The Obamacare Marketplaces Aren’t In A Death Spiral

Are the insurance marketplaces created by the Affordable Care Act really on the verge of collapse, as President Trump and GOP leaders have repeatedly claimed?

Three months ago, this story would have started like this: It depends on where you look and who you ask.

Today, it goes something like this: They are in a fragile state pretty much everywhere.

With Trump threatening to withhold payments to insurers and expressing reluctance to uphold the mandate requiring most people to either buy insurance or pay a penalty, otherwise stable state markets are now in a precarious position. Others are experiencing issues they likely would have anyway, but with a layer of new instability on top. But just because many markets were stable doesn’t mean they were serving everyone well. The messy reality of these two intertwined issues — what keeps the markets stable and who they cover — often leaves politicians on both sides of the aisle telling half-truths about the health of Obamacare’s most public provision. A look at the ways marketplaces are succeeding and failing reveals opportunities for improvement and hints at why the political climate could make those improvements all but impossible.

For the last couple of decades, the term “death spiral” has been used to describe a marketplace spinning out of control. In the face of rising premiums, healthy people bail from a marketplace, causing premiums to rise further, until the prices are unaffordable for everyone and the whole plan falls apart. The Obamacare marketplaces are not in a death spiral, according to various health policy experts, despite numerous Republicans’ claims to the contrary. In fact, the term, at least under its pre-Obamacare definition, is largely obsolete. That’s because the ACA fundamentally changed how the markets are organized. Now that the government is subsidizing health insurance, people with incomes just above the federal poverty line are largely protected from rising premiums — 83 percent of the people currently using the markets receive subsidies to help pay for their plans — and, healthy or sick, they are unlikely to flee the markets amid rising premiums.

However, growing costs in the marketplaces frequently determine whether someone with a slightly higher income¹ will buy into the market. That’s because under the current system, those people receive low or no subsidies to offset the cost of insurance — they aren’t immune to the price increases. It’s those people who are at risk of being pushed out of an expensive market, said Robert Laszewski, a consultant to the health insurance industry. It’s a different kind of death spiral, one that leaves middle-income people without coverage options, instead of the sickest and poorest.

That’s partly why Laszewski thinks that something called the take-up rate is the most important metric for measuring the health of the insurance marketplaces. The take-up rate is the percentage of people who are buying insurance among those who are eligible to do so. By that measure, enrollment among middle-income people has been a concern from the start, Laszewski said. Among people with incomes just above the federal poverty line in 2016 — the group that receives the largest subsidies — the take-up rate was greater than 80 percent. That’s perfectly healthy, and Obamacare appears to have served them well. Among people with slightly higher incomes,² the take-up rate was less than 50 percent, far below what the insurance industry considers necessary to keep a plan up and running. The Trump administration hasn’t shared the data required to calculate take-up rates for 2017.

The problem with Obamacare, Laszewski believes, is that it prioritized lower-income people over those with more moderate incomes. But he said the GOP bill to repeal and replace parts of the ACA, which narrowly passed the House earlier this month, falls into a similar trap: It prioritizes middle-income people over the poor. He sees this as a result of both parties looking out only for their own voters, in both cases creating an unbalanced marketplace. “This is the goofiest thing of all. Democrats took care of their constituency, now Republicans are taking care of theirs. But if the GOP bill passed, you’d have the same problem of [low] uptake among the poor.”

By this measure, the ACA markets were flawed from the start, but there is one relatively straightforward fix available: extending the subsidies to cover people with higher incomes. That solution has poor political prospects, however, as the GOP is looking to cut subsidies rather than extend them. But history tells us that lower-income people are unlikely to buy insurance without significant subsidies, which makes it tough to see how coverage can be extended to all income brackets in this political environment.

The inconsistent take-up rate matters in large part because it’s a sign that healthier people are staying out of the market. That means there’s a lot of room for growth, said Chris Sloan, a senior manager with Avalere, a health industry consultancy group. “This group is basically all uninsured,” he said, referring to the people contributing to the low take-up rate. “And we can assume people who are not enrolled are healthier.”

That’s likely the case in Iowa, where the marketplace is in critical condition. Three insurers there say they will likely pull out of the ACA marketplaces and stop selling new individual plans entirely, including in the unsubsidized markets, in 2018. That would leave Iowans in 94 out of 99 counties with no way to buy individual insurance. At the heart of the situation is one of the biggest conundrums in health policy: how to pay for people who are very expensive to treat. The big-picture problem in Iowa is similar to that in many other states — there aren’t enough healthy people enrolled to counterbalance the sick. The GOP bill tries to remedy that by using age as a proxy for health and allowing insurers to charge older Americans more than they currently do. Iowa insurance companies say that this change will partly solve the problem, but for the system to truly work, there also need to be more incentives for young, healthy people to sign up.

When Wellmark, Iowa’s Blue Cross Blue Shield provider, announced that it would pull out of the markets for next year, it also revealed that one enrollee with a rare genetic disease costs more than $1 million a month to treat. The company’s president told the Des Moines Register that there are a few hundred people in Iowa whose costs top $100,000 a year. With Wellmark out, any insurer still left in the market would be on the hook for many of those costly patients.

Which raises another important metric: how many insurers are selling in the marketplace. In that regard, the marketplaces look somewhat bleak in much of the country, not just Iowa. A third of U.S. counties currently have only one insurer, which the Urban Institute has found is associated with higher premiums (though there are exceptions).

