So far, the carrot has been much more effective than the stick, and that’s not a good thing for the markets. The sickest older eligible people generally signed up for heavily subsidized health insurance, while the healthy younger people have been reluctant until recently, and new rules prohibiting insurers from denying coverage or adjusting premiums based on certain elements of risk have meant that they either take more losses, raise premiums, or do both if their patients turn out sicker than expected. It appears both are happening in tandem, and premiums for the exchange benchmark plans will rise by almost 10 percent on average this year as a result. That won’t be a big problem for most people in the market, as over 80 percent of all enrollees don’t actually see the true costs of insurance because of federal tax credits applied to premiums and cost-sharing of deductibles, copays, and coinsurance between patients and the federal government, but it is a big problem for the government and for insurers themselves.
In an attempt to control premiums and avert a “death spiral,” where rising costs and patient risk both continually intensify each other, the ACA also provides reinsurance, risk adjustment, and “risk corridors” to compensate insurers who accept sicker patients and experience higher costs than expected. In essence, these programs spread the gains of the whole individual market and of insurers that took lower-risk patients to mitigate the losses of those with sicker enrollees or higher costs than expected. Those programs should have functioned as stopgaps, temporarily encouraging individual-exchange insurers to pick up their fair share of sicker enrollees. And while these measures have funneled billions to insurers that have taken on losses to enter the market, risk corridors and reinsurance will be phased out in 2017, and risk corridors have been so far behind on payments that insurers launched a class-action lawsuit in February to seek compensation.
It’s no wonder, then, that Aetna suffered losses of $430 million since its entry into the exchanges. Like UnitedHealth Group before it, Aetna cited issues with the risk pool—that sicker patients are signing up more than healthy patients—in its decision to leave all but a handful of exchange markets. While that rationale is certainly suspect given the release of documents suggesting Aetna pulled out of the markets in retaliation for the Department of Justice blocking a merger with Humana, the move has an undeniable financial logic behind it, especially for an insurer of Aetna’s size. Why participate in a struggling, costly individual market when the lucrative honeypots of employer plans, privately-administered Medicaid plans, and Medicare advantage are there for the taking?
While Aetna’s move does highlight major issues in the exchanges, it probably isn’t a catastrophe for Obamacare. Kevin Counihan, the CEO of the federal insurance marketplace, expressed confidence in the markets after the move and in a blog post noted that the exchange risk pools are also “gaining healthier, lower-cost consumers” in the long-term. Government subsidies do at least help stabilize the market, so adverse selection won’t likely lead to the dreaded “death spiral” of ever-increasing costs and ever-sickening patient bases. Since essential covered benefits are standardized under the ACA, plans can compete by lowering the costs and increasing the efficiency of the services they provide.