One pillar of Obamacare is in crisis — but just how serious a crisis remains debatable. Insurance companies have been fleeing the highly regulated “exchanges,” created by the Affordable Care Act, through which people who lack coverage buy plans.
Today, The Big Idea features dueling pieces examining the cause of the problems, and potential solutions. Bob Kocher and Ezekiel Emanuel worked in the White House on the Affordable Care Act. In a companion piece, Avik Roy, president of the Foundation for Research on Equal Opportunity and a Republican policy adviser, offers a decidedly more skeptical perspective.
With the “exit” of United and now Aetna from the Obamacare health exchanges, many people are proclaiming the end of those exchanges and thus the end of Obamacare itself. This is wildly premature. There is no doubt the exchanges are having some growing pains, but they have succeeded in granting millions of Americans access to high-quality, more-affordable health insurance. And there are relatively simple adjustments that can stabilize the exchanges and allow them to work better for both consumers and insurance companies.
We should never forget that there is no politically viable alternative to the exchange marketplaces if we want Americans to be able to buy insurance regardless of their medical conditions. The two theoretical alternatives are, first, a government-run single-payer plan, and, second, high-risk insurance pools that group uninsurable Americans together and then highly subsidize their coverage. Conservatives will never consider single payer, and high-risk insurance pools are about the most inefficient and costly way to get people health care. Therefore, the best option is to improve the insurance exchanges.
Exchanges facilitate a faster, easier, and better way for citizens to buy health insurance on their own than existed previously. Since most Americans rely on their employers to do the work for them, most of us have never tried to buy individual health insurance. Suffice it to say, pre-ACA it was a terrible experience.
Pre-exchanges, individuals and families would need to contact each insurance company directly (often with the help of brokers who may have had incentives to sell people more expensive plans than they needed), transmit a large dossier of medical information for underwriting, wait a few weeks, and then review prices for a confusing array of health plans from a single carrier. In the descriptions of those plans, important details like exclusions for pre-existing conditions, coverage caps, and hidden fees might be hidden in small print.
If they didn’t like their choices, they would repeat this process for another health plan and hope for better options. And even for those who did get insurance, many people wound up surprised by what they actually bought, surprised by hidden costs in the plans, and surprised by what was not covered.
Returning to the discriminatory pre-ACA system is unthinkable
The ACA’s exchanges altered this experience. Exchanges enabled people, for the first time, to select a benefit level, to see and compare multiple plans simultaneously, and to get price quotes immediately. Thanks to subsidies linked to income, shoppers can have confidence that they can afford the premiums.
Despite a bungled roll-out, exchanges worked well for consumers. In fact, over 10 million people have purchased coverage through them. It is now unthinkable to go back to the days of medical underwriting, excluding people with pre-existing conditions, gender discrimination, benefit caps, and coverage exclusions. Even ACA’s strongest opponents (begrudgingly) agree that insurance exchanges are a better way for people to buy insurance than the alternatives.
While opponents of the ACA argue that some people are now paying higher premiums than before the law was passed, their criticism is misleading: Many Americans are paying less, particularly people over age 50, and the coverage people are buying is more comprehensive than pre-ACA individual market policies. Moreover, premiums today are 20 percent lower than the Congressional Budget Office predicted when the ACA was passed.
A boon for consumers, less so for insurers
While exchanges have generally worked well for consumers, they have worked less well for insurers. With the exception of Covered California, which created a vibrant market that has saved consumer money with only 4 percent premium growth and has helped health plans make money, most states have struggled to attract enough healthy people to create profitable and stable insurance markets.
When the ACA was created, we anticipated that, because of some built-in and unavoidable risks, it would take a few years to create vibrant and stable markets. Insurers did not know how many people would sign up and what their health characteristics would be. This made it hard to know how much health care they would use and, therefore, what the “right” premiums would be. To ensure the risk they bore was reasonable, the ACA created “three R’s”: risk corridors, reinsurance, and risk adjustment. These policies are not new or controversial; they are deployed in programs like Medicare Advantage and Medicare Part D.
Risk corridors reimburse plans by redistributing money from plans with lower-than-expected claims cost to plans with higher-than expected costs. Notably, if more plans have higher costs, the federal government was supposed to offset losses with funds from outside the markets to stabilize markets and premiums. Similarly, reinsurance lowers premiums by reimbursing plans for largely unavoidable catastrophic medical bills. Finally, risk adjustment is designed to mitigate the risk that plans will only want to enroll health people by transferring premiums from plans with healthier populations to those with sicker populations.