Some insurers are indeed leaving marketplaces because they have lost money — but that’s not the only factor. Congress has reduced or canceled payments that the ACA had guaranteed to insurers, taking away funds that companies were counting on when they created plans and increasing the risk the industry was facing. And some insurers have retreated from markets where they were making money. Aetna, for example, was turning a profit on Obamacare plans in at least some of the states in which it operated, but it appears to have been using the threat of leaving the markets as leverage to win approval for a proposed merger with Humana that the Obama administration had blocked. Some Blue Cross Blue Shield plans and Molina Healthcare, which built business models around providing coverage for low-income people, have fared much better.

Some states have managed to make the markets more enticing to insurers. Nevada, for example, appears to be successfully using a new tactic this year to recruit providers. Like many states, Nevada contracts out Medicaid to private insurers. This year, the state told companies bidding for Medicaid customers that they would get extra points, making them more likely to win these lucrative contracts, if they also sold plans to individuals on the marketplaces. Aetna, which had previously said it would withdraw from the state’s market, now plans to apply to sell there this year, according to Louise Norris of healthinsurance.org, an independent consumer guide to health insurance. The state also heavily promoted enrollment for 2017 and saw a small uptick in sign-ups, which is significant given that most other states using the federal healthcare.gov platform saw a decrease.

Insurers may also be more eager to participate if they don’t have to cover people with pre-existing conditions; the GOP bill would let states seek waivers so that insurers could charge people with pre-existing conditions more under certain circumstances, effectively pricing some of those patients out of the markets. That would mean drumming up interest among insurers at the expense of people who need insurance the most.

Other oft-cited signifiers of a marketplace’s health include the cost of premiums and the balance of sick and healthy people in the insurance pool. The latter can be judged using a crude government rating called the average state risk score, said Larry Levitt, a senior vice president with the health policy think tank the Kaiser Family Foundation. The risk score, which is meant to reflect how sick enrollees are, suggests that states that didn’t expand Medicaid or allowed people to stay on pre-ACA plans ended up with a mix of people that skewed less healthy than the mix in states that expanded Medicaid and canceled plans that didn’t comply with the new law.

That appears to have been the case in Tennessee, where counties around Knoxville were nearly left with no insurers for 2018 (the state’s division of Blue Cross recently said it would offer insurance in the area).³ But some unique circumstances led to those troubles. The state Farm Bureau has members-only plans that are open to all state residents, though it can deny membership based on pre-existing conditions. And it is allowed to operate under pre-Obamacare conditions, determining premiums based on a person’s health status. This means relatively cheap coverage for 73,000 people who buy non-ACA-compliant plans from the bureau, but, according to researchers at Georgetown University’s Health Policy Institute, it has also likely left behind a sicker, more expensive pool of patients buying their coverage from the ACA marketplace.

This average risk score suggests that states that opposed the ACA were less likely to have healthy markets. In many cases, however, these were markets that state politicians didn’t believe should exist in the first place. And there’s not an easy political fix to that problem. Given that the Republicans who want to get rid of the ACA can’t eliminate the markets entirely, they could look to improve the balance of healthy and sick enrollees. The GOP bill would accomplish that by making coverage too expensive for older or sicker people — resulting in a healthier pool of enrollees but leaving those who are most likely to need coverage uninsured.

States where insurance plans were priced too low in the early years of the ACA have also struggled. Arizona has been a common talking point for Trump because its 2017 health insurance premiums have increased by triple-digit percentages (for some plans and some people). But some of that increase was the result of insurers making plans too cheap in the first years of the marketplaces. In 2016, a person in Phoenix would have paid $207 a month for a benchmark plan, $87 less than the average cost of insurance in major cities in every state. In 2017, the cost of a benchmark plan in Phoenix jumped to $507, which is 40 percent higher than the national average. Insurance company executives have said it can be difficult to recover from underpricing plans.

In contrast to Arizona, South Florida’s market has flourished in the face of political opposition to the ACA, in part because insurers priced plans accurately in the early years. When the law took effect, outreach counselors who help people enroll in ACA plans were forbidden from working out of county health facilities, and the state chose not to expand Medicaid. And yet, South Florida has had one of the country’s most successful marketplaces. It’s no coincidence that the area had one of the highest concentrations of uninsured people in the country before the ACA, which made it an attractive market for insurers. Instead of underpricing plans to attract customers, Florida Blue, the state’s dominant insurer, aggressively recruited customers at retail centers, in doctor’s offices and at Wal-Marts. The company now has more people buying on the individual market in Florida than through an employer, according to Pat Geraghty, the company’s CEO.

So we know that premiums weren’t spiraling out of control everywhere last year (in a couple of states, rates even dropped between 2016 and 2017). And it’s important to note that even where premiums did increase, those price jumps won’t really affect lower-income people, at least not as long as the Affordable Care Act is law. But they will affect middle-income individuals who have to pay full price for their plans. They will also affect insurers, who will have a hard time finding reasons to stay in the marketplaces amid political uncertainty and the threat of shrinking enrollment among higher-income people.

Which means there are still very real concerns. The large premium increases many states saw in 2017 were widely believed to be a one-time correction, but there are some early signs that this may not be true. In the first states to reveal their proposed insurance plans for next year, insurance companies have requested average increases of 11.1 to 44.7 percent,⁴ per Charles Gaba, the independent tracker behind ACASignups.net. And some of these companies have come right out and said that a big chunk of that increase stems from the uncertainty hovering around Washington. Will the GOP pass a bill rolling back parts of the legislation? Will the White House cough up the money it owes insurers for subsidizing the poorest enrollees? And will Trump promote enrollment or enforce the individual mandate next year? As long as all of these questions remain unanswered, the price of insurance will likely continue to rise.

CORRECTION (May 22, 3 p.m.): A previous version of this article incompletely described the situation in Iowa’s insurance marketplace. Three insurers have threatened not just to leave the ACA marketplaces but also to stop selling new individual insurance plans altogether. The paragraph has been updated.