The data is not fully out yet, but, if my home area of Houston, Texas (Harris County) is representative, PPO plans that offer the greatest choice of doctors and that provide low cost sharing are extinct, as are POS plans that also offer more choice of medical practitioners. Platinum plans of any sort are on their way to its extinction.
In 2015, there were 19 PPOs available in Harris County, 12 from Blue Cross Blue Shield and 7 from Cigna Healthcare. In 2016, according to the preliminary data available on healthcare.gov and released Sunday, there are none. Nor does the matter improve my considering POS plans, which also offer a greater degree of choice of doctor than does an HMO. In 2015 there were17 such plans in Harris County, 10 from Aetna and 7 from Humana. Those are gone too in 2016. So, basically, it is no longer true in Harris County that you have a choice of doctor if you purchase an Obamacare plan. You get what the HMO or EPO gives you.
Platinum plans are now almost extinct. In 2015, there were three platinum plans available in Harris County, an HMO and POS offered by Humana and and EPO offered by United Healthcare. According to the preliminary information released Sunday, only the Humana HMO survives. Thus, you can get a plan that has minimal cost sharing, but no longer one that offers great choice of medical practitioners. The Humana POS and the United EPO are gone.
And it’s going to cost you a lot to put yourself in a pool in which cost sharing is low. In 2015, the gross premium for the Humana Platinum HMO (32673TX0640030) was $448 for an individual age 40 (non-smoker). In 2016, the gross premium for the same Humana plan was $551, an increase in gross premiums of 23%.
Net premium increases — the thing the insured actually pays — are likely to rise a similar amount for the one remaining platinum plan. The second lowest silver plan — the baseline for computation of subsidies — has increased in price by $34, from $222 in 2015 to $256 in 2016. Consider an individual eligible for a $150 subsidy in 2015. If they purchased the Humana Platinum HMO in 2015, their net price would be $298. If they purchased the same policy in 2016, yes, their subsidy might grow by $34 but their net price would still be $367, an increase of 23%.
All of this is the very predictable consequence of a design flaw in the ACA. It heralds an unraveling of the Obamacare market. Who is willing to pay the extra cost of a PPO: generally people who value a long term relationship with their physician. And those people are disproportionately less healthy than others. Hence, the PPO pool tends to be populated by people who are expensive to treat. Although insurers could, in theory, compensate for this by raising premiums to very high levels, in fact that does not work for long because, with premiums yet higher, only the least healthy of the least healthy persist, and the pressure on premium grows. Insurers, seeing the handwriting on the wall, thus kill off these plans before they technically implode.
It is the same problem with platinum plans. The people who most want low cost sharing tend to be the people who most have high costs. These plans are thus difficult to sustain where plans with lower cost sharing are available. The complex ecology of health insurance does not permit them to survive.
When the Obama administration releases its data in a form that is more susceptible to in depth analysis, we’ll be able to see if Harris County is representative or an anomaly. Although the trend may be stronger or weaker in other areas, I predict it will not show there is much special about the Houston, Texas area in its vulnerability to a death spiral.
Contrary to the views of some, the number of people who have insurance coverage through the Exchanges as of January 1, 2014, matters to everyone. It matters because the pool that exists on that date will determine, at least for a while, whether the premiums charged by insurers in the Exchange are likely to be stable and the extent of the federal government’s multiple obligations to subsidize plans purchased on the various Exchanges. It is not as if insurers get a claims paying holiday simply because more and healthier people may enroll later in the year. It also matters because a major point of the Affordable Care Act was to increase in an efficient and relatively painless way the net number of people who have insurance or social protection against significant illness. If the numbers in the Exchanges and in the expanded Medicaid program do not way more than offset the number of persons who lose their insurance as a result of the ACA, or if the cost of extending health protection in this fashion proves too high, the ACA will not have accomplished its goals.
Given the chaos that has erupted as procrastination strains Exchange infrastructure and deadlines are repeatedly extended, it is difficult to tell right now whether the ACA is performing as hoped. A few things are clear, however. The first thing is that the Obama administration is not releasing the sort of information from which an objective assessment could be made. Platitudes such as “Millions of Americans, despite the problems with the website, are now poised to be covered by quality affordable health insurance come New Year’s Day,” from President Obama at his last press conference are just not a substitute for knowing how many people have enrolled in the plans in the various Exchanges, and more importantly, have paid for coverage. What are their ages? How about some real numbers as a Holiday present?
