The status of the market for individual health insurance has attracted considerable scrutiny recently. Premiums are high and rising, and insurers are exiting the market. Some believe that this is evidence of a death spiral in the market, reflective of inherent problems with the Affordable Care Act (ACA). Yet, other recent reports suggest a turn toward insurer profitability and market stability. Where does the truth lie?
The typical hallmarks of a death spiral are risk pool deterioration and declining enrollment, which drive rising premiums, which in turn drive greater beneficiary disenrollment. However, deterioration of the risk pools has been modest—on the order of 5 percent, on average, between 2014 and 2015—though this varied widely, with risk increasing by as much as 17 percent in some areas and declining by 8 percent or remaining stable in others. Enrollment has also been relatively stable, although, in 2017, the number of consumers selecting a plan during the open enrollment period decreased slightly, by 4 percent. The telltale signs of a death spiral seem to be absent.
Yet, the market is far from healthy. Between 2016 and 2017, the Kaiser Family Foundation reports that many locations experienced huge premium increases. For example, the unsubsidized premium for the second-lowest silver plan increased 145 percent in Phoenix, AZ, 71 percent in Birmingham, AL, and 67 percent in Oklahoma City. Overall, for 2017, Assistant Secretary for Planning and Evaluation estimated that the national average premium increase would be 22 percent. Though only some proposed rates are known for 2018, thus far, they appear to be comparably high. While the ACA’s premium subsidies dampen the impact of these increases, and thus the opportunity for a death spiral to result, these significant premium increases put health insurance out of reach for the unsubsidized middle class who rely on the individual market. Further, the outlook for plan participation in 2018 is worsening. Currently, 20 counties are facing the prospect of having no individual market plans available, and this number could still grow (or shrink) as issuers finalize their participation agreements later this summer.
How to Support the Individual Insurance Market
What’s driving the instability in this market, and what can be done to improve it for the long term? In part, the current market status can be traced back to a series of regulatory and implementation failures that served to undermine the market including lax enforcement of the individual mandate, incomplete payouts to insurers, and regulatory uncertainty. Looking ahead, a set of regulatory and legislative changes, alongside the assurance of operational and regulatory certainty for issuers, could put it back on track.
Specifically, three basic pillars are necessary to improve the situation:
1. Sound rules to encourage individuals to enroll in coverage and remain enrolled
The medical expenses of the beneficiaries in the market exceeded initial expectations. Prior to the ACA, average medical loss ratios (MLRs)—the percent of premiums spent on covering medical costs—for insurers in the individual market were in the low to mid 80s. In 2014 they jumped to 98 percent, followed by 103 percent in 2015 and 96 percent in 2016. MLRs this high indicate that insurers were losing money, on average, implying that the risk pool was considerably worse than insurers had anticipated. In fact, a significant portion of the increase in premiums since 2014 (on the order of 15 percentage points) reflects a repricing to levels appropriate for the beneficiaries who actually enrolled. Current preliminary estimates suggest vastly improved MLRs, consistent with the view that premiums have adjusted to better reflect risk, reducing likely future premiums spikes.
While some of the instability in the market is arguably related to uncertainty associated with a new market, it also partially reflects details around implementation of the ACA that need to be addressed. Specifically, the mandate was weak because of the small penalty size, the large number of exceptions, and lax enforcement. Additionally, many of the early regulatory decisions created opportunities for beneficiary “gaming” of enrollment rules, potentially driving adverse selection in the market. For instance, the current 90-day grace period—meaning coverage isn’t formally terminated until about three months of premiums have gone unpaid—effectively allows individuals to receive the benefit of 12 months of coverage while only paying premiums for the first nine months of the year. This may also inflate premiums. Eighty-five percent of exchange beneficiaries on the individual market could take advantage of this strategy, though it is far more likely to be employed by those not needing care, resulting in adverse selection effects.
