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Member Research & Reports

Member Research & Reports

Texas A&M on Turmoil in Health Insurance Marketplaces

Last week marked the beginning of the third open enrollment period for individuals without health insurance to purchase plans through the marketplaces, or exchanges, established by the Affordable Care Act (ACA), the health care law commonly referred to as “Obamacare.”

[Photo: Dr. Michael A. Morrisey]

Since its inaugural enrollment period for 2014 health coverage, the ACA has encountered its share of complications that increasingly threaten the longevity of the government-run marketplaces and coverage certainty among private insurers and consumers.

Dr. Michael A. Morrisey, professor and head of the department of health policy and management at the Texas A&M School of Public Health, released a policy brief with the Leonard Davis Institute for Health Economics at the University of Pennsylvania, outlining the turmoil that has challenged health care in the United States.

As the brief discussed, dominant insurers in each state opted to offer plans through the ACA during its first enrollment period. Yet, due to uncertainty about how the marketplaces would develop, many insurers initially set their premiums higher than they might have to minimize losses from the uncertainty.

“The first year experience of the ACA made clear that premiums, not quality of coverage nor out-of-pocket expenses, drove the purchasing decisions of consumers,” Dr. Morrisey said. “This led to lower-than-expected enrollment numbers.  These initial enrollees also tended to be less healthy than even the plans anticipated.”

Many companies then opted to offer narrow-network plans, which lower insurer costs through negotiated prices with hospitals and physicians. Narrow networks allowed patients to visit a fairly limited group of health care providers.

Some insurers reduced their premiums in an effort to appeal to healthier individuals. This low-premium strategy brought in more unhealthy individuals than predicted, while still failing to entice enough healthy individuals to purchase insurance through the marketplaces. Ultimately, the insurance companies experienced unsustainable shortfalls in 2015 for their exchange-related business.

As more thorough data of the ACA’s impact emerged during 2016, insurers began realizing the magnitude of their losses and opted to exit the exchanges entirely in many states or altered the types of plans they offered, generally by narrowing options. Others announced they were increasing premiums to offset the costs of serving the disproportionately higher utilizing individuals who enrolled.

This was troublesome news for many Texans.

Dr. Morrisey cited “adverse selection,” in which a customer delays purchasing coverage until they deem necessary, as the principal contributor to the substantial problems endured by many states since 2014.  “Two features of the ACA are key to understanding the dynamics of the marketplaces: the ban on medical underwriting—in which the ACA prohibited insurance companies from using health history to determine an applicant’s coverage — and the mandate for coverage,” he said.

As a result of medical underwriting, younger, healthier individuals were charged higher premiums to help compensate costs incurred by older and less healthy individuals. Coupled with the guarantee that coverage could be obtained if a person became ill, many healthy individuals, who the ACA relied on to sustain the exchanges, forwent coverage.

“Not enough healthy individuals enrolled through the ACA exchanges, despite the penalties for failing to enroll,” Dr. Morrisey added. The annual individual mandate penalty, which is the amount individuals must pay for not purchasing any health insurance, increased from $95 in 2014 to $695 in 2016. Experts and policymakers are watching to see if the sharp hike in penalties will prompt the uninsured to enroll.

For remaining insurers to prevail in the exchanges, Dr. Morrisey noted that they have two options: “aggressively offer narrow network plans in the hopes of attracting the elusive healthy enrollees while cutting costs” or “raise premiums substantially to reflect the future losses they anticipate from disproportionately unhealthy enrollees.”

Morrisey provided a number of measures for policymakers to help rectify the ACA, ranging from doing nothing so the insurance companies can attempt to stabilize care through premium and coverage adjustments to establishing a public option, which would essentially be government insurance that would allow enrollees to sign up for Medicare or model ACA-plans similar to Medicare’s structure.

“To be successful, of course, a public option has to have a competitive advantage over private plans,” Dr. Morrisey said. “It could have lower premiums because it pays providers at Medicare rates, for example, or it could offer lower premiums because it provides additional subsidies to enrollees.”

He also proposed increasing penalties for non-enrollment, scaling back waivers for late enrollment, and expanding the age corridor, which caps the difference in premiums between young and old enrollees. By introducing a high-risk pool to the marketplace, Dr. Morrisey said that those with serious health conditions could gain coverage comparable to existing ACA plans, and taxpayers would directly pay for the losses generated by the claims likely to be incurred.

Taxpayer subsidies for insurers whose claims were greater than anticipated are set to expire at the end of 2016.

“Reintroducing these subsidies could stabilize the marketplace by potentially reducing premium increases and encouraging re-entry of insurers who withdrew from the exchanges,” Dr. Morrisey commented.

When people across the country begin adjusting to their 2017 coverage and subsidies for insurance companies expire, President Barack Obama will no longer have authority to determine the future of his signature health care law. As no political party is expected to gain a veto-proof majority in Congress, the ACA may likely go the way of the next president’s proposals.

“None of these proposals are easy,” Dr. Morrisey said, “either healthy folks pay more through greater penalties, unhealthy folks pay more through higher premiums, or taxpayers pay more through greater subsidies.”