Second, the Obama administration is acting as if a large number of enrollees in the aggregate is the measure of success. This is simply not true. Putting aside the problem of it being paying customers rather than mere enrollment that ultimately matters, meeting or exceeding projections in some states does not compensate for deficiencies in many other states. Because the pools are state-based, Texas insurers and insureds are not helped if enrollment in New York or Connecticut exchanges ultimately equals or exceeds targets. The insurance market in Texas and many other states will still be unstable with some insurers likely pressing for significant premium increases, contemplating withdrawal from the Exchanges, and demanding larger subsidies from the federal government via Risk Corridors and other programs.
Third, even those who have been on the more pessimistic side of matters, must acknowledge that there has indeed been a surge in many state Exchanges and in many states covered by the federal Exchange. On December 11, I wrote: “With a decent last minute kick, it is not unimaginable that California could make 1/3 of its total by the December 23, 2013 deadline and get closer to its ultimate goal by the end of March.” With enrollments at 17,000 per day, California may in fact be there. Colorado, which previously had dismal enrollment numbers, reports 33,356 enrolled as of Monday, which puts it at of the 136,000 projected enrollment for 2014 and 52% of the way towards the Obama administration’s projections for this time of the open enrollment season. (33356/(0.47 x 136000)). Other states such as New York and Connecticut, which previously were doing better than most, have also reported a high pace of enrollment.
Whether that surge has been as large in many other states remains to be seen. Proponents of the ACA like to cherry pick their states with at least as much zest as opponents do. Perhaps both sides share the belief that insurance enrollment is at least much a social phenomenon as a purely economic one. Numbers for large states (with large numbers of uninsureds) such as Texas, Florida, Georgia, Indiana, Illinois, North Carolina and Florida have yet to report any numbers that I have seen. And, as mentioned above, even if California and New York and some other states have enrollment sufficient to forestall premium instability and possible entrance into an adverse selection death spiral, that will not greatly help states in which enrollment ends up being less than half of that projected.
Finally, we need to look beyond the last minute holiday rush for health coverage and see what happens between now and March 31, 2014. The carrot of the ACA has basically been eaten for 2014. If you wanted health care coverage and could afford the prices on the Exchange it made little sense to wait until after the December deadline to acquire it. This is all the more true given that the President has permitted people to game the system by simply enrolling in a plan now and deciding until January 10, 2014, whether to pay.
Now, however, the first surge is likely over. Will there be the needed second surge? All that really remains is the stick: the individual mandate tax penalty. Many people, including me, believe that even before the events of last week, it was too small in 2014 to achieve its goal of inducing enrollment by those in good or average health. The number of people for whom insurance would not be a good deal at, say, $2,000 a year net but for whom it would be a good deal at (effectively) $1,705 per year ($2,000 – the $295 per person tax penalty) is not likely to be enormous. This is so because ACA premiums often depart greatly from actuarial risk by their prohibition on medical underwriting, accurate age rating, gender rating and their — shall we say — loose enforcement of tobacco rating.
Moreover, with the administration exempting last week upwards of half a million people from the individual mandate, the number of people who need fear the stick got even smaller. So, yes there are mega-procrastinators or people who have been stymied by the dysfunctionality of various Exchange website in obtaining coverage. There are former skeptics who see their neighbors helped by health insurance coverage under the ACA and who now enroll just as there may be some turned off by whatever problems emerge in administration of the plans. On balance, I would not be surprised to see modest increases in enrollment between now and the middle of March. I remain highly skeptical, however, that there will be a second surge equivalent to what has occurred this past week. As they say, however, only time will tell.
I am enjoying a family vacation in the Colorado mountains this winter holiday. It’s snowing outside my window as I write this and the beauty of a quiet snowfall can eclipse what may seem so important at other times. So please continue to read ACA Death Spiral periodically, but don’t expect a huge amount of activity for about the next week. I’m confident we’ll be back exploring issues in the new year.
Healthcare.gov appears to be working much better, at least in enabling individuals to select plans. And some of the state exchange web sites appear to be improving their functionality too. Some have heralded these advances as providing hope that the Exchanges will be able to meet the enrollment projections on which the economics of insurance without medical underwriting in part depend. But do these claims stand up to the cold light of mathematics? Not very well.
