Last November, UnitedHealth Group announced significant losses on individual health insurance policies and said it would consider withdrawing from Affordable Care Act exchanges in 2017. Since then, Aetna, Anthem and Humana have announced larger than expected financial losses on ACA business. Goldman Sachs projects that Blue Cross and Blue Shield plans had net losses due to ACA business in 2015. Some argue the ACA is unraveling, while some say this is merely a market adjustment.
In fact, a slow motion train wreck is underway on the ACA exchanges.
Health insurers are losing money on individual insurance products because their new customers are sicker than expected. Of course, insurers can and are raising rates, as long as regulators let them price to the actual cost of care.
But insurers actually are worried about the longer-term problem of adverse selection, which starts when healthier people decide health insurance just isn't worth the price. As they leave, prices go up and more people drop insurance.
This has happened before. The state of New York required insurers to accept anyone regardless of medical condition. The market did not fall apart overnight. Gradually, healthier people stopped buying. Premiums rose so high that only sick people with money could afford it. New York expanded Medicaid for low-income adults, but people with modest incomes were left out. This is the future of Obamacare unless it is reformed.
The ACA expansion of Medicaid, along with subsidies for private insurance, have increased the number of people insured. But enough younger and healthier people are not signing up, even with subsidies for some and financial penalties for not having insurance, because they are not finding value in doing so.
For many, the cost of insurance is substantially higher than the penalty they would have to pay, even after subsidies. More than 80% of people who sign up on the exchanges get a subsidy. People who don't get a subsidy don't buy. Many who buy individual policies find they get little value for the premium they pay.
The problem will get worse. Insurers raised rates substantially for 2016 to catch up on costs. The benchmark ACA plan will see an average increase of 7.5%, several times higher than incomes are rising. Healthcare costs are increasing at a rate of 5-6%, so insurers will need to raise prices at least twice the rate of general inflation in 2017.
The penalty for not having insurance will peak in 2016 to $695 per adult or 2.5% of household income, whichever is greater. In 2017 and beyond, the penalty will go up by general inflation, but the cost of insurance will rise at twice that rate.
Will many insurers exit the exchanges in 2017? Not likely. Regulators will push local plans to stay in the market. These plans will keep a commitment to their communities if regulators allow them to move toward profitability.
Can adverse selection stabilize? It might. Health insurers are starting to reward hospitals and doctors for quality and taking risk around the cost of care. These efforts may reduce health inflation, but there is little evidence for that so far. Here are some ideas on how to fix ACA markets now.
- Tighten enrollment requirements. Too many abuse the system, signing up after they become sick or canceling after receiving care, raising costs for everyone. Recent CMS tweaks to the rules are not enough.
- Allow pricing for the real cost of age. Young people subsidize old people under the ACA. Lower prices for young people will bring more to the market. Older, low-income adults will be protected by tax credits.
- Allow anyone to buy catastrophic coverage. ACA rules allow only young people to buy these products. Before the ACA, older people bought them.
- Get rid of the metal tiers. Give each product an actuarial rating (like an energy star rating), but allow for more flexibility.
- Set up an industry reinsurance pool to replace the government program.
- Set up a cap-and-trade process for risk. An insurer that cannot manage diabetes could pay another insurer to take on diabetics.
Paul von Ebers is CEO of insurance advisory firm Prospective Health. He has more than 20 years of health insurance management experience, most recently as CEO of Blue Cross and Blue Shield of North Dakota and previously as chief operating officer of Excellus Blue Cross and Blue Shield in New York.