Recent developments have once again prompted some to declare that the insurance marketplaces developed as part of the Affordable Care Act (ACA) are unsustainable and collapsing. And once again, these reports are overstated.
What has prompted this latest round of recriminations is the report that UnitedHealthcare, the nation’s largest health insurance company, will be pulling out of the ACA’s marketplaces except in a “handful of states” in 2017. The company cites financial losses in its plans sold to individuals as the impetus for its withdrawal. The insurer is still quite profitable overall, earning $3 billion in operating profits in the first quarter of 2016.
The thing is, this really says more about UnitedHealthcare than it does about the ACA.
Other major insurers, such as Anthem and Cigna, have expressed more confidence in the ACA’s marketplaces as a business opportunity. In fact, CIGNA is planning to expand its presence in 2017. Insurers that have traditionally served Medicaid beneficiaries (eg, Centene) have also done well financially in the marketplaces.
Competition, Winners, and Losers
The marketplaces have proven to be much more price competitive than anyone fully anticipated. Most consumers—who are generally lower-income and receiving government premium subsidies—enroll in 1 of the 2 lowest-cost plans in the marketplace. And, as insurers raise and lower premiums to jockey for market share, consumers have shown a remarkable propensity for switching to lower premium plans to save money. For example, in the recently completed open enrollment period for 2016, 43% of renewing enrollees switched plans.
With this competition comes winners and losers.
UnitedHealthcare was initially cautious in its participation in the ACA marketplaces, but became more aggressive recently, offering coverage in 34 states in 2016. However, the company’s plans were often not competitively priced, with UnitedHealthcare offering 1 of the 2 lowest premium plans in only 35% of the counties where it participated, according a Kaiser Family Foundation analysis.
The company’s inability to compete on price may be because its historical strength has been in the employer-based health insurance market, which values broad networks of doctors and hospitals. In the ACA marketplaces, narrower networks have been a primary way in which insurers keep costs and premiums low.
Because UnitedHealthcare’s plans were generally not low-cost, its withdrawal will have only a modest effect on premiums. The Kaiser analysis finds the average benchmark premium nationally would have been 1% higher in 2016 if the company had not participated in any market. (This assumes no new entrants to the market and that other insurers would not have altered their pricing behavior.)
UnitedHealthcare’s exit could, however, leave pockets of the country with fewer choices and higher premiums, which is a cause for concern in those markets. According to the Kaiser analysis, in 29% of the counties where United participates, its withdrawal would leave just 1 insurer, and in an additional 29% of counties only 2 insurers would remain. Overall, there are 1.8 million marketplace enrollees who would be left with a choice of 2 insurers and 1.1 million who would have just 1 insurer available.
In general, though, the ACA marketplaces appear viable and sustainable with or without United. The number of people signing up for coverage during open enrollment periods grew from 8.0 million in 2014 to 11.7 million in 2015, and then to 12.7 million this year. This, along with the expansion in Medicaid, has helped to get 20 million more people covered as a result of the ACA.
There are, however, speed bumps and vulnerabilities ahead.
Although marketplace enrollment is growing, it has not grown as quickly as anticipated. In particular, this has meant that fewer healthy people have signed up to balance out the sick people who came into the market once the ACA prohibited discrimination against people with preexisting health conditions.
Insurance companies faced tremendous uncertainty when the major provisions of the ACA went into effect in 2014. As insurance became more accessible to people who were sick, insurers had to guesstimate how many sick and healthy people would enroll and how much health care they would use. That uncertainty continued into 2015, because insurers had to set their 2015 premium in the spring of 2014, when they still didn’t have hard data on the health care utilization of their enrollees.
It turns out that insurers often guessed wrong, and many experienced losses in the individual insurance market in 2015.
Aside from investors, few people are likely to shed tears over insurance companies losing money. But they should, since the availability of affordable insurance is key to the success of the marketplaces and the ACA more generally. Unlike UnitedHealthcare, the health insurance marketplaces are core markets for these BCBS plans, so they’re likely to stick around. However, the losses suggest that bigger premium increases may be coming for 2017.
About 83% of marketplace enrollees are receiving government premium subsidies, which will cushion them from any premium increases, assuming they are willing to switch to 1 of the 2 lowest-cost plans in their area (as has generally been the case so far). And, initial premiums came in 15% lower than what the Congressional Budget Office projected. So, what we are likely to see is more of a market correction than a sign that the marketplaces are unsustainable. The marketplace is functioning quite well in some parts of the country, such as California, where insurers are profitable.
Still, this being an election year, premium increases could become a talking point on the campaign trail, further fueling the divisive politics surrounding the ACA. And, for the third presidential election in a row, voters will face a stark choice about the future direction of health care.
About the author: Larry Levitt, MPP, is Senior Vice President for Special Initiatives at the Kaiser Family Foundation and Senior Advisor to the President of the Foundation. Among other duties, he is Co-Executive Director of the Kaiser Initiative on Health Reform and Private Insurance.
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