As Insurers Flee, What’s the Current State of Obamacare?

Obamacare
Obamacare

I’m, shall we say, skeptical the Affordable Care Act will ever be repealed and replaced, at least not in the “roots and all” way that some GOP politicians typically suggest. As Robert Laszewski notes, “Obamacare has insured millions of people—particularly in the states that have expanded Medicaid … and it has been attractive to the poorest that get bigger subsidies and lower deductibles in the exchanges.”

And the idea of universal coverage — including subsidizing the purchase of insurance for those who can’t otherwise afford it — is sound. What’s more, if Hillary Clinton is elected POTUS — currently an 80% chance, according to betting markets — whatever slight chance to “repeal and replace” probably vanishes for good.

But more and more it seems significant reforms are needed. (And how many parts do you replace on a car before it’s not really the same car anymore?) The latest bit of troubling news for the ACA is insurer Aetna’s decision to withdraw from 11 of the 15 states where it currently offers plans through the insurance exchanges. This follows pullbacks by Humana and UnitedHealth Group. And as the Wall Street Journal points out, “all five major national companies now expect to be in the red on that business this year.”

My AEI colleague Scott Gottlieb comments on the state of the ACA in light of the above news:

I think the significance here is threefold, and it isn’t the Aetna withdrawal per se. Aetna had a small footprint in the exchanges, so their departure isn’t material. The bigger issues are:

1) All five commercial insurers are now shrinking their footprint. Anthem hasn’t announced their plans yet, but there is an expectation they will withdraw from at least some if not many of their markets. But Cigna, Humana, United, and Aetna have all shrunk substantially. Humana may be the most material since they were in the most markets, they have gone from around 1,300 counties where they offered plans to around 200 now. A substantial departure for an insurer that had a big presence previously in Obamacare.

2) There has been NO NEW NET HEALTH CARRIER FORMATION since 2008. I liken this to Sarbanes Oxley, where we have seen no new bank formation since the passage of that law. Ditto for Obamacare. The only new health insurance carriers that got started were the co-ops, which are now going bankrupt, and a smattering of provider sponsored plans. But there has been virtually no investment capital to form new health insurance carriers. I think this is because the Obama team was so adverse to allowing a health plan to earn anything above, say, a 5% profit margin, and heaped on so many regulations to make that the reality, that this became an un-investable space. They even capped the operating margins of the health plans at 80%. When the rollout didn’t go as expected, that 5% margin that progressives thought was “OK” suddenly became losses for everyone. It is hard to get investors to invest in new plans if they have no hope of earning an above-market-rate of return on their capital because the government has capped their operating margins.

So the only people who invested in new plan formation are those who are either subsidized by the government (co-ops) or those who have an ulterior motive in monopolizing their markets (local health systems who started provider sponsored plans). Contrast this to Part D or Medicare Advantage. When those programs got started there were literally thousands of new plans formed, many backed by investors. The market consolidated over time, and profitability was decreased through competition (Part D plans now operate at something like a 3% profit margin on average). But by enabling some profitability at the outset, and not trying to tightly regulate margins, a lot of capital came into the space to start new plans and create choice and competition.

3) So what does this mean for consumers? The only plans that are growing their footprint in Obamacare are the Medicaid plans. Even the Blues, which are the backbone of the exchanges, are struggling financially reporting the first aggregate loss in decades last year. What Obamacare is becoming is a near-Medicaid market serviced by Medicaid-like plans. This makes sense since the Obamacare plans are really only affordable to those who qualify for the special cost sharing subsidies, which are those between 175%-250% of FPL. What’s amazing is that the government heaped so many regulations on these plans that even with the assistance of fairly rich premium subsidies, they still are not commercially viable. It is only those who get the cost sharing subsidies for whom this is a reasonably OK deal — and even then, the plans are still expensive. My thesis is the sweet spot for Obamacare is probably between 175% and maybe 225% of FPL. The data actually proves that out, in terms of the income demographic of those who are actually enrolling. People, after all, are rational economic actors.

And an additional comment from another AEI colleague, Joel Zinberg:

The ACA also provides for premium subsidies up to 400% FPL for plans purchased on the exchanges – this is given in the form of an advanced tax credit based on predicted income. If actual income is different the enrollee is supposed to pay back the subsidy (higher income) or get additional monies. In practice the system is a mess and many people are escaping without paying back excess subsidies.

The important point is that approximately 85% of exchange enrollees are receiving subsidies. Very few eligible people with incomes above 400% FPL are buying exchange policies. The exchanges only exist because of hefty subsidies.

Hence, the Obamacare expansion in coverage is nearly entirely composed of Medicaid and subsidized exchange plans.

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