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Insurers Can Make Obamacare Work, But They Need Help From Congress

When the health insurance startup Oscar lost $92 million selling policies on New York’s insurance exchange last year, CEO Mario Schlosser could have joined the insurance executives blaming Obamacare for their companies’ struggles. Instead, he changed his business model.

Out went Oscar’s original New York model of selling traditional insurance — with access to nearly every doctor and hospital in town — to individual customers via the Affordable Care Act’s online marketplace. In came “narrow networks” that offer customers less choice but lower prices. Schlosser believes the new approach will make the company’s offerings more attractive to customers — and more profitable for investors.

Recent weeks have brought a storm of questions about whether the health insurance exchange system at the heart of President Obama’s signature health law is already unraveling amid defections by major insurers. But as Oscar’s decision illustrates, the true picture is more nuanced. Companies lose — or gain — different amounts of money on the exchanges for different reasons. They need different changes, both in the law and in their own strategies, to make their businesses profitable, which would in turn help ensure Obamacare’s long-term success. And overall, the problem is significantly smaller than it looks.

The bottom line is that the Affordable Care Act is fixable — at least if Congress is willing to take some basic steps to save it.

Obamacare’s growing pains moved back onto center stage on Aug. 15, when insurance giant Aetna said it would stop selling policies under the ACA1 next year in two-thirds of the counties it now serves. Aetna joined UnitedHealthcare and Humana, both of which had already announced plans to pull out of several states, in Humana’s case, and all but three states in United’s. The other two big insurers, Cigna and Anthem, are keeping up their exchange business for now. Some smaller companies, including Oscar, are also pulling back; Oscar is quitting the ACA business in New Jersey and the Dallas metro area. (However, Oscar is staying on Healthcare.gov in San Antonio and expanding into San Francisco.)

The stakes are high now, and they will get much higher if the problem festers. Since Aetna, United and Humana serve at least 2 million people who buy individual coverage through Obamacare, those companies’ shrinking role in the ACA marketplace means lots of people need new 2017 coverage. More fundamentally, if insurers can’t make money, that could undercut Obamacare’s goal of using America’s existing private insurance system to achieve near-universal coverage. Even executives who have been critical of the details of the law don’t want to see it fail.

“People seeking care through these exchange products need this care,” Aetna CEO Mark Bertolini said in an earnings call with analysts. “These aren’t people running off to get services that they don’t need.”

Fixing Obamacare’s exchanges will take three main steps: First, companies need to adjust their strategies to the real economics of Obamacare, which are just now becoming clear. Second, regulators need to make changes to accommodate insurers that are facing sicker patients than expected and, especially, a wave of extremely expensive drugs concentrated in the treatment of hepatitis C. Finally, Congress needs to make fixes, the most important being subsidizing more of the premiums paid by middle-class customers — the kind of midcourse adjustment that Congress routinely makes for Medicare but which has been politically impossible for Obamacare.

First, insurers have to get their own act together and control costs where they can.

It’s a manageable problem: Obamacare losses aren’t that big, considering that health care is a $3 trillion-plus business. Aetna, UnitedHealthcare and Humana collectively earned $5.5 billion in the first half of 2016 on $150 billion in revenue. According to Credit Suisse, the three companies’ total Obamacare losses won’t top $2 billion this year.

Insurers aren’t all struggling equally. Some, such as Molina Healthcare and Centene, are actually making money on the exchanges. Others lose just a little — Goldman Sachs estimates Anthem loses 5 cents on every dollar it makes selling Obamacare policies. A few lose a lot: United is losing 20 cents on the dollar, about $850 million total this year, and some analysts think Aetna may be losing about 15 cents, though the company itself says it’s a little less than a dime.

It’s no coincidence that companies like Molina and Centene are making money while big insurers aren’t. Molina and Centene built their pre-ACA businesses by cheaply delivering basic Medicaid plans for poor patients, and they have carried that frugal approach into the ACA market, where they are so far managing to make money while offering low prices.

These two companies are succeeding where others are struggling in part because they control nonmedical costs such as marketing and executive salaries. In the second quarter, Molina spent 7.8 percent of ACA premiums on administrative expenses; at Aetna, 17.1 percent of companywide premiums went to such expenses. (Aetna declined to give numbers for the ACA business alone.) Molina CFO John Molina said the big companies could learn something from their smaller competitors. They could use fewer brokers to sell individual coverage, for example — selling directly to consumers through exchanges like Healthcare.gov is cheaper, Molina said. And he couldn’t resist pointing out that his company skips the corporate jets and multi-million-dollar executive salaries that are standard at bigger insurers.

“My father said, ‘This is a business of nickels,’” Molina said. “We have shareholders in the family who are patient and know Obamacare will settle out.”

Big insurers have a different strategy for cutting costs: getting even bigger. Anthem is trying to buy Cigna and Aetna is in the process of buying Humana; the companies argue the deals would save money — $1.25 billion a year for Aetna/Humana and $2 billion for Anthem/Cigna, far more than they are losing on Obamacare. (Indeed, Bertolini made that argument in his much-discussed letter to the Justice Department threatening to halt his company’s Obamacare expansion if the deal were blocked.) The Justice Department is challenging both deals on antitrust grounds, but federal officials have indicated they’re willing to settle and the mergers still may happen.

