The proverbial clock is ticking. Once Donald Trump becomes president in January, it seems a matter of when, not if, the Affordable Care Act, America's health law of the land, will be repealed or significantly amended.
One of the key talking points of Trump's campaign, and of the Republican Party in general, is the idea of repealing and replacing the landmark ACA, which President Obama signed into law in 2010 and was appropriately nicknamed "Obamacare." A clear pathway to amending or repealing the law has been elusive until now. With a Republican as president, and both houses of Congress staying Republican in the November elections, a repeal is a real possibility. Even if the Senate can't muster enough votes to completely repeal Obamacare, a simple majority could lead to major changes that strip out many of its core components.
For health insurance providers, the likely demise of Obamacare brings mixed emotions.
Insurers won't miss these aspects of Obamacare
On one hand, most insurers aren't going to miss the hefty losses brought about by participating on individual ACA marketplace exchanges. UnitedHealth Group (NYSE:UNH), the largest insurer in the country, announced that it was pulling out of 31 of the 34 states it was operating in for 2017 because its ACA plans had generated aggregate losses totaling nearly $1 billion between 2015 and 2016. Big ACA-based losses were also felt by Aetna (NYSE:AET), which has lost a cumulative $430 million on individual marketplace plans since inception, and Humana (NYSE:HUM). Aetna and Humana, which had attempted to merge, but were denied by federal regulators, are cutting back on their county-based coverage by nearly 70% and almost 90%, respectively, in 2017.
Three reasons, in particular, led most insurers to lose money on Obamacare's marketplace exchanges.
First, there was a mandate in place that required insurers to accept all consumers, regardless of whether they had pre-existing medical conditions. Before Obamacare, insurance companies were afforded the luxury of picking and choosing whom they wanted to insure. This way they could avoid potentially high-risk patients with costly or chronic ailments. Under Obamacare, insurers can't turn consumers away anymore, so that aforementioned group of sicker patients who'd previously been shut out of the system came flooding back in. These patients are generally sicker and costlier than your average consumer, leading to higher medical expenses for health-benefit providers.
Secondly, the Congressional Budget Office (CBO) let insurers down with its enrollment estimates. Less than two years ago, the CBO had been forecasting that 21 million paying members would be enrolled by the end of 2016. However, the latest projection from the CBO calls for just 10 million paying members by year's end. The CBO was way off in estimating how many people were uninsured before Obamacare's implementation, and it also overestimated how many workers would unenroll from employer-sponsored care in favor of Obamacare. In other words, insurers were left to fight over a much smaller patient pool than expected.
Finally, the risk corridor was mostly a bust. You could reasonably argue that the risk corridor punished overly profitable ACA insurers by requiring they divert a percentage of their profits to the risk-corridor fund. In turn, insurers with excessive losses that had priced their premiums too low wound up receiving only a small fraction of the money they'd requested. Ultimately, numerous low-cost healthcare cooperatives closed their doors, and the insurers that were profitable were only nominally so thanks to the risk corridor.
But they'd prefer to keep these Obamacare provisions
On the other hand, there are certain aspects of Obamacare that insurers don't want to go away. In particular, insurers have expressed strong interest in keeping two particular components of Obamacare intact.
Not surprisingly, health-benefit providers want a commitment from the Trump administration that it'll have a plan in place to cover lower-income individuals and families that are currently being supported by the Advanced Premium Tax Credit (APTC) and/or cost-sharing reductions (CSRs).
According to the latest update from the Centers for Medicare and Medicaid Services, 84% of ACA marketplace enrollees qualify for the APTC, which lowers their monthly premium, while 56% qualify for CSRs, which make copays, coinsurance, and deductibles more affordable. If a reconciliation bill were to remove the APTC and CSRs, medical care would probably be unaffordable for a large swath of low-income individuals and families.
Along those same lines, 31 states chose to take federal funds and expand their Medicaid programs. It's probable that Medicaid expansion could be rolled back, too, if Obamacare is repealed. In total, insurers have suggested that in the neighborhood of 22 million people could suddenly find themselves uninsured if Trump and Congress act too quickly, or if they don't have a plan in place to cover lower-income individuals and families.
From the perspective of an insurance company, if roughly 22 million people were suddenly taken out of the potential pool of members, they're probably going to head for the exit and not look back. Even though government-sponsored payments don't lead to the same juicy margins as more well-to-do consumers who can afford healthcare, the sheer guarantee of being paid by the federal government made the APTC and Medicaid expansion worthwhile for insurers.
The other provision insurers would like the Trump administration to keep or modify minimally is the individual mandate. The individual mandate is the actionable component of the law requiring that consumers purchase health insurance or pay a penalty come tax time. This penalty is known as the Shared Responsibility Payment, or SRP, and in 2016 it's the greater of $695 or 2.5% of your modified adjusted gross income.
The argument from insurers is simple: They need healthier young adults to enroll to help counteract the higher medical costs of accepting people with pre-existing conditions. The SRP is in place to provide the needed motivation to young adults who might otherwise choose to remain uninsured.
However, the SRP also has a pretty big issue. According to estimates from the Kaiser Family Foundation, the average household SRP in 2016 will be $969. While that might sound like a lot, it's peanuts compared to the $2,400 to $3,600 most healthy young adults could pay for an unsubsidized bronze plan. Even with the possibility of tax deductions for premiums paid, it's still cheaper to remain uninsured and pay the penalty for millions of Americans. Insurers want to see some sort of coercive tactic used to get healthier young adults to enroll in the Republican health plan.
One bit of solace for consumers and insurers
Regardless of whether you're a fan of Obamacare, one thing looks fairly certain: Modifying or repealing Obamacare isn't going to be an overnight affair.
Insurers would like to see these two aforementioned Obamacare provisions kept, but what they value most of all is having ample time to adjust their coverage options once healthcare changes are announced. It would appear likely that any Republican-led efforts to modify Obamacare or repeal it entirely would take place over at least a two-year period. That means consumers aren't simply going to wake up the next day after legislation is passed without health insurance coverage. Implementing a new plan over a few years gives the new administration the time needed to roll out incentives for healthier young adults and lower-income folks to maximize enrollment and minimize the uninsured rate.
It's still unclear exactly what healthcare reform is going to look like in America, but with the sands of time ticking down until Trump takes office, expect some of the industry's biggest names to chime in with suggestions in the weeks and months to come.