Here’s the headline:
A close look at the numbers shows that the pace of enrollments from here to the close of open enrollment needed to meet projections is high in every state, even those touted as successful, and almost impossibly high in many. Given the incredibly slow start in most jurisdictions, it will not just take a little pickup over the next few months to achieve the projected and needed number of persons in the Exchanges. It will take a miraculous last minute stampede. Since miracles seldom occur, the result may be two different stories of the Affordable Care Act: a few states in which the Exchanges proved from the start to be a somewhat stable mechanism for providing health insurance without medical underwriting but a significant number of other states in which the results for at least the first year represent a large failure.
News appears to be breaking today that the federal exchanges enrolled about 100,000 in November. This is being heralded as somewhat of a success compared to the 26,000 who enrolled in October. And, of course, enrollment figures from healthcare.gov are difficult to assess due to the actual and feared dysfunctionality of the web site. But one way to look at this is to consider what has to happen between December 1, 2013, and March 23, 2014, the close of open enrollment to make projections. The states that are dependent on healthcare.gov need about 4.84 million enrollees by the end of that period if the nation is to meet the goal of having 7 million enrolled in the Exchanges by the close of open enrollment. If, right now, there are about 126,000 enrollees in those states, we are just 2.5% of the way there. The pace of enrollment on healthcare.gov will need to increase by a factor of about 20 in order to meet goal. In absolute terms, healthcare.gov needs to be enrolling about 42,000 people per day. And while perhaps not every single one of those people need to enroll for the system to succeed, the 7 million enrollment goal isn’t just a mere wish. There are, as I and many others have noted potentially serious consequences to the stability of insurance markets if the figures fall well short, even in several states.
Whether healthcare.gov can score the needed come back, however, will basically depend on two related factors: (1) whether healthcare.gov is truly fixed and can stand up to the increased pace that will be needed and (2) whether the requisite increase in pace is likely. This latter factor depends in turn on where on the following spectrum the possibilities fall. On one end of the spectrum, there is the possibility that there is this pent up demand from procrastinators that will surge forward to access the web site in the coming weeks. Perhaps March Madness for 2014 will constitute this huge surge — kind of like April 15 rushes to the post office to send in tax returns — as the March 23 “deadline” approaches. On the other end of the spectrum, there is the possibility that most people who wanted to and had the means to enroll — the wealthy sick — did so already and others have looked at the prices, the coverages and the penalties and decided that, for now, Exchange coverage is not for them. The fact that a surprising 70% of current enrollees in the Exchange plans are unsubsidized gives some support to this gloomier hypothesis.
To get further insights, we can also take a closer look at some representative states.
First, let’s look at what has to happen in the most successful state, Connecticut. There, as of November 14, 2013 (the date of the last report), 7,591 people had selected a plan. That’s not all it will take finally to get coverage — among other things, people will have to start actually paying premiums — but it’s a solid start. This 7,591 figure represents 12.9% of the projected total of 58,637 for Connecticut. A little math shows that in order to make projections, people in Connecticut will need to enroll at a pace 2.3 times faster than they had as of November 14 in order to make the projection by the March 23, 2014 date.
It hardly seems impossible that Connecticut could make the projections. Whether they do so, however, will basically depend on the location of Connecticut on the spectrum discussed above. We should have a better sense of where on the spectrum we are falling when Connecticut releases new numbers.
Connecticut is a small state. The enrollment there was projected to constitute only about 1.4% of the total enrollment in the Exchanges. Let’s take a look at a big state: my home state of Texas. With the largest uninsured population in the country and with no Medicaid expansion into which some Exchange eligible persons might otherwise “fudge into,” Texas was supposed to enroll 780,959. As of November 2, 2014, Texas had enrolled just 2,991. This means that Texas will have to enroll at a pace 59 times faster than it had as of that date in order to meet enrollment projections. And, even if due to failure to the healthcare.gov website, Texas has enrolled, say, just 10,000 as of November 30, 2013, it will still need to up its pace by a factor of 41 in order to meet projections. Viewed in absolute terms, Texas will need to enroll at a pace of over 6,800 per day. Again, we will have a better sense of the plausibility of this increase when the federal government releases newer data.