These policies have worked well in all cases. Indeed, if risk corridors, a policy that limits the losses and gains of insurers beyond a predetermined cost limit, had not been eradicated by a rider injected by Marco Rubio in the acrimonious government funding bill December 2014 that nearly led to a government shutdown, virtually all the losses incurred by health plans would have been eliminated.
In the absence of risk corridors, some payers, like United Healthcare and Aetna, have exited, and others, particularly underfunded startup coops, have failed.
Other factors have also contributed to issues with the exchanges. Because of low health care inflation since passage of the ACA, very few large employers have dropped coverage, which had a side effect of reducing the number of healthy people in the exchanges. This made it less essential for traditionally business-to-business big insurance companies to learn how to compete in consumer markets.
The insurance industry’s pending mega-mergers made organic growth in exchanges less critical too. As a result, it is not surprising to see Aetna and United Healthcare exit exchanges since their core business serving large employers has remained intact. As the exchanges become more predictable, and if Congress funds and extends the three R’s so that they become profitable for health plans, it is probable that plans would re-enter the market.
Republican intransigence has aggravated the difficulties
Finally, persistent opposition by Republicans has not helped. By not expanding Medicaid in many states, poorer and sicker patients had no affordable options to get health insurance. Furthermore, an unwillingness to work with CMS on marketing and outreach efforts pushed down enrollment of healthier patients. And a total refusal by Congress to contemplate even the most minor technical corrections — plus active undermining of programs like the risk corridors — has been harmful too.
Fortunately, there are a few policies that can improve the competitiveness and economic attractiveness of the exchanges. First, Congress should reenact risk corridors for the exchanges. Second, Congress should extend the reinsurance program — perhaps on a state-by-state basis — until all exchanges achieve more stable risk pools. Third, greater encouragement of larger exchanges, potentially multi-state, would be helpful.
Today, exchanges are really a series of small populations, because some states have inherently small individual markets, and insurers can choose to participate in only a subset of counties with the most attractive populations. By definition larger populations have more stable risk pools. For insurers, larger markets are more attractive with lower customer acquisition costs. Exchanges should also adopt the California approach of requiring insurers to bid on large geographic areas and populations and not try to cherry pick only profitable counties.
There are slightly more politically contentious policies that could help. One is enhancing the mandate penalty for not purchasing health insurance. This could be done by raising the penalty or penalizing people if they delay purchasing until they get sick. Another policy to attract younger enrollees would be to change the age-banding, the policy that limits how much more plans can charge older people. Increasing this from the current 3-1 ratio to 4-1 would have the effect of lowering premiums for younger and healthier individuals. This change may also necessitate raising premium subsidies, especially for older individuals who would have to pay more. These reforms would make the economic calculus of buying insurance far more logical for many people and help insurers spread risk.
More importantly, while exchanges can clearly be improved, the central problem is not how exchanges are designed, but rather that health care premiums remain far too expensive. The single most important thing that Congress and HHS can do is to reduce underlying cost growth by continuing to push for implementation of new provider payment models, create incentives for lower cost approaches to treatment, and improve preventive care. Fostering more competitive provider markets, where doctors truly compete on price and quality, and figuring out what to do about drug prices would help immensely, too.
Other successful health care policies have had growing pains
Six years into a bold new program, it should come as no surprise that the ACA needs policy tweaks to make exchanges work better. When the Balance Budget Act of 1997 launched the modern version of the program now called Medicare Advantage, which enables Medicare beneficiaries to select private health plans to administer their Medicare benefits — often with additional benefits — enrollment was a struggle, health plans lost money, and many exited the program. From 1999 to 2005, Medicare Advantage enrollment fell by nearly 20 percent, from 6.9 million to 5.6 million.
In 2003, a Republican Congress intervened and passed the Medicare Modernization Act, which increased subsidies for health plans. This attracted more health plans, created a profitable and competitive market, and attracted many more enrollees. Since 2003, enrollment has grown by 200 percent to approximately 17 million Medicare beneficiaries, and the program has tremendous bipartisan support. No one could have imagined in 1965 that in 2016 there would be a vibrant private sector option in Medicare.
Similar constructive interventions could help the Obamacare exchanges. Health insurance exchanges are a private sector approach for creating more efficient insurance markets. Despite extraordinary efforts by opponents of the ACA to undermine the law, they have worked well for consumers. It is in all of our interests to take steps to make ACA exchanges attractive markets for health plans and younger healthier individuals. Not only will this create more choice and competition, and lower long term premium growth, but it will also reduce the need for a public option for Americans who are not able to access private health insurance.
Bob Kocher is a partner at Venrock, a venture capital firm. Ezekiel Emanuel is vice provost at the University of Pennsylvania and author of Reinventing American Health Care. Both worked in the White House on the Affordable Care Act.
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