Similarly, there has been controversy about the special enrollment periods (SEPs), and some have suggested higher risk among SEP beneficiaries is evidence of abuse, and a need to tighten enrollment rules. Analyses show that consumers who enroll during special enrollment periods—who account for about 17 percent of total enrollment—have per-member per-month costs in their first three months of enrollment that are 41 percent higher than those for open enrollment period enrollees. However, this does not mean special enrollment periods are a fundamental problem or that the higher costs reflect abuse. Certainly some special enrollment periods are needed (for example for newborns) and tightening them may carry unintended effects. Thus, care in structuring SEPs is needed to balance access, affordability, and stability.
Some movement has been made on these issues — additional penalties for non-payment of premiums have been introduced, special enrollment period rules have been tightened, and the open enrollment period has been shortened. Some of the new policies will likely help avoid adverse selection but the consequences of others are less certain. It is also not clear how quickly any positive impacts will be reflected by the market. As a general principle, improving the functioning of the mandate to stabilize the risk pool is important and undoubtedly over time, this aspect of the ACA can be improved.
2. A stable regulatory structure
Without stable rules, there cannot be stable markets. Currently, the biggest source of regulatory uncertainty involves the continuation of the cost-sharing reductions (CSRs). Marketplace rules require issuers to offer silver plan variations that reduce out-of-pocket costs for low-income consumers, but the reliability of federal funding needed to support these plans is in question. Without the CSRs, the Kaiser Family Foundation estimates that the cost of the benchmark silver plan would have to increase an average of 19 percent to recoup the losses caused by withheld CSR payments. Uncertainty about these payments is perhaps the biggest threat to stability in the individual market leading issuers to withdraw from marketplace participation for 2018 and/or request higher premium rate increases than would otherwise be needed.
Yet, the CSRs are not the only source of uncertainty. Insurers’ prior experience with the administration’s failure to fund risk-corridor payments exemplifies the type of challenges related to uncertainty that plans face when operating on the exchange. In 2015, insurers collectively lost $5.8 billion that would have been covered by the risk-corridor program. Payments represented only 13 percent of what the ACA called for.
3. Public financial support
Like every other segment of the insurance market, the individual market requires some government regulation and significant subsidy to achieve stability. The Congressional Budget Office estimated that in 2017, the marketplaces will receive $49 billion in federal subsidy. This investment is small in comparison to those made by the government in other segments. Medicare cost $646 billion in 2015 (20.2 percent of national health expenditures) and Medicaid and CHIP cost $560 billion (17.5 percent). The market for group coverage benefits from favorable tax treatment, amounting to a subsidy in the neighborhood of $260 billion annually. The individual market is not an exception. The main questions are how big a subsidy is needed and how it should be structured.
In addition to the aforementioned premium and cost-sharing subsidies, instituting a permanent reinsurance program (the temporary one ended with the 2016 plan year) would also help to stabilize the market by reducing the extent to which healthier consumers—of all ages—must pay premiums that exceed the actuarially fair amount for their expected health care costs. This in turn, could help the market to retain, and gain, enrollment by healthier individuals, reducing premiums for everyone.
It is important to recognize that, ultimately, success requires better control of underlying health care spending growth. Public subsidies and reinsurance programs must be financed. Subsidies can stabilize the market for coverage, but the stability of the entire system also requires that we make progress on containing the cost of care.
Moving Forward
The ACA’s framework is not the only, or even the best way to insure people in the individual market, but it certainly represented a step towards increasing coverage. Nevertheless, it has been hindered by operational issues and, lately, by growing regulatory and operational uncertainty. A stable market requires stable rules and investment. If coverage expansion remains a goal, a viable approach would be to fix the weakness of the ACA’s structure and implementation. Other approaches are possible but any approach will require financial commitment.
Author’s note
Dr. Michael Chernew reports research support from Anthem, BCBSA, and Carefirst, and has received honorarium from NIHMC and AHIP. He serves a Vice chair of the Massachusetts Connector.
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