The Health Insurance Marketplaces Chapter Four: Three Things not to Forget

Tomorrow, the healthcare marketplaces open for business, and in 8 days, their long-term destiny will be clearer as the race for the White House is settled. This is the fourth year Healthcare.gov and its state counterparts will offer insurance to those inclined to purchase coverage and avoid the penalty.

Looking back: how did we get here?

The implementation of state run insurance marketplaces was included in the Affordable Care Act as the vehicle through which access to private insurance could be induced. The concept traces its roots in conservative ideology of the Heritage Foundation that preferred an individual mandate over an expanded federal single-payer system. Two states, Utah and Massachusetts, had successfully operated insurance marketplaces, so getting other states to play seemed reasonable to centrist policy wonks tasked with crafting this important dimension of the law.

The marketplace construct involves a stick and a carrot: the stick is the individual mandate in the law that this year will slap a $695 penalty on those choosing not to purchase coverage this April. The carrot is tax credits and subsidies paid to insurers on behalf of those who qualify (U.S. citizens with income between 100% and 400% of the federal poverty level). Combined with expansion of Medicaid, the marketplaces were expected to insure young, healthy, previously uninsured adults thus cutting into the burgeoning population that had no coverage. Together, they’ve reduced the ranks of the uninsured from 57 million before passage to 31 million today.

Operationally, the marketplace model seemed simple: create an Amazon-like online shopping experience where uninsured individuals could compare insurance plans side by side. The federal government would set policies for the marketplaces while delegating the mechanics to states. It dictated what was to be included in the insurance policies (essential health benefits) and how they were to be priced using a risk-adjustment methodology intended to keep premiums for older and sicker adults lower.

But politics trumps policy in DC and implementation is always more complicated than anticipated. In the election after passage of the ACA (March 2010) control of Congress shifted from Dems to the GOP. “Repeal and Replace” became a battle cry for House Republicans whose antipathy toward the White House made the ACA a useful target. Since passage, the House GOP has passed more than 60 resolutions calling for the ACA’s repeal.

Their hope of the ACA’s undoing was dashed in June, 2012 when the Supreme Court affirmed it as the law of the land and dampened in the fall, 2012 when President Obama beat Mitt Romney in a race wherein the Affordable Care Act was a prominent issue. Last year, the Supreme Court’s decision in King v Burwell settled the challenge to subsidization of premiums through the marketplaces, so for the time being, the marketplaces are here to stay. But partisanship about the Affordable Care Act remains a divisive issue in Congress and among voters.

So, as a political strategy, knowing insurance marketplaces in each state were scheduled to go live 14 months after the Supreme Court affirmed the law’s constitutionality, GOP governors chose a new tact: instead of setting up their own marketplaces, let the federal government set up the exchanges and assume the risk. If they worked, no harm no foul. If they failed, then the Dem’s could be blamed fueling intensifying political vitriol. The rest is history. The rollout of Healthcare.gov as the marketplace option was botched. And the young, healthy, uninsured didn’t buy in never reaching the 34% targeted by the bean counters.

So as round four starts tomorrow, Healthcare.gov operates the marketplaces in 36 states and 14 operate their own (some with shared support from the federal marketplace). Here’s the scorecard per ObamacareFacts.com:

Plan participation has been an important variable from day one: most private insurers entered presuming the marketplaces would work. Most found otherwise. The newly insured were not as healthy as assumed in their pricing, and provisions that allowed special enrollment allowed a person to enroll one day, have major surgery the next and then disappear. Costs for these newly insured were higher than expected, and technical glitches in the Healthcare.gov marketplaces were constant. So, in Round Four, major issuers like United, Aetna and others simply pulled back or exited altogether due to mounting losses.

Last week, CMS released its estimates for Round Four. It anticipates premium increases for the second lowest priced silver plans will average 22% than Round Three with rates ranging upward to 60% in some states and single digits in others. It anticipates 12,000,000 will enroll and 85% of these will be eligible for tax credits and subsidies that pays 75% of their premium bringing their out of pocket cost to $106 per month.

In Round Four, most (62%) marketplace enrollees will have a choice of three or more plans in 2017, down from 85% in 2016. And 2.3 million will have a choice of only one. The number of counties with a single marketplace insurer is likely to increase from 225 (7% of counties) in 2016 to 974 (31% of counties) in 2017 and 6 in 10 counties will have 2 or fewer marketplace insurers.

Round Four and Beyond: What to Watch

How a new administration and Congress addresses the role and shape of the marketplaces going forward is unknown. What we know is this:

1-The individual insurance market is inherently risky. The individual insurance market, on or off the exchanges, is tricky. It’s price sensitive, highly volatile and less profitable to insurers. The added stipulations included in the Affordable Care Act for insurer participation in the marketplaces add additional risks to issuers:  each will participate selectively in states where they can make a profit. And in these, charging premiums that cover their costs regardless of political heat or enrollee pushback will be table stakes. It’s just business. There’s no moral imperative to participate even if regulators and pundits imply otherwise.

2-Some insurers have found the marketplaces profitable. Participation has been not a money loser for Centene, Kaiser, Molena, UPMC, many of the Blue Cross plans and others. In fact, 29% of plan participants saw profits in their marketplace activities. Many factors account for the discrepancy in their experiences versus the well-publicized losses by United, Aetna, Anthem, and Blues in states like Tennessee and Alabama: analysts point to premiums priced more appropriately, healthier and less costly enrollees, and execution as key differentials.

3-Marketplace participation is relatively inconsequential to most insurers. The health insurance industry is a highly concentrated big business with $743 billion in premium revenues. The biggest (Blues, Anthem, Aetna, Cigna, United) control 83% of the market, up from 76% a decade ago.  But the individual market on and off exchanges represents only 7% of revenues and proportionately less of profits. As profit margins for insurers have shrunk, their boards have elected to purge unprofitable lines of business including marketplace participation and diversify in more lucrative businesses. Thus, Optum is, United HealthGroup’s second curve and Aetna is partnering prominent health systems like Inova, Texas Health Resources and others in new ventures. The leading insurers had a good run since passage of the ACA: versus the S&P share price growth of 75% in the five years after passage, share price increases were double or higher for United, Centene, Humana, Aetna and Cigna, and just short for Anthem and HealthNet. They’re all moving on.

So, as enrollees go online tomorrow, and as Campaign 2016 nears its end, the story of the marketplaces will continue to unfold. A new administration is unlikely to dismantle the marketplaces but nip-tucks to correct underwriting flaws and technical glitches are certain.

The marketplaces aren’t going away, but they’ll morph against a complicated insurance environment in which provider organizations play a more direct role, employers leverage high deductible programs to shift financial risk to their employees and federalists ponder the expanding role of central government in Medicaid, Medicare, CHIP, military health, federal and state employee coverage and the marketplaces.

Round Four starts tomorrow. When the dust settles from the election next week and open enrollment ends January 31, debate about Round Five and rhetoric about Campaign 2018 will begin.

Paul

PS: Healthcare generally and the ACA specifically did not get much attention in Campaign 2016. The vitriol between the major candidates and the media appetite for personality-politics devoured time that might have been spent on substantive discussion about our system’s future. Sad.

Sources: ASPE Issue Brief “Health Insurance Marketplace Premiums After Shopping, Switching, And Premium Tax Credits: Health Insurance Marketplace Monthly Premium Changes for 2015–2016 in HealthCare.gov States” (April 12, 2016); Commonwealth Fund; Kaiser Family Foundation; Mark Farrah Associates; National Association of Insurance Commissioners (NAIC); California Department of Managed Health Care (CA DMHC), ObamaCareFacts.com and HHS.gov.