Aetna Out

National Review Online

Thursday, August 18, 2016

When the cynically misnamed Affordable Care Act was passed, Democrats and their media megaphones assured the American public that this was a carefully crafted piece of policy architecture, each piece fitting just so with the rest to form a highly functional whole. The planners knew what they were doing, and everything would be fine. Many conservative critics argued that the problem with America’s health-care system was not that it wasn’t centrally controlled enough but that it was too controlled — lacking the makings of a working market and so horrendously inefficient — and that the new law would make that worse.

Time would tell, and now it is telling — with predictable results highlighted by this week’s decision by Aetna to stop offering individual insurance plans through the Obamacare exchanges in most of the locations where it had been selling them. Aetna says that the Obamacare insurance pool is older and sicker than expected, which means much higher costs. Even as insurance premiums soar, Aetna is losing money on most of its individual plans under Obamacare, and so it will join dozens of other insurers in ceasing to sell them.

This is far from the first sign of serious trouble, of course. From the beginning, the administration has had to engage in a series of frantic and legally dubious machinations to keep the system from toppling — creating new rules to let people keep some old insurance plans, delaying and altering various mandates, fines, and requirements, and throwing massive subsidies (at times without any congressional appropriations) at insurers to keep them from bolting.

And yet, here we are. In this third year of implementation, only 40 percent of eligible consumers are buying Obamacare exchange plans, the increase in the insured population has been about 25 percent lower than the Congressional Budget Office predicted when the law passed, and the average cost of subsidizing people in the exchanges is almost 20 percent higher than CBO predicted just a year ago.

But even given these other warning signs, the insurers fleeing the exchanges might be the worst sign of all because the exits suggest that the exchanges aren’t stabilizing. When he was arguing for his health-care program, President Barack Obama promised that the new law would reduce premiums by an average of $2,500 per family per year. Something close to the opposite has happened, with insurance premiums continuing to rise, some by 8 to 10 percent a year, some much more dramatically. That isn’t expected to slow down; it is expected to increase.

That makes insurance increasingly unaffordable for people who aren’t heavily subsidized. Those who are subsidized, meanwhile, find themselves with increasingly unattractive insurance options, because insurers who need to somehow keep those premiums down while still meeting Obamacare’s strict and rigid definitions of coverage are squeezing where they can — which often means narrower physician networks or more cost-sharing. Higher co-pays and deductibles are normally a price consumers pay for lower premiums. To pay those while still shouldering higher premiums every year is just a bad deal, and consumers know it.

The penalties for failing to obtain coverage — which were how Obamacare’s designers thought they could induce healthy people into a system that would sell insurance at the same rates to the healthy and the sick — are not high enough to make this bad deal worthwhile. If you are young and healthy, it often still makes more economic sense to forgo insurance and pay the penalty than to sign up for coverage you might not need at skyrocketing rates. (This year the penalty is $695 per uninsured adult and $347.50 per child up to $2,085, or 2.5 percent of household income.) As a result, the insurance pools are full of older, sicker people than Obamacare’s architects expected.

And this process feeds on itself: Sicker risk pools mean the insurers will need to raise rates again, which means the risk pool may grow even less healthy, and so on. Aetna found that it couldn’t make money this way, and the company saw no reason to expect that to change.

Another prediction made at the time of the Affordable Care Act debate — that price controls, mandates, and regulations would create powerful economic incentives for consolidation in the insurance and health-services industries — also is at play here. Aetna had proposed merging with Humana in the hopes that the new, larger firm would be better able to adapt to the artificially constrained insurance marketplace created by Obamacare. But the Obama administration blocked that merger.

Aetna, out of options, gave up.

Politicians sometimes forget that a right of exit exists for the people and firms that do the actual work and create the actual wealth that makes life in these United States possible. Raise the income-tax rate high enough and some people will stop working — or figure out how to take their pay as capital gains or in some other tax-advantaged form. All those regulations, mandates, and price controls on insurance companies sound like brilliant social engineering, right up until the moment the insurance companies stop selling insurance.

The insurers are, let’s not forget, guilty parties here, too. Obamacare might be a headache for them now, but it was sold to them as one of the greatest pieces of corporate welfare in all of history: Most industries would kill for a federal mandate requiring every single American family to buy its product, especially if that mandate was paired with subsidies to insulate consumers from high prices. The insurance companies thought they were getting on a crony-capitalism gravy train. Instead, they ended up under it.

No one is going to cry for the insurance companies, which are right up there with the airlines and cable companies in their ability to make even committed conservatives reconsider the merits of capitalism. But the fact that the insurers thought the government would bail them out of trouble if they played along doesn’t excuse the Democrats’ blindness to basic economics, either.

In at least one market formerly served by Aetna, the firm’s withdrawal will leave consumers with exactly zero options available on the ACA exchanges. In many other markets, consumers have a choice between only a small handful of companies and policies. The virtues of free markets are brought out most effectively when there are lots of buyers and lots of sellers in a market, with lots of repeated interactions between them. That’s how we’ve seen radical improvements in quality at radically lower prices in everything from groceries to mobile phones; it’s the absence of that kind of robustly competitive market that keeps critical services such as K–12 education and health insurance mired in mediocrity.

We would welcome the complete repeal of the Affordable Care Act, a root-and-branch extirpation of that particular species of managerial progressivism from these shores. But with Barack Obama in the Oval Office, Republicans are poorly positioned to accomplish that, and we fear that they will be no better placed come January. Given that the essential core of Obamacare — the strict definition of allowable insurance products — is the core of the problem we are now witnessing, tinkering at the edges of the system is unlikely to work. House Republicans have recently proposed a set of measures that would make for a workable, economically rational alternative to Obamacare. But if the Democrats will not put up with a formal repeal, Republicans should at least look for ways to lift those regulatory restrictions on coverage and make more room for functional consumer markets.

Barack Obama will defend the ACA until his last breath, but he has indicated that his real preference is for a British-style public monopoly system. Alas, Republican nominee Donald Trump has at times said the same thing, with an eye toward Canada. Hillary Rodham Clinton, for her part, currently is pushing a so-called public option. In other words, when faced with the fact that insurers with long experience in pricing health coverage can’t seem to make the economics of the exchanges work, her solution is to create a brand-new insurer with no experience and have federal bureaucrats run it. She assumes it will do better if we throw enough subsidies at it. That proposal does not suggest that she has learned much from Obamacare’s troubles.

All of this is the result of careless legislation in the service of misguided economic thinking. In 2009, President Obama would have signed a copy of the Q volume of the Encyclopedia Brittanica if Congress had sent it to him with Nancy Pelosi’s blessings and the words “Health-Care Reform” printed at the top. What he did sign was even worse.

This mess will be his main domestic legacy, and his administration will be remembered as a time of missed chances and squandered opportunity. But the work of reform remains, if any have a mind and a stomach for it.