Since its inception, the Affordable Care Act has been a controversial law. Though it has undeniably lowered the uninsured rate to record lows -- Gallup pegs the uninsured rate at just 11% as of the first quarter of 2016 -- the ACA, which is more affably known as Obamacare, has seemed to fail consumers in other respects.
Obamacare is coming up short for the consumer
For example, when President Obama first introduced the ACA, he touted the ability of consumers to keep their current health plan. However, new minimum essential benefits requirements for ACA plans pushed millions of people off their pre-Obamacare plans, potentially forcing them to change doctors.
The emphasis of the individual mandate also hasn't sat well with the consumer. The individual mandate is the actionable component of Obamacare that requires individuals to purchase health insurance or pay a penalty come tax time. Since 2014, the first year of Obamacare's full implementation in the individual insurance market, this penalty, known as the Shared Responsibility Payment (SRP), has increased from the greater of $95 or 1% of modified adjusted gross income (MAGI) to the greater of $695 or 2.5% of MAGI in 2016. Long story short, consumers don't like being forced to buy health insurance, and they especially don't like paying a penalty for choosing not to purchase it.
But the biggest issue for Obamacare has always been whether it would be sustainable on a cost basis.
On paper, Obamacare looked as if it would go a long way toward curbing premium inflation. It was designed to allow consumers to shop for and compare health plans in a transparent manner through their state's marketplace exchange. The presumption was that if consumers had more transparent information, they would make smarter purchasing decisions.
Obamacare also had certain incentives built in to encourage participation by plenty of insurance companies, with the idea being that more competition would result in competitive prices for the consumer. The risk corridor was a type of risk-pooling introduced with the ACA that, in a nutshell, required overly profitable insurers to contribute to a fund that would be paid out to ACA insurers that were losing excessive amounts of money. The financial backdrop was expected to draw in new participants, ultimately giving them a year or two to right the ship if they priced their premiums too low.
Unfortunately for the consumer, Obamacare's premium inflation curbs have mostly failed.
Why premium inflation is getting out of hand
To begin with, fewer young adults than expected have enrolled in Obamacare. Young adults are typically healthy and frequent the doctor a lot less, so their premium dollars are critical to offsetting the higher costs of treating older and sicker patients. The problem here could very well be that the SRP simply isn't high enough to coerce young adults to enroll. The Kaiser Family Foundation estimated that the average SRP in 2016 could be $969. Now compare that to the lowest-cost bronze plan in each state which could be $2,400 for the year -- and that's on the low end. The two costs aren't even close, and young adults could simply be choosing the cheaper path, which in this case means not buying health insurance.
Also, adverse selection has been a problem for insurers. Prior to the implementation of Obamacare, insurers could deny coverage to consumers with pre-existing conditions. However, Obamacare's rules dictate that insurers can't pick and choose who they'll cover. This has allowed sicker individuals who previously had no access to insurance to enroll, which is great for those patients, but has pushed up medical expenses for insurers.
The risk corridor has been an utter disaster, too. According to Highmark, a regional insurer currently suing the federal government over the risk corridor, the federal government had initially promised to provide funding for the risk corridor if there weren't enough funds generated from overly profitable insurers to pay those insurers with big losses on the Obamacare exchanges. It later backed off those claims, instead choosing to run the risk corridor as a budget-neutral entity. The result was that only $362 million was paid out to money-losing insurers out of $2.87 billion in funds requested.
Among the most reliant on the risk corridor were low-cost insurers, such as Obamacare's healthcare cooperatives, or co-ops. Because the risk corridor failed to provide the financial protection that insurers assumed was a guarantee, 16 out of 23 approved co-ops have closed their doors, or announced their intention to close their doors, by the end of the year.
Signs of a death spiral?
