The Department of Health and Human Services announced in a report on Monday that insurers are increasing their premiums by an average of 25 percent for plans offered on the Affordable Care Act’s federal exchange in 2017. This report confirms what has been evident for some time: The ACA — a.k.a. Obamacare — is financially unstable just as many critics predicted it would be, and this instability is making the law more vulnerable politically, too.
The basic problem is that those who signed up for coverage in 2014, 2015, and 2016 were, on average, higher users of medical services than insurers anticipated. Consequently, the premiums they had been charged for coverage were far too low to cover their costs, and insurers incurred substantial losses. In 2014 alone, insurers lost about $2.7 billion from the plans they offered in the individual insurance market, and their losses almost certainly grew in 2015 and 2016.
It should be self-evident that even nonprofit insurers won’t long survive if they continue to pay claims far in excess of the premiums they collect. Predictably, many of them are now adjusting. Some have decided to withdraw from large numbers of the ACA’s insurance markets in 2017 because of the substantial losses they have already incurred and would likely continue to incur going forward. Others are staying active in the market but have substantially recalibrated their premiums for 2017, hence the 25 percent average premium increase reported by HHS.
There is some speculation that the ACA’s insurance markets are in the beginning stages of a complete collapse, sometimes called a “death spiral.” An insurance market falls into such a condition when a large portion of healthier enrollees withdraw from the market because they believe the premiums being charged for coverage are too high relative to their health risks, while those with higher risks perceive the premiums to be worthwhile given their expected use of medical services. Over time, these perceptions create a shift in the market toward those with expensive conditions. As insurers work to recalibrate to the changing profile of their customers, they have no choice but to raise their premiums rather steeply and rapidly, which drives even more healthy customers away.
Several states have tried to implement insurance-market reforms similar to those that were enacted in the ACA. Washington, Kentucky, Maine, New Jersey, and New York all enacted restrictions on the use of health status in setting insurance premiums and benefits for customers in the individual insurance market. In each instance, the result was something approximating a death spiral and a collapse of the market.
It is far from a foregone conclusion that the ACA exchanges will suffer a similar fate. Unlike the reforms enacted by the states, the ACA provides large subsidies for insurance enrollment to households with modest and low incomes. The law also penalizes households with a special tax for choosing not to buy a qualified plan. The subsidies in particular are likely to serve as a firewall of sorts against a full-scale death spiral, because they insulate millions of households from the consequences of annual premium hikes. The law stipulates that households with incomes below 400 percent of the federal poverty line (FPL) receive subsidies to prevent their premium payments from exceeding a fixed percentage of their total income. In practical terms, this means households in this income range are largely unaffected by the overall pressure on premiums because what they owe is capped.
The law’s architects hoped the additional tax owed for going without insurance would also encourage households whose incomes make them ineligible for a big subsidy to buy insurance, but the penalty is likely too low to have a substantial effect in that regard. In 2016, households must pay an additional tax of 2.5 percent of their income, up to the national average cost of a bronze plan. In most cases, the penalty is far below the premiums these households would owe for coverage. For instance, according to Bob Laszewski, a couple living in Roanoke, Va. with an annual income of $60,000 would have to pay about $5,000 in an annual premium for an insurance plan with a $5,000 deductible. The same family’s tax penalty for going without insurance would be only $725.
The IRS says 8.1 million tax returns included payments for going without insurance in 2014. In 2015, the number of returns with tax payments for going uninsured was 5.6 million just through April, according to a preliminary assessment. Another 12 million households claimed exemption from the tax payment altogether based on various hardships.
As news of the coming premium increases has spread, both supporters and critics of the ACA have engaged in some wishful thinking.
Even if its death is not imminent, there is little doubt that the ACA will continue to be unstable absent some fundamental changes.
Some supporters are suggesting that dire predictions of the law’s demise are unwarranted, and that its problems will work themselves out as the marketplace naturally adjusts over time. That hopeful assessment ignores the fact that in many regions the insurance industry has all but given up on participating in the individual insurance market. The ACA needs competing private plans to function well, and, in too many places, the exchanges are down to just one or two participating insurers. That needs to be fixed for the law to remain stable.
Meanwhile, some critics are now suggesting that the ACA is near full collapse and its days are numbered. That is also untrue. The federal subsidies are so significant that there will always be a large number of consumers eager to get coverage on the exchanges, no matter how high the premiums. And for persons with expensive health conditions, the insurance plans offered on the exchanges are far better than what was available before the ACA. Combined, these two groups of consumers would seem to guarantee that the ACA exchanges will have a floor for enrollment of around 10 million people, even if the insurance market itself is suffering from adverse selection.
But even if its death is not imminent, there is little doubt that the ACA will continue to be unstable absent some fundamental changes. The basic problem is that the law is too prescriptive and does not allow insurers to offer the kind of coverage that a broader cross-section of consumers would find attractive. The benefit requirements are too rigid, as is the requirement that insurers can charge their oldest customers only three times what they charge their youngest ones. And the requirement that all consumers use the public exchanges to purchase coverage if they want to be eligible for a premium subsidy puts too much faith in federal and state governments to reach the consumers who are needed to make the program stable.
#related#Individual reforms aside, the problems with the ACA’s exchanges are a symptom of a larger disease: The law shifted too much control over the health-care system to the federal government. President Obama bristles when what the law set in motion is described as government-run health care, but it is becoming increasingly apparent that that is exactly what it is. The federal government is effectively running the entire health-insurance market, and is now also trying to orchestrate, through Medicare regulations, fundamental changes in how physicians and hospitals organize themselves to take care of patients. There is virtually no corner of American health care that is outside of the regulatory control of the federal bureaucracy.
It is possible to provide all Americans access to secure and affordable health insurance without the massive expense and governmental control of the ACA. What is needed is a fundamental change in direction, toward a market-based reform plan. Speaker Paul Ryan and others in Congress understand this. Unfortunately, as matters now stand, it would seem that their ability to implement a market-based reform plan is going to be limited, at best, in the coming years. The ACA’s problems are therefore likely to get worse before anyone who knows what needs to be done has the opportunity to begin turning things around.