Published April 22, 2016
United Healthcare’s announcement that it is pulling out of most of the exchanges established by the Affordable Care Act (ACA) — a.k.a. Obamacare — is one of many indications of the law’s continuing instability.
United made this decision for obvious reasons: It was losing too much money, with no prospect of a quick turnaround. The company reported that it lost $475 million on plans sold in the ACA’s exchanges in 2015 and expects to lose another $650 million in 2016. Even for a company as big as United Healthcare, $1.1 billion is a lot of money to lose.
There are many other insurance plans in the same boat. Blue Cross Blue Shield plans have dominated the individual and small-group markets in most states for decades. If they were to abandon this market, they would have less ability than United does to grow their business elsewhere. But many of these plans are nonetheless contemplating such a move. Blue Cross Blue Shield of North Carolina has lost $400 million on the ACA exchange so far and may abandon the market in 2017. The Blues plan in New Mexico has already exited that state’s exchange because of large losses in 2015 and the state’s disapproval of its request to raise premiums by over 50 percent this year.
McKinsey and Co., the consulting firm, estimates total insurer losses in the individual market, which is now dominated by the ACA exchanges, at $2.5 billion in 2014. Based on individual insurer reports, it seems likely that this number grew in 2015 and will again this year.
The large losses in the exchanges explain why so many insurers are now pressing the Obama administration to find a way to bail them out, through so-called “risk corridor” funding or other means. The risk-corridor provision of the ACA required insurers with large profits to send some of their gains to plans that experienced large losses. Congress rightly saw that this could easily turn into a large, taxpayer-financed bailout for the insurers and insisted on a requirement that the payments to the losers could not exceed the amounts extracted from the winners. Because there are so many more losers than winners, the total amount disbursed to the losers is far below what the insurers had been expecting, which is perhaps another reason some insurers are rethinking their participation in the program.
But insurers wouldn’t need to be bailed out if they weren’t losing so much money in the first place. What explains the large losses? The simple and not-so-helpful answer is that the plans are charging premiums that are too low to fully cover the medical claims of their enrollees. The Blue Cross Blue Shield Association released a report last month showing that new customers enrolling in Blues plans through the ACA exchanges in 2015 filed medical claims that cost, on average, 22 percent more than the claims filed by enrollees in employer coverage sponsored by the same insurers.
There are a couple of potential explanations for the mismatch of premiums and costs in exchange plans. The ACA disrupted the individual marketplace in many ways, by forcing the cancellation of old coverage and by imposing sweeping new rules on insurance plans offered in the new market. Insurers had no experience with this new marketplace when it started in 2014, and so there were bound to be some mistakes.
But one would have thought that the mistakes would go in both directions, with some plans charging premiums that were too high and some too low. Instead, there was a bias toward undercharging for coverage, which is why the risk-corridor payments were capped below what was expected.
One explanation for the bias could be competitive tactics. Some insurers may have purposely lowballed their premiums in the first couple of years of the new exchanges in order to build market share and drive out competitors. And some insurers are announcing plans to expand their presence in the exchanges. But, as an industry, there are clearly more plans trying to cut their losses than ones seeing potential for business expansion.
The fundamental problem is politicization of the marketplace. The Obama administration had an enormous stake in creating the perception of early success for the exchanges, and that meant premiums that could attract customers. Insurers felt great pressure to set premiums low initially, to ensure that the exchange rollout was not a flop right out of the gate. So instead of setting prices prudently to avoid large financial risks, insurers engaged in collective wishful thinking and hoped it would all somehow work out.
Now, three years into the program, it’s clear that the exchanges are becoming less rather than more stable. The situation is unlikely to improve on its own.
What’s holding the exchanges together and preventing even more rapid destabilization is the vast amount of federal subsidization of premiums for lower-income households. There will always be a baseline of participation in the program, because the law makes enrollment in an insurance plan nearly free for millions of people. They are not experiencing the high premiums and large deductibles that other Americans are seeing.
But households with incomes above about 250 percent of the poverty line already find the plans offered on the ACA exchanges unattractive. Very few of these households have purchased plans through the exchanges. The perception that Obamacare plans cost too much and cover too little will only harden over the next two years as many insurers are forced to raise premiums substantially to stem their losses.
Obamacare isn’t likely to enter an insurance death spiral; there’s too much federal money propping the whole thing up. But it isn’t on track to become a stable, self-sustaining insurance pool either, because very few middle-class families want to get their insurance through the exchanges. Which means the law is not only unstable financially, it is politically unstable as well.