By James C. Capretta
Thursday, August 25, 2016
The remarkable cascade of bad news from this spring and
summer about the status of the Affordable Care Act — a.k.a. Obamacare — is
convincing even the law’s ardent defenders that a problem is brewing:
• Aetna announced that it is pulling out of eleven of the
15 states where it currently sells products on the ACA’s exchanges because of
continued large financial losses from these products. The company has lost $430
million since January 2014 on insurance plans sold through Obamacare, with more
losses coming through the remainder of this year.
• Other major national insurers have also pulled back
substantially from their participation in the ACA. United Healthcare has lost
$1.3 billion so far on the exchanges and will reduce its participation in the
program from 34 states to just three in 2017. Humana is reducing its
participation in the program from 19 to eleven states.
• Blue Cross Blue Shield of Tennessee estimates that it
will have lost $500 million on the state’s exchange by the end of 2016. The
insurer asked and received permission from the state’s insurance regulator to
hike premiums 62 percent for 2017. The other major insurers in the state —
Cigna and Humana — have received permission to raise premiums by 46 and 44
percent, respectively.
• Texas Blue Cross has lost $1 billion on the ACA
exchange in two years, and has asked for a 60 percent premium increase for
2017.
• Blue Cross and Blue Shield of Minnesota has largely
pulled out of the insurance exchange for 2017 because of $500 million in losses
during the first three years. The Blues plan in North Carolina has lost $400
million on the ACA exchange and is currently evaluating whether to continue
participating in the program in 2017 and beyond.
• The average premium increase nationwide for plans
offered on the ACA exchanges is 24 percent for 2017. In California, where
premium growth for insurance plans offered on the state’s exchange was
relatively modest in 2015 and 2016, the average increase for 2017 will be 13
percent.
• The consulting firm McKinsey estimates that between 12
and 17 percent of exchange customers will be picking from plans offered by only
one insurer in 2017.
Overall, the insurance industry is taking large losses
from the plans they are offering because the risk profile of those signing up
for coverage is much worse than they anticipated, or priced for.
The law’s defenders argue that some insurers are doing
just fine, and that is true. But, in general, the plans that are surviving more
closely resemble the managed-care plans offered to Medicaid recipients with
very narrow networks of physicians participating in the plans. These are not
the kind of insurance products typically offered to workers in the
employer-sponsored setting.
Moreover, as the big national insurers pull back from
participating in the exchanges, their high-expense enrollees will have to go
somewhere to get coverage, and most likely that means enrolling in plans that,
so far at least, haven’t yet experienced large losses. With more high-cost
enrollees shifting their way, it wouldn’t be surprising if some of the plans
that turned profits in the first three years saw those profits vanish in 2017.
It is not possible to operate an insurance market with an
industry-wide negative margin. For a private-insurance market to survive, the
insurers, on average, have to cover their costs plus a profit with their
premium collections.
Pro-ACA advocates are now offering a three-part plan to
shore up the exchanges. First, they are calling for a concerted marketing
campaign aimed at persuading the young and healthy to sign up for coverage on
the exchanges. Second, they propose deducting student-loan payments from the
income calculation used to determine the subsidy amounts available to insurance
enrollees. This would presumably benefit mainly younger applicants. Third, and
most significantly, they want to resurrect the idea of a “public option”
competing alongside the private plans.
The effort to draw in more young and healthy people is
unlikely to succeed. The insurance offerings on the exchanges are appealing
only for people who are getting most of the premium and cost-sharing
requirements covered by federal subsidies. For everyone else, the plans are
unattractive because the premiums are high (and rising), the deductibles are
well above what most people are accustomed to, and many physicians are not
participating in the plan networks. Better marketing will not change any of
that. More generous subsidies for those with student loans might help at the
margin, but it is unlikely to be sufficient to overcome all of the other
reasons people are steering clear of the ACA products.
The public option is an entirely different matter. If the
problem is an unstable environment for private insurance, a public option is
definitely not the solution.
A public option would be a government-sponsored and
government-run insurance plan, probably modeled on the traditional Medicare
program, which would be offered to customers on the exchanges as an alternative
to the private-insurance plans. Unlike a private-insurance plan, there’s no
particular reason why a publicly run product couldn’t experience ongoing
losses, so long as the law provided for direct or indirect taxpayer
subsidization. The Medicare program itself is funded heavily by taxpayer
subsidies.
The most consequential difference between public and
private insurance is the ability to regulate prices. Private insurers must
negotiate contracts with their networks of hospitals and physicians. Public
insurance, like Medicare, is in the business of regulating prices, not
negotiating them. Medicare, for instance, sets regulated prices for the
services it covers on a take-it-or-leave-it basis. Because Medicare is so
important to the bottom lines of many providers, they have no choice but to
take what Medicare pays, even though it is usually well below what private
insurers pay for the same services.
But government-imposed price controls always have a
predictable result, which is reduction in those willing to supply the service
at the regulated price. This is evident in the Medicaid program. Many hospital
and physicians purposely steer clear of the program because of its very low
reimbursement rates. As a result, Medicaid enrollees often have much more
trouble accessing care than do patients with private insurance.
This does not mean that a public option wouldn’t attract
enrollment. It probably would because the regulated prices it would pay to
providers would allow it to charge a premium below that charged by many of the
private offerings. Some consumers would take that option not thinking much
about what it might mean when it comes time to find a doctor to take care of
them.
In selling Obamacare to the electorate, President Obama
argued repeatedly that the law wouldn’t lead to “government-run” health care because
the coverage would be delivered by private insurance, at least for those who
get their insurance through the exchanges. But this was always more of a
debating point rather than a statement based on conviction. The president
himself has always favored public over private insurance, as do most of those
who supported the legislation. The only reason a public option wasn’t included
in the ACA in the first place was because a sufficient minority of Democrats in
Congress feared the idea would sink the entire bill.
Now that the ACA is on the books, and the
private-insurance options are on shaky ground, there’s no real reason for
proponents of the ACA not to fully embrace the public option. It’s what most of
them wanted all along, and the turbulence among the private insurers provides
the perfect excuse to pursue it.
The fact that introducing a public option at this stage
would only add to the instability of the private options offered on the
exchanges is not a reason for the public-option advocates to abandon the idea
because they never really wanted a functioning private-insurance marketplace
anyway. The goal all along has been government-run health care, even if they
haven’t always been willing to admit that.
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