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.
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.