All eyes may be focused on the upcoming presidential and congressional elections, but in a little more than one week's time the open enrollment period for the Affordable Care Act, which you likely know better by its shorthand name Obamacare, is set to kickoff.
In each of the three previous enrollment periods we've witnessed total enrollment levels increase. This is probably due in part to some combination of improved understanding of Obamacare and the rising penalties (officially known as the Shared Responsibility Payment) associated with not purchasing health insurance according to the individual mandate.
A staggering number of people could be looking for a new health plan in 2017
But as we head into the 2017 open enrollment period, there's something eerily familiar for consumers to the 2014 open enrollment period: plan discontinuances.
One of President Obama's pledges when the ACA was passed in 2010 was that Americans would be able to keep their doctors. However, that really wasn't a choice that was up to the American public. Instead, it was up to insurers to modernize and beef up their existing health plans to meet the new minimum essential benefit requirements set forth by Obamacare. When a number of insurers simply chose not to update some of their plans for the ACA marketplace, millions of Americans were displaced from potentially longtime plans and forced to seek out new plans, along with new primary care physicians in many cases.
Heading into 2017 we could be looking at a similar story, but for different reasons.
According to Bloomberg, at least 1.4 million people in 32 states will be looking for new healthcare plans this year because their old plans will cease to exist after Dec. 31, 2016. As a reminder, 11.1 million people remained enrolled and paying customers as of March 31, 2016 per the Centers for Medicare and Medicaid Services, meaning more than 1 in 10 Obamacare enrollees are being displaced.
Health plan choices are shrinking
The reason at least 1.4 million people are being forced to look for another health plan in 2017 is twofold.
First, the risk corridor, which was a type of risk-pooling fund designed to collect money from insurers who were overly profitable and redistribute those funds to insurers who lost excessive amounts of money from pricing their premiums too low, was completely ineffective. Insurers wound up requesting $2.87 billion in disbursements, but just $362 million wound up being paid out.
While not a huge issue for big insurance companies, the lack of risk corridor protection proved decisive for 17 of Obamacare's 23 approved healthcare cooperatives, which closed their doors due to excessive losses. These co-ops attempted to use low premium prices as a lure to attract a large number of enrollees, but they (and larger health insurers for that matter) simply didn't count on their enrollees being sicker and more costly than anticipated. When they didn't get the financial protection they'd been counting on, about three-quarters of the co-ops were forced to close their doors.
The other issue for consumers is that three of the nation's five largest insurers have decided to significantly pull back on their coverage in 2017. Following a cumulative loss expected to near $1 billion from Obamacare in 2015 and 2016, UnitedHealth Group (NYSE:UNH) is reducing its coverage from 34 states in 2016 to just three in 2017.
In similar fashion, after the Justice Department put the kibosh on a potential Aetna (NYSE:AET) and Humana (NYSE:HUM) merger which would have significantly reduced costs for the two companies and likely allowed them to expand their Obamacare marketplace offerings, the duo announced big cutbacks on their coverage. Humana is reducing its coverage by close to 90%, with plans being offered in 156 counties in 2017 as opposed to 1,351 this year. Meanwhile, Aetna is cutting nearly 70% of its coverage with a plan to offer health insurance in just 242 counties next year.
In other words, health plan choices are shrinking for consumers in what should be a transparent purchasing environment. Furthermore, fewer choices could give the remaining insurers even stronger pricing power, hurting middle-class families that make too much to qualify for subsidies.
Two possible fixes for Obamacare
In some respects Obamacare is finding its mark. It has indeed delivered a sizable reduction in the uninsured rate, which was the intention of its passage all along.
However, there are clear cut concerns with Obamacare that include the fear of losing one's plan, as well as premium inflation that's far and away higher than wage growth. There may be two possible solutions to these concerns, though it's unlikely the American public would favor them.
1. Adjust the SRP to more accurately reflect annual bronze-level premium costs
First, as has been discussed previously, the biggest issue with premium inflation likely has to do with a lack of young adult enrollment. Young adults are often healthier than older adults, meaning they're less likely to head to the doctor or contract costly illnesses. Enrolling these healthier members of society is therefore imperative to the risk-pooling of medical costs for insurers. Unfortunately, not enough young adults have enrolled. The reason? The Shared Responsibility Payment (SRP) doesn't accurately reflect the cost of purchasing a health plan.
Despite the penalties associated with the SRP rising from the greater of $95 or 1% of modified adjusted gross income (MAGI) in 2014 to the greater of $695 or 2.5% of MAGI in 2016, the average SRP penalty is still well below the annual cost of a cheaper bronze-level plan. The Kaiser Family Foundation estimates that the average SRP in 2016 will be $969. Meanwhile, most bronze plans cost $200 or more a month, leading to a $2,400 annual cost. If given the choice, healthier individuals are opting to save money by not purchasing health insurance and paying the SRP. Until the SRP is more reflective of actual annual healthcare costs, young adult enrollment could remain subpar, and premium inflation above average.
2. Offer more restrictive networks
The other potentially unpopular solution is to allow insurers to substantially narrow down their networks. In other words, allow insurers to confine their members to a small network of physicians to ensure that they're getting medical care in the cheapest but most efficient manner possible. Doing so helps keep insurers' costs down, which could in turn be passed along in the form of lower premium inflation.
Furthermore, if insurers stuck to narrower networks and were able to turn a profit, and consumers embraced the idea, it's quite possible we could see competition return. Constant losses are what chased UnitedHealth, Aetna, and Humana out of most states or counties, and the prospect of sustainable profits could bring them right back.
A recently published study from researchers at the University of Pennsylvania appeared to back up this assumption. Researchers looked at low-cost silver plans across the country in 2014 and found that those with narrower networks had 6.7% lower premiums than plans that offered larger networks. Consumers may appreciate having abundant physician choices, but it may not be conducive to the sustainability of Obamacare.
Only time will tell whether these fixes or other proposed ideas can alleviate consumers' concerns and make Obamacare work for America over the long run.