Another way of thinking about the issue is to consider what would happen if Texas’ future enrollment relative to its prior enrollment is the same as Connecticut needs to be in order to meet the Connecticut projection. If Texas enrolls at a pace 2.3 times faster than it has thus far, Texas enrollment will be something like 29,000. That would be just 4% of what was originally projected, a shortfall of 752,000. Connecticut could double its projected enrollment and it would barely make a dent in compensating for a shortfall of this magnitude. Even if Texas celebrates the rebirth of healthcare.gov by stepping up its enrollment by a factor of 10, that still gives it less than 150,000 enrollees, a shortfall of 630,000 over the projected value.
It would also help if the government could get the Spanish language version of its website, cuidadodesalud.gov, to accept applications the same way that healthcare.gov does.
A problem with projecting Texas numbers is that it has been hamstrung by its chosen dependency on healthcare.gov, which has been completely dysfunctional until recently. So, what about a large state that shares some demographic characteristics of Texas but that has a mostly functional web site? Let’s look at California.
In California, as of November 19, 2013, there were 78,891 counted as enrolled relative to a projected enrollment as of March 23, 2014 of 691,016. Viewed one way, California is going to need to step up the pace of its enrollment by a factor of 3.07 in order to meet its target. In absolute terms, California needs a pace of about 4,936 per day (including weekends and including the busy holiday season) in order to meet target.
Whether viewed in relative or absolute terms, the pace needed in California is ambitious. Covered California, which brags of a recent tripling in the pace of enrollment, still enrolled just 2,700 per day for Exchange plans in the most recent period for which data currently exists. (It is only by counting Medicaid/Medical enrollments that the numbers get higher). If California were to persist at that pace for the remainder of the enrollment period, it would have something like 414,000 enrolled by the March 23, 2014 date. Depending on the precise composition of the pool of insureds, such a figure would likely be enough to stave off severe adverse selection but probably not enough to do so entirely. And, again, for those focusing on the 7 million nationwide figure, shortfalls of 277,000 in California or 700,000 in Texas are just difficult to compensate for even if other states are considerably more successful.
Let’s pick one more big state. And, again, let’s pick one where the Exchange is generally said to be doing well: New York. In New York, as of November 24, 2013, 41,021 are claimed to have enrolled in plans out of the 411,304 originally projected. This means New York will have to quadruple the pace of enrollments (4.09) in order to meet projections. In absolute terms, the state needs to be enrolling 3,111 per day every day until March 23, 2014. It is thus in roughly the same position as California. Whether it meets its goals depends on why there has thus far been a shortfall. If it’s massive procrastination, perhaps New York can get pretty close. If, on the other hand, many New Yorkers are rejecting the product, and the pace of enrollment just doubles from what it has been, expect New York to fall short by about 190,000 people (46%). Again, smaller states that are more successful will have difficulty compensating for such a large absolute shortfall.
There is no state in which a significant uptick in the pace of enrollments will not be needed in order to meet enrollment projections. This is true in states that have their own Exchanges and states that do not. It is true in states touted as a success as well, of course, of those seen as failing. It is most definitely true for states that depend on the federal website, healthcare.gov.
In a few states, the burden may be met. Many people do indeed procrastinate, even perhaps when it comes to subsidized health insurance that they now lack. To meet enrollment projections in many other states,however, we need for Exchange applications to be far more the province of procrastinators than even income tax returns. After all, only 25% or so wait until the last two weeks to file those. In these other states, the appropriate analogy may not be tax procrastination but the miracle of The Heidi Game in which two touchdowns were scored in the closing 9 seconds after the mainstream media (NBC Sports) assumed the game was lost. But it’s been 45 years since that turnaround occurred. It just might happen again with applications for health insurance on the Exchanges, but it seems unlikely.
Could I add one more point?
People are focusing on March 23, 2014 (earlier March 15, 2014) as the measuring date. The ACA will presumably be deemed a success if enrollment figures meet projections by that date. But this strikes me as an awfully generous measure. The problem for insurers is that there will be a smaller pool during the first three months of the policy year. And smaller pools generally have higher claims per person. So, if I ran the world, I’d be looking at two dates to examine enrollments: January 1, 2014 when the plans kick in and March 23, 2014 when open enrollment ends. Yes, great enrollment by March 23 will ultimately go a long way to reassuring insurers if enrollment is problematic on New Years Day. But if enrollment is really bad come Rose Bowl time, expect insurers to lose a lot of money on claims filed between then and the close of open enrollment. If they can’t make that money back on the late filers, expect insurers to figure out some way of getting even for 2015.
