ObamaCare is not doomed
Aetna leaving a bunch of exchanges isn't good news. But it doesn't mean the end of ObamaCare.
You probably heard that ObamaCare was whalloped with another bit of bad news. Late Monday, health insurer Aetna announced that in 2017 it will pull out of almost 70 percent of the counties where it offers health plans through the ObamaCare exchanges.
This makes Aetna the third major insurer, following UnitedHealth Group and Humana, to announce major drawdowns in their participation on the exchanges — the marketplaces through which ObamaCare offers a menu of private health insurance plans and subsidies to people who can't get coverage elsewhere. As a result, the Wall Street Journal reported, states like Oklahoma, Alabama, Wyoming, and Alaska are all likely to be stuck with just one health insurance provider on the exchange marketplaces next year.
So is this just the latest sign that ObamaCare's exchanges are in crisis? Not so fast.
"I don't think it's a big deal," Timothy Jost, a health policy expert and professor at the Washington and Lee University School of Law, told me. "I think insurers are going to come and go. It's a competitive market that's been created through the Affordable Care Act, and there will be some winners and losers."
It's worth remembering that enrollments in the exchanges only began in October of 2013. So these drawdowns might just be the growing pains of a relatively young market, in which providers are still finding their footing and figuring out their strategies, Jost said. The exchanges gave insurers a new pool of customers, and predicting how much they'd have to charge while still remaining profitable was tricky. So some insurers probably under-priced initially.
"I think what we're seeing for 2017 is a one-time pricing correction," added Topher Spiro, the vice president of health policy at the Center for American Progress, a liberal think tank aligned with the White House. Spiro also told me that many insurers like Aetna entered the exchanges by trying to gain market share by under-pricing their competitors. "That business strategy didn't end up working too well for them, so now they're correcting for it."
Now, there are ways to make sure insurers' revenues exceed their costs without increasing premiums. The first — upping the subsidies — would require new legislation from an uncooperative Congress, so it's probably a nonstarter. Another route is to simply move money around between insurers, from ones who are doing well to ones who are struggling. But ObamaCare already does this — it's just been hampered from doing it effectively.
The problem comes down to the three policy tools that ObamaCare uses to shift money around: risk adjustment, risk corridors, and reinsurance. They're actually more straightforward than they sound. Risk adjustment moves money from plans whose customers are healthier than average to plans whose customers are sicker than average. Risk corridors move money from plans that see unusually high gains and distribute it to plans that see unusually low gains. And reinsurance uses fees on all the participating insurers to create a fund, that then gives money to plans whose customers exceed a certain cost.
ObamaCare's trouble is that both the reinsurance program and the risk corridors are scheduled to expire in 2016. On top of that, in a recent budget law, Republicans insisted on preventing any general government spending from backstopping the risk corridors with extra money, starting in 2015. That limited its ability to be a stabilizing influence.
"I think the reinsurance program phased out way too quickly," Jost continued. And "Congress defunding the risk corridor program has had a big impact on the number of competitors."
A comparison to Medicare Part D, which was created in 2003 under the Bush Administration, is educational. That program also used government subsidies to help people buy private insurance coverage — in this case, drug plans for retirees. Medicare Part D also included risk adjustment, risk corridors, and reinsurance. There were slight differences with ObamaCare, but the basic idea was the same. And its reinsurance program is actually paying a much bigger portion of claims than the reinsurance program in ObamaCare ever did. Jost surmised that, had these three programs in ObamaCare been designed more along the lines of Medicare Part D, the last few years would probably have gone smoother for insurers.
One last interesting wrinkle is that Aetna will continue offering insurance plans outside the exchanges in the vast majority of places whose exchanges it's departing.
That's probably because if an insurer leaves a market altogether, it can't come back for 5 years. But if it keeps one foot in the market, it can jump back into the exchange whenever it want. Furthermore, new regulations under ObamaCare mean that the leeway insurers have to fiddle with benefits and premiums isn't that much greater outside the exchanges than inside them. So if there's business logic to staying in the individual market, there's business logic to staying in the exchanges. Jost suspects Aetna is just biding its time to jump back in.
Spiro also pointed to some statements by Aetna's top brass in April which painted a much rosier picture of the company's finances on the exchanges, and some of the states they just pulled out of. A merger between Aetna and Humana was also recently scuttled by government regulators. So the degree to which Aetna's pullout from the exchanges was governed by the economics of the markets may be overdramatized compared to the role played by their own business decisions.
All of which is to say, Aetna's departure still isn't great news for ObamaCare. But is it a crisis? "I don't think we're there yet," Jost concluded.