Loss of ACA subsidies would hurt some insurers more than others

When the Affordable Care Act was passed in 2010, leaders of the Marshfield Clinic's Security Health Plan saw an opportunity to offer affordable insurance products to people in its mostly low-income area of central Wisconsin.

Security, a not-for-profit HMO, heavily marketed plans sold through the federal marketplace and helped thousands of Wisconsinites sign up. John Kelly, Security's chief marketing and operations officer, said the 2014 and 2015 enrollment totals “exceeded our expectations.” Security has 34,000 exchange members as of June, making it one of the top exchange plans in the state.

But all of Security's work could be undone this month when the U.S. Supreme Court issues its decision in King v. Burwell on whether the language of the ACA allows premium subsidies in states that did not establish their own exchange. Insurers and consumers in as many at 37 states including Wisconsin could be affected.

If the court rules against the Obama administration, roughly 6.4 million Americans would lose the premium tax credits that make their insurance affordable unless states quickly established their own exchanges, which appears unlikely. In Wisconsin, 91% of 183,000 exchange-plan enrollees who receive subsidies are at risk; the average subsidy in the state is $315 a month. Nationally, the decision would affect 85% of exchange-plan members, who get an average subsidy of $272 a month.

Experts say smaller regional insurers, provider-sponsored plans and some Blue Cross Blue Shield plans would be jolted. If people lost their tax credits, they would immediately face higher premiums that they likely couldn't afford to pay. Most enrollees would drop coverage, except for sicker people who would do everything they could to keep it. This would skew the risk pool, forcing insurers to seek huge premium hikes or exit the market.

The result? “Immediate chaos,” said Larry Levitt, senior vice president at the Kaiser Family Foundation.

The entire individual market of about 18 million people would be disrupted. That's because the individual market in each state is a single risk pool, and under the ACA, individuals can move freely between plans during open enrollment. If exchange-plan premiums soar, off-exchange premiums would rise as well, and off-exchange plans would lose customers, Levitt said.

In addition, the loss of subsidies would significantly weaken the ACA's requirement for nearly everyone to buy coverage. Without subsidies, many more people would qualify for the law's mandate exemption based on affordability of the premium. That would threaten the viability of the individual market because it would allow healthier people to remain uninsured.

Kelly said that scenario would be “disastrous,” akin to jumping in the lake without a life jacket. “The Supreme Court ruling is a challenge to that basic tenet about keeping insurance affordable,” Kelly said. “The subsidy is that life jacket. We're very concerned.”

Not all health insurers would be equally affected. Plans that are more reliant on the individual market, with the least diversification, are the most vulnerable, said Katherine Hempstead, director of health insurance research at the Robert Wood Johnson Foundation.

The new not-for-profit co-op plans, created through loans authorized by the ACA to foster competition in the insurance market, face the greatest risk for their more than 1 million members. Most co-op plans already are struggling to break even, according to a February report from credit rating agency Standard & Poor's. “Co-ops certainly couldn't function without these subsidies,” Levitt said.

Not-for-profit Blue Cross Blue Shield companies also face risk. Blues plans are dominant players in several federal-exchange states, including Florida, Illinois, Michigan, Texas, and North Carolina. But their employer line of business still drives most of their revenue. Plus, for some Blues plans the individual market hasn't been profitable so far. Chicago-based Health Care Service Corp., the Blues plan for five states, lost $282 million in 2014, mostly because of its exchange plans.

If the subsidies go away for Blues plans, “there would be some kind of sunk cost, but I don't think it'd be that significant,” said Mark Rouck, a senior director at Fitch Ratings who tracks health insurers.

The large publicly traded insurers would be the most insulated, analysts say. Individual plan members represent a small slice of business for Aetna, Anthem, UnitedHealthcare, Humana, and other large carriers. Ana Gupte, a managing director at Leerink Partners, said exchange plans are contributing less than 1.5% toward earnings-per-share growth this year for eight public companies participating on ACA exchanges.

Kelly said his plan would not pull out of Wisconsin's individual market if the Supreme Court kills the subsidies. But that could create grave problems for the ACA's reformed insurance market as a whole. “Subsidies are an essential part of the act in its totality,” he said.