Many people who remain basically positive about the Affordable Care Act are viewing the enrollment statistics like the football fan whose team is 2-6 and who point out that the team could win 7 out of its 8 remaining games and still probably make the playoffs. Yes, getting off to a really bad start doesn’t preclude a happy ending. Success may still be mathematically possible. But unless there’s good reason to think that the fundamental factors such as poor coaching, poor game plans or unexpected injuries that have led to the bad start no longer apply, the more reasonable prediction is that things will continue more or less as they have.
For purposes of this blog entry, I’m going to assume that enrollment in the Exchanges ends up being about 2 million for 2014 instead of the projected 7 million. I can’t rigorously justify that number — but, of course, neither could the pundit who is now saying 4 million. And, if I had time and space I’d prefer to do this analysis under a variety of scenarios, but, for now, the 2 million figure feels about right. And if I were betting on which side of the 2 million we will fall, it would be the lower side. What are the consequences? I can’t address all of them in a single blog entry — and trying to predict matters past 2014 gets very treacherous — but here are some.
And, for those of you who don’t want to read further, here’s the headline:
Insurance sold through Exchanges without medical underwriting — a central promise of the Affordable Care Act — is likely to implode in a significant number of states by 2015 while limping along in several others but providing little net desired decrease in the number of people without quality health insurance. The silver lining in this failure will be that the program will likely cost less than projected due to fewer number of people receiving subsidies, although this reduction will be partly offset by higher-than-projected subsidies to the insurance industry. Expect significant pressure to grow among supporters of the Affordable Care Act to use these net savings to increase the subsidies available to people buying coverage through the Exchanges and to lure insurers in the problem states back into the Exchanges.
1. The number of people without private health insurance may actually grow
This is so because, if 2 million obtain insurance through the Exchanges but more people (3.5 million is a prevailing estimate from sources ranging from Forbes to Jonathan Gruber) lose their current individual health insurance, that’s a net decrease in the number of insured. And if we add in the loss of 100,000 or so people from the Pre-Existing Condition Insurance Plan that likewise is terminated or those who heretofore were in various state high risk pools, there is a serious risk that the Affordable Care Act will have decreased the number with private health insurance.
In fairness, I have not taken Medicaid expansion into account. Some may see it as unfair to count just the number of people with private health insurance rather than the number with access to health care through private insurance or public schemes such as Medicaid. And, indeed, in those states in which Medicaid has been expanded — one can’t blame President Obama too much if other states choose not to participate — enrollment has outpaced enrollment in private plans at about a 4-to-1 ratio. This suggests, by the way, that people are willing to use a web site, even some clunky ones, to sign up for health care if they think the price is right.
The rejoinder to the argument that we should consider Medicaid, however, is that an awful lot of political energy and an awful lot of monetary investment has been predicated on healthcare reform benefiting more than just the poor but the middle class too. If it turns out the middle class has, net, been hurt by the 2014 features of Affordable Care Act or has paid a large investment for the 2014 features of a law that, net, does provide little marginal benefit, it’s fair to criticize the 2014 features of the Act for their architectural shortcomings. And, yes, I know all about staying on your parents’ policy until you are 26 and limitations on rescissions, but none of those pre-2014 “achievements” should count in assessing the 2014 record.
2. The number of people with quality health insurance may stay about the same
Yes, there will be people who formerly had no health insurance or who had rotten health insurance who, thanks to the 2014 aspects of the ACA, now have health insurance that covers more. There are many news accounts from pro-ACA forces providing evidence of this. Here’s one (although all the “success stories” are likely to have high medical claims); here’s another (notice again that the successes are likely to have high medical claims).
On balance, though, it’s quite believable that, many of the gains due to subsidization may be offset due to government offering only products that have more “features” than many people are willing to pay for. To analogize, consider a law that prohibited people from owning either a clunker car (defined somehow) or a car without four-wheel drive. The theory behind the law was that clunkers were unsafe and that four-wheel drive is sometimes useful: even if you don’t need it right now, you might need it or have needed it at some point. Fair enough. But such a law might not actually increase the number of people driving quality cars that fit their needs. Some people just can’t afford a new car. And others, who could afford a respectable car without four wheel drive and didn’t think they needed it right then (urban Floridians, for example), might simply decide not to get a car rather than use scarce marginal dollars for cars with features they don’t need. While such a result need not occur — it depends on all sorts of factors — my sense is that this is where we are heading with the Affordable Care Act and its fairly demanding and undifferentiated requirements for coverage in policies sold on the Exchanges.
