offer going forward. At the same time, they have to be concerned about yielding market share to competitors if the exchanges are ultimately successful. The reaction of the industry to recent challenges is likely to take the form of small adjustments rather than wholesale abandonment, at least for the near future.