This year, according to an analysis by the Kaiser Family Foundation of the lowest-cost-silver plans in 14 major cities, as well as the publicized insurer rate requests of nearly all 50 states (note, many of these rate requests haven't been finalized with their state's Office of the Insurance Commissioner), Obamacare premiums could rise by an average of 10%, or more. This huge spike in premiums has some pundits suggesting we could be on the verge of a "death spiral," or in simpler terms, a situation where costs rapidly rise, product offerings shrink, and low-risk policyholders run for the sidelines.
Just this past week we witnessed our third instance of a national insurer announcing that it was scaling back its Obamacare individual market coverage after hefty losses of approximately $300 million per year. On Monday, Aetna (NYSE: AET) announced that it would be pulling out of all but four states (Nebraska, Delaware, Iowa, and Virginia) almost entirely in the upcoming year, servicing just 242 counties. That's a 69% drop from the 778 counties where it's offering health insurance in 2016. Here are a few of the key points issued from Aetna's press release on Monday:
Following a thorough business review and in light of a second-quarter pre-tax loss of $200 million and total pre-tax losses of more than $430 million since January 2014 in our individual products, we have decided to reduce our individual public exchange presence in 2017, which will limit our financial exposure moving forward. More than 40 payers of various sizes have similarly chosen to stop selling plans in one or more rating areas in the individual public exchanges over the 2015 and 2016 plan years, collectively exiting hundreds of rating areas in more than 30 states.
Providing affordable, high-quality healthcare options to consumers is not possible without a balanced risk pool. Fifty-five percent of our individual on-exchange membership is new in 2016, and in the second quarter we saw individuals in need of high-cost care represent an even larger share of our on-exchange population. This population dynamic, coupled with the current inadequate risk adjustment mechanism, results in substantial upward pressure on premiums and creates significant sustainability concerns.
But this extends well beyond Aetna. Earlier this year, UnitedHealth Group (NYSE:UNH) announced that losses of around a half-billion dollars in 2016 from its ACA plans would necessitate a pullback in its 2017 offerings. When all was said and done, UnitedHealth said it was reducing its offerings to just three states (New York, Nevada, and Virginia) in 2017 from 34 in 2016.
The same story was heard from Humana (NYSE:HUM). The interesting thing about Humana's updated coverage guidance is that it came on the same day the U.S. Justice Department announced that it would block the proposed merger between Aetna and Humana. Aetna had suggested that the cost-savings from combining would allow it to expand its ACA offerings into new states, but the DOJ putting the kibosh on the merger caused both Humana and Aetna to pull back -- albeit Humana did so immediately. Humana is scaling back its coverage from 19 states in 2016 to roughly 11 in 2017, but the real story is that it's cutting the number of counties it's offering coverage in from 1,351 this year to just 156 next year. That's close to a 90% decline.
Without getting into nitty-gritty statistics, the 16 co-ops' failures, coupled with the reduced coverage from three of five national insurers, could result in around 2 million people who are forced to seek a new plan next year. On the flipside, margins for Aetna, UnitedHealth, and Humana should be expected to rise, even with significantly reduced premium revenue from the ACA.
The only thing preventing a possible death spiral
Rapidly rising premiums and fewer product choices for the consumer have every hallmark of the beginnings of a death spiral.
However, the one aspect of Obamacare that could provide a saving grace and keep the program from going over the cliff is the high percentage of enrollees receiving Medicaid under the Medicaid expansion, or the Advanced Premium Tax Credit (APTC).
According to data from the Centers for Medicare and Medicaid Services, 85% of all enrollees are receiving some sort of subsidy to help lower their premium cost and/or copay/coinsurance/deductible. Consumers receiving a subsidy are far less likely to drop their coverage, and they're far more likely to be able to absorb large increases in monthly premiums since they're only paying for a fraction of what non-subsidized premium costs would be. With a subsidy, consumers are paying an average of $113 a month in 2016. Without the APTC, the average consumer is exposed to a $408 a month premium.
As long as a majority of enrollees continue to receive a subsidy, the program appears to be sheltered from a death spiral. But it's still unclear whether or not the program can survive over the long-term if fewer low-risk policyholders are enrolled.