Results on the Obamacare experiment are mixed

We’ve seen a spate of bad news about the Patient Protection and Affordable Care Act (otherwise known as Obamacare) recently.

Insurers are leaving the exchanges. For those insurers who remain on the exchanges, premiums are on the rise. In Arizona, monthly premiums for a 40-year-old non-smoker on a “silver” plan will increase from $207 to $507 (that’s a 145% increase) in 2017.

Ouch.

Not surprisingly, Republicans have seized on this.

So is the sky falling? Is Obamacare “hurting the families it was supposed to help” as John McCain charged?

Talking about unsubsidized premiums on the exchanges is misleading

Let’s take the extreme case in Arizona of a 145% increase. What opponents of Obamacare don’t account for are the tax credits that most people on the exchange receive to help them cover the cost of care. After all, that’s why people buy individual health insurance on the exchanges in the first place…because it’s the only way to qualify for these tax credits based on income.

So, after tax credits, that same customer (assuming he earns $30,000 per year) will pay $207 in 2017: exactly the same as in 2016.

Table 1: Monthly Silver Premiums

for a 40 Year Old Non-Smoker Making $30,000 / Year

2nd Lowest Cost Silver Before Tax Credit

2nd Lowest Cost Silver After Tax Credit

State

Major City
2016
2017
% Change
from 2016
2016
2017
% Change
from 2016
Arizona Phoenix $207 $507 145% $207 $207 0%
NOTES: In areas in which the two lowest-cost silver plans have the same premium, the next lowest-cost silver plan is used as the “second-lowest” silver plan. In some cases, a portion of the second lowest-cost silver plan is for non-essential health benefits so these values may differ from the benchmark used to determine subsidies.

SOURCE: Kaiser Family Foundation analysis of premium data from Healthcare.gov and insurer rate filings to state regulators. For more information see “Early Look at 2017 Premium Changes and Insurer Participation in the Affordable Care Act’s Health Insurance Marketplaces” Jul 2016.

So, sure, if you don’t qualify for tax credits, you would not want to buy this plan on the exchange. But, if you don’t qualify for tax credits,  there’s not much point in going on the exchanges to begin with.

How did this happen?

First of all, if you want to understand why the Patient Protection and Affordable Care Act was destined to raise unsubsidized health insurance premiums for healthy people, you can read my explanation here. In short, Obamacare asks healthy people to subsidize sick people so that they can access health care.

But the exchanges have been up and running since 2014. Why the big jump between 2016 and 2017?

Table 2: Total Number of Insurers by State, 2014 – 2017

Total Number of Issuers in the Marketplace

State
2014
2015
2016
2017
Arizona 8 11 8 2
SOURCE: Kaiser Family Foundation analysis of premium data from Healthcare.gov and insurer rate filings to state regulators. For more information see “Early Look at 2017 Premium Changes and Insurer Participation in the Affordable Care Act’s Health Insurance Marketplaces” Jul 2016.

NOTES: Insurers are grouped by parent company or group affiliation, which we obtained from HHS Medical Loss Ratio public use files and supplemented with additional research.

So, six of the eight insurers on the exchange for Arizona dropped out for 2017. In most industries, less competition means higher prices. So, on the surface, that would seem to explain it.

But health insurance is not most industries. The more insurers (payers) there are, the more leverage hospitals, physicians, and other health providers have to demand higher and higher reimbursement because, if one of their insurance contracts is terminated, they can fall back on their other contracts. Also, health insurance premiums are heavily regulated and must be approved by state departments of insurance in advance. In addition to the historic regulations in each state, Obamacare added a new rule that insurers must maintain medical loss ratios of at least 80 percent…meaning they must spend 80 percent of their premium income or more on paying claims.

The insurers who dropped out cited concerns about the health risks of the populations insured on the exchanges. In short, the beneficiaries were sicker as a group than the insurers had predicted, which is a phenomenon known as adverse selection. Too many young, healthy people are opting to go without insurance and simply pay the penalty, effectively turning the exchanges into a heavily subsidized high-risk pool…something even John McCain advocated when he campaigned for President in 2008.