Controlling administrative expenses is hard, but controlling medical costs will be even harder. Molina spends about 78 percent of Obamacare premiums on actually providing health care, while giant players spend as much as 84 percent overall, according to company reports.2

Molina and Centene spend less on medical care because they offer only services (and, crucially, facilities) that are inexpensive enough to keep premiums affordable, said Larry Levitt, senior vice president at the Kaiser Family Foundation, a health policy think tank. In Los Angeles, for example, Molina doesn’t normally let clients have babies at tony Cedars Sinai hospital, sending them instead to less-expensive institutions. “You can have your baby, you just can’t have Katherine Heigl in the next room,” John Molina said in an interview.

Companies like Oscar are learning from that example. Oscar’s L.A. network is built around Providence Health & Services Southern California, which helps keep prices down. Schlosser said in June that Oscar’s narrow networks produce “double-digit discounts.”

But narrow networks aren’t likely to be a total solution for Obamacare woes. For one thing, insurers aren’t the only ones merging to improve their bargaining power; health care providers are doing the same. In Dallas, 2013’s merger of Baylor Health Care System and Scott & White Healthcare created a giant with almost 50 North Texas hospitals and surgery centers, more than 100 outpatient offices and 6,000 doctors, including on-staff and affiliated physicians. The newly expanded hospital system can demand higher rates, making it harder for insurance companies to make money. Oscar and Aetna are both pulling out of the exchange market there.

More importantly, middle-class customers who are used to group insurance are often much less willing to accept narrow networks than poorer people who are glad for any coverage, said Les Funtleyder, a health care fund manager at E Squared Capital. That could put insurers in a catch-22: Given the prices individuals are willing to pay, insurers can’t afford to offer networks that are broad enough to attract healthy customers. And if insurers can’t lure the young, healthy consumers who haven’t yet signed up for Obamacare, they can’t turn a profit. “It’s just math,” Funtleyder said. “If you give people more benefits, it costs more.”

Regulators could take steps to help resolve that conundrum. For one thing, they could be more aggressive in enforcing the “individual mandate,” the requirement that individuals buy insurance or face financial penalties. That rule is key to making sure that healthier (and therefore cheaper-to-insure) patients buy insurance, helping to offset the added cost of the sicker, more expensive patients who now have access to insurance under Obamacare.

Regulators could also limit the use of extremely expensive drugs such as new hepatitis C medications that cost as much as $94,500 per patient. Molina already restricts the new drugs in some cases to patients for whom the virus has already caused liver scarring, a step many larger insurers haven’t yet taken.3 The government could also negotiate the price of these drugs — a political nonstarter. Or it could require insurers to share the cost of pharmaceutical losses, as they already do for losses associated with high-risk patients.4

Such regulatory steps could help in the short term. Permanently fixing the problem, however, will likely require Congress to increase subsidies so that the policies offered on the exchanges will be more attractive to young, healthy workers. There is precedent for Congress adding more money to fix medical programs. The last two big expansions of Medicare — Medicare Advantage in the 1990s and Medicare Part D in the early 2000s — both faced what many feared was a death spiral, similar to the concerns Obamacare now faces. But according to a new paper by Jack Hoadley and Sabrina Corlette of Georgetown University’s Health Policy Institute, Congress raised reimbursements to make those health care markets healthy.

Public perception of the Medicare system once “had the feel we have this year — ‘Oh my goodness, the program is falling apart,’” Hoadley said. “But over the next few years, payment levels got increased and plans began coming back in.”

Similar congressional action to save the ACA will be a hard sell in the current political environment. But at $250 billion yearly, the tax exclusion for employer-paid health insurance costs six times what Obamacare individual-market subsidies do, offsetting 30 percent of premium costs, according to the Congressional Budget Office. The money that United, Humana and Aetna lost on Obamacare totals less than 1 percent of that. The bottom line is that Obamacare can be fixed. The problem is deciding to do it.

Footnotes

  1. Meaning policies sold to individuals either on Healthcare.gov or in the state-run online health-insurance marketplaces created under the ACA.

  2. A higher percentage of big companies’ Obamacare premiums is going toward medical costs in part because companies that are losing money are spending more than 100 percent of premiums, once administrative costs and taxes are factored in.

  3. In 2014, Cigna paid for me to take the hepatitis C drug Sovaldi — which is not the most expensive of the available medications for this disease but nonetheless lists for $84,000 — even though I never reached the stage of liver scarring. One sign of how differently these drugs are treated than others is that the speciality pharmacy delivered mine by hand, rather than using FedEx.

  4. On Aug. 29, the Centers for Medicaid and Medicare Services released draft rules proposing a version of this system, along with other moves designed to deter people from waiting until they are sick to enroll for coverage.

Tim Mullaney is a New York-based economics writer for TheStreet.com and CNBC.com and a columnist for MarketWatch.com

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