The real reason Aetna is bailing on ObamaCare

Aetna has finally washed its hands of ObamaCare entirely.

The health insurance giant was originally in 15 of the state exchanges set up by the Affordable Care Act. But as it racked up hundreds of millions in losses, Aetna pulled out of nearly all of the exchanges. It abandoned the final two — Delaware and Nebraska — this week, leaving both states with only one insurer apiece on their exchanges in 2018.

Aetna is hardly alone in bailing on ObamaCare. Humana has also said it will leave ObamaCare's markets entirely. Other insurers have pulled out of various individual states, or have requested significant premium hikes for next year.

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Needles to say, this has all brought renewed claims from conservative critics that ObamaCare is doomed. "The death spiral with disastrous ObamaCare continues," President Trump crowed on Twitter.

A death spiral occurs when insurers hike premiums to cover disproportionately high costs. Those hikes drive away more healthy customers, leaving the insurers with even less revenue and sicker and costlier remaining customers. Then the cycle continues over and over again until the insurers just abandon the market.

That's probably not what's happening to ObamaCare.

The Congressional Budget Office — certainly a more sober policy analyst than Trump — said it expects ObamaCare's markets to stabilize despite insurers' troubles. Other health policy experts also say this is more likely a temporary market correction that will ultimately settle down.

But there's another possible explanation for Aetna's decision to bail on ObamaCare. And that one is legitimately worrying.

ObamaCare provides subsidies to help people pay their health insurance premiums. ObamaCare also reduces cost-sharing — the out-of-pocket spending on deductibles and copays that insurance customers are responsible for. If you're below 250 percent of the federal poverty line, ObamaCare mandates that insurers lower your cost-sharing burden. On its own, that rule would threaten insurers' financial stability. So ObamaCare also pays insurers subsidies directly to make up for the higher costs: $7 billion in 2016 alone.

Lawmakers disagree about whether the text of ObamaCare technically appropriated that money in the correct manner. House Republicans field a lawsuit arguing the payments were unlawful, and a judge ruled in their favor. Then the decision was put on hold so the Obama administration could file an appeal.

Enter the Trump administration.

All the new White House has to do is drop the appeal, and the previous ruling would take effect, canceling the cost-sharing subsidies. All of a sudden, insurers would have to keep capping the costs they pass along to customers without receiving anything back from the feds. A lot of analysts say that looming possibility is making insurers especially jittery.

"[Aetna's] decision is not a surprise given continued uncertainty about market stability and whether cost-sharing subsidies will continue to flow," said Michael Newshel, an Evercore ISI analyst, in a note to investors. "We are seeing a number of insurers expressing concern over the political and regulatory uncertainty they face next year," said Kaiser Family Foundation associate director Cynthia Cox. In fact, Anthem, another ObamaCare insurer, explicitly said its continued participation depends on the cost-sharing subsidies.

Even some Congressional Republicans seem inclined to fix the problem by just changing ObamaCare's language to explicitly authorize the payments. During recent negotiations over next year's budget, there was chatter of doing that in exchange for some concessions from Democrats. But then Trump's White House apparently intervened to push for maintaining the status quo — the cost-sharing subsidies will continue, but under a cloud of uncertainty that Trump could cancel them at any moment. So it wasn't included in the recent budget deal.

This makes absolutely no sense as either policymaking or political strategy. Holding this sort of sword over everyone's head, and actively maintaining the threat, makes ObamaCare's collapse more likely. Trump seems to think voters will blame Democrats in such an event. But that flies in the face of polling and political science: When bad things happen, Americans hold the party in power responsible.

And remember, this isn't the only uncertainty insurers are dealing with. There's also the (unlikely but real) possibility that Republicans will succeed in replacing ObamaCare with something much worse. And there are Trump's executive orders, which — while they can't rewrite the law — can sow a lot of confusion about enforcement of it. But the fate of the cost-sharing subsidies is by far the biggest uncertainty in the minds of insurers themselves, because it involves such a big and immediate financial impact.

I usually think psychological explanations or worries about uncertainty play too big a role in how people analyze economics. For the most part, it's a world shaped and driven by big, impersonal, structural forces. But in this case, the structural forces pushing ObamaCare to survive and pushing it to fail seem pretty evenly matched. Even something as mercurial as the bullying personality of our commander-and-chief might be enough to tip it all over the cliff.