Is private health insurance a good way to finance health care?

Despite all of the Republican protests, PPACA was designed to be a compromise between Democrats and Republicans to reform the health insurance system without eliminating private insurance. It was modeled after the health reform law that Mitt Romney signed when he was governor of Massachusetts (commonly known as RomneyCare). It’s debatable how well RomneyCare worked in Massachusetts and how good a model it was for federal policy.

I believe the only way to truly correct what is broken in U.S. health care is by burning down (metaphorically) the private health insurance system and moving to a single-payer system financed directly by the Treasury (that is, by taxes). Here’s why:

  • Only single payer can solve the adverse selection problem. Although there is a penalty for not carrying health insurance under the Affordable Care Act, many people — especially young and healthy people — have opted to remain uninsured and pay the penalty because it’s cheaper than buying even subsidized insurance on the exchanges. But, with a single-payer system, every American would be automatically enrolled, and risk would be spread broadly among them. It would not be possible for anyone to be uninsured.
  • Single payer reduces the cost of health care itself. Health insurance premiums are a function of the cost of health care. A system with multiple payers adds layers of administrative complexity for health providers just trying to get reimbursed for the care they provide. Whether it’s managing multiple insurance contracts, hiring collection agencies to chase down payments from patients, or writing off uncompensated care, these costs get passed on in the form of demands for ever higher reimbursement from private insurers with the threat that they will go out of network if their demands are not met. In my hometown of Indianapolis, our largest insurer (and my former employer) Anthem Blue Cross and Blue Shield initially offered health plans on the exchange with “narrow networks,” to reduce costs but later backed off when subscribers were unhappy. With a single-payer system, no provider would dare go out of network because there would be no other source of income to fall back on. That’s the power of a monopsony to reduce costs. It would also eliminate the uncompensated care problem because everyone would be covered.
  • Single payer covers everyone, without exception. The goal of universal health coverage in the United States has been frustratingly elusive. The Affordable Care Act has reduced the uninsured rate from 16 percent to 8.6 percent, which is a tremendous achievement. But 8.6 percent still adds up to 27.3 million people, and that’s 27.3 million too many. Plus, many of the insurance plans offered today, including on the exchanges, have high deductibles and out-of-pocket limits, putting beneficiaries at great financial risk even though they are technically “insured.”

What else can be done?

With that said, a single-payer system doesn’t seem politically feasible, and repealing the Affordable Care Act like the GOP wants to do would put us right back where we started before 2010…including all of the serious problems that went with it. So, what can realistically be done to address the very real problems on the Obamacare exchanges?

  • Substantially increase the penalty for going without insurance. It wouldn’t be popular, but changing the financial calculus could bring more healthy people into the risk pool, which would in turn reduce insurance premiums by spreading risk more broadly. If the penalty were higher than the cost of insurance (or at least not dramatically lower), there would be little to no incentive for remaining uninsured. The higher the penalty, the lower the premiums.
  • Crack down on special enrollments. The exchanges offer special enrollment periods — intended to enable people who have had life changes like a job loss or a change in marital status — to enroll outside of the annual open enrollment period. Insurers have suggested that people have been abusing these special enrollment periods…waiting until they get sick to buy health insurance off cycle instead of enrolling during the open enrollment period.
  • Sweeten the deal for young people. To get more young people (who tend to be healthy) into the pool, they need to be enticed. Perhaps an extra tax credit for people under 30 could change the equation, at least for some. Alternatively, changing the 3:1 age banding requirement (meaning that the oldest person in the pool can only be charged three times as much as the youngest person in the pool) to something more like 5:1 could encourage more young people to enroll since their premiums would be lower.
  • Reduce the cost of care. Despite the spike in premiums on the exchanges in some states, the Affordable Care Act is working to slow the growth of total health care spending…actually exceeding expectations. If we can mitigate the adverse selection problem by getting more young, healthy adults into the risk pool, premiums will follow suit.obamacare-total-spending

 

 

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