3. Federal mandate tax payments may be a little bit bigger than expected for 2014
The Congressional Budget Office estimates this spring that the United States Treasury would receive about 2 billion dollars as a result of the individual mandate tax (26 U.S.C. § 5000A). That figure was premised, however, on a belief that 7 million people would enroll in the Exchanges. If only 2 million people get insurance through the Exchange that’s roughly 5 million fewer than anticipated who will not. There thus could be as many as 5 million more people who will have to pay the individual mandate (26 U.S.C. §5000A) and could lead to something like another $500 million in revenue next year.
Before we spend the money of 5 million more Americans who might have to pay extra in tax, however, we need to we need to subtract off two categories of people. (1) We should subtract off those who acquire faux-grandfathered policies created by President Obama’s recent turnabout to let people who like their (potentially cruddy) coverage keep it under some circumstances and not have to pay the individual mandate. (2) We should subtract off the small number of people who were projected to purchase policies on the Exchange but, because of poverty or otherwise, would not have had to pay the mandate tax had they failed to do so.
So, let’s say on balance that 3 million fewer people than projected pay the tax under 26 U.S.C. 5000A. It’s hard to know exactly what sort of tax revenue would be involved, but it is likely in excess of $285 million per year because each such person would have been responsible for at least a $95 per person penalty. (I know, I know, there are lots of complications because the penalty is difficult to enforce and because you only have to pay half for children, but then there are complications the other way in that $95 is a floor and one may have to pay 1% of household income). Why don’t we use round numbers, though, and say that the government might get about $300 million more in tax revenue for 2014 (although they may not get the money until 2015) due to lower-than-projected enrollments in the Exchanges.
4. Before the federal government subsidizes them, insurers in the Exchange will lose billions
4. Before consideration of various subsidies (a/k/a bailouts) of the insurance industry created by the Affordable Care Act, insurers could lose $2 billion as a result of having gambled that the Exchanges would be successful. Here’s how I get that figure. No one knows for sure but, if the experience under the PCIP plan is any guide, when about 1/3 of the projected number of people apply to a plan that is not medically underwritten, expenses per person can be more than double that originally expected. Even if we assume that experience under the PCIP is not fully applicable, given an enrollment 1/3 of that projected, it would shock me if covered claims were not at least 125% of that expected. If so, on balance that means that losses per insured could total roughly $1,000. If we multiply $1,000 per insured by 2 million insureds, we get about $2 billion. If the Exchanges lose money at the same rate as the PCIP, insurer losses could be upwards of $7 billion. Again, I make no pretense of precision here. I am simply trying to get a sense of the order of magnitude.
5. The federal government will subsidize insurers more than expected but insurers will still lose money
The Affordable Care Act creates several methods heralded as protecting insurers writing in the Exchanges from claims that were greater than they expected. One such method, Risk Corridors under section 1342 of the ACA, could end up helping insurers in the Exchanges significantly. But, if, as discussed here, enrollment in the Exchanges for 2014 is 2 million persons, the cost of helping the insurance industry in this fashion will be another $500 million for 2014. Risk Corridors, which have recently been aptly analogized to synthetic collateralized debt obligations (CDOs), requires the government to reimburse insurers for up to 80% of any losses they suffer on the Exchanges. It also imposes what amounts to a special tax (again of up to 80%) on profits that insurers may make on the Exchanges. The system was supposed to be budget neutral but, as I and others have observed, will in fact require the federal government to pay money in the event that insurer losses on the Exchange outweigh insurer gains. The basis for my $500 million computation is set forth extensively in a prior blog entry. It will only be more if, as discussed in another prior blog entry, the Obama administration modifies Risk Corridors to indemnify insurers for additional losses they suffer as a result of President Obama’s decision to let those with recently cancelled medically underwritten health insurance policies stay out of the Exchanges.
If claims are, as I have suggested 25% higher as a result of enrollment of 2 million, insurers will lose, after Risk Corridors are taken into account, about 9% on their policies. It would thus not surprise me to see insurers put in for at least a 9 or 10% increase on their policies for 2015 simply as a result of enrollment in the pools being smaller than expected.
The relatively modest 9% figure masks a far more significant problem, however. It is just a national average. Consider states such as Texas in which only 2,991 out of the 774,662 projected have enrolled thus far. If, say, Texas ends up enrolling “only” increasing its enrollment by a factor of 16 and gets to 50,000 enrollees, I would not be surprised to see claims be double of what was projected. Even with Risk Corridors, insurers could still lose about 24% on their policies. A compensating 24% gross premium increase, even if experienced only by that portion of the insurance market paying gross premiums, could well be enough to set off an adverse selection death spiral.
Footnote: For reasons I have addressed in an earlier blog entry, one of those methods, transitional reinsurance under section 1341 of the ACA is best thought of as a premium subsidy that induces insurers to write in the Exchanges. Because the government’s payment obligations are capped, however, the provision is unlikely to help them significantly if the cost per insured ends up being particularly high throughout the nation.
6. The federal government might save $19 billion in premium subsidies
The Congressional Budget Office assumed that premium subsidies would be $26 billion in 2014, representing a payment of about $3,700 per projected enrollee. If the distribution of policies purchased and the income levels of purchasers are as projected, but only 2 million people apply, that would reduce subsidy payments down to $7.5 billion. And if the policies sold in 2014 cost a little less than projected, that might further reduce subsidy payments. I think it would be fair, then, to estimate that low enrollment could save the federal government something like $19 billion in premium subsidies in 2014. This savings coupled with heightened tax revenue under 26 U.S.C. §5000A — could we round it to $20 billion — would be more than enough to cover insurer losses resulting from the pool being smaller and less healthy than projected.
The Bottom Line
I suspect my conclusion will make absolutist ideologues on the left and right equally uncomfortable. What I am wondering is if the Affordable Care Act might not die in 2015 with a giant imploding bang but rather limp on with a whimper. On balance, what we may well see if only 2 million enroll in Exchanges pursuant to the Affordable Care Act is a system that fails to function in some states and remains fragile and expensive elsewhere. On the one hand, it will be an expensive system because of the enormous overhead incurred in creating a highly regulated industry that provides assistance to a relatively small number of people. On the other hand, precisely because it will be helping far fewer people than projected, it might well cost significantly less than anticipated. I would expect this departure from what was projected to lead to two sorts of pressures:
(1) There will be a claim from ACA supporters that we can use the savings to increase subsidies or the domain of the subsidies beyond the 400% of Federal Poverty Line cutoff and thereby reduce the adverse selection problem that will already be manifesting itself.
(2) There will be a claim from ACA detractors that all of this confirms that, apart from ideological considerations, the bill is an expensive turkey and that, if the only way to save it is to impose more and more regulation and spend more and more money, it ought simply to be repealed.
There are many factors that could result in the estimates provided in this entry being quite wrong. I do not want to fall into the same trap as others who have ventured into this field and claim that there are not very large error bars around all of these numbers. And I do not believe the system is necessarily linear. It may be that small changes have cascading effects. Here are several reasons my estimates might be wrong.
1. The rules change in 2015. There are at least three significant rule changes in 2015.
a. The tax under 26 U.S.C. 5000A for not having government-approved health insurance increases significantly, going from the greater of $95 per person or 1% of household income to the greater $295 per person or 2% of household income. Insurers may therefore assume that enrollment will be greater in 2015 than in 2014. Some people will be pushed over the edge by the higher tax rate into purchasing health insurance. If so, insurers may feel less pressure to increase prices because they believe their experience in 2014 will not be repeated in 2015.
b. The employer mandate will presumably not be delayed again by executive order which may have two offsetting events: employers reducing the number of full time employees thereby adding more to the Exchanges or employers maintaining health insurance thereby reducing the potential pool for the Exchanges.
c. As discussed in an earlier blog entry, there will be a decline in transitional reinsurance now provided free to insurers in the Exchange which, in and of itself, will put significant pressure on premiums
Finally, this is a field where events just frequently overtake predictions. All of these predictions go out the window, for example:
a. if there is a major security breach in the government computer systems and people’s personal information is disclosed;
b. healthcare.gov continues to seriously malfunction during the critical pre-December 23 sign up period