Why So Many Insurers Are Leaving Obamacare

How rejecting Medicaid and other government decisions have hurt insurance markets

Eric Gay / AP

One of the most common reasons critics of Obamacare say the law is “collapsing” is that insurers appear to be fleeing the Affordable Care Act’s health-insurance exchanges, or the state-based, online marketplaces where people can buy individual health-insurance policies.

The fact that one-third of counties are projected to have just one insurer on their Obamacare exchanges this year has been a popular talking point among Republicans—including President Trump—trying to gin up support for their replacement bill, the American Health Care Act.

The stat was echoed in a recent editorial by Health and Human Services Secretary Tom Price, in which he portrayed Obamacare as a house that’s on fire and “many of our fellow Americans are trapped inside.”

Though some insurers are still deciding whether to participate in the Obamacare exchanges, the complaint about lackluster insurer participation is valid. In recent weeks alone, Aetna pulled out of Virginia’s Obamacare exchange, leaving its participation in Obamacare this year limited to just four states. Medica, the last insurer remaining in most of Iowa, threatened to stop selling individual plans. And after Humana pulled out of Tennessee in February, leaving 40,000 people with no insurance option, BlueCross BlueShield reluctantly stepped in on Tuesday, but only if certain conditions are met. According to a Kaiser Family Foundation analysis, 31 percent of counties will have just one insurer this year, up from just 7 percent last year.

Percent of Enrollees and Counties, by Number of Insurers
Kaiser Family Foundation

There is one thing Republicans usually leave out of their indictment of Obamacare, though: Insurers might have been less likely to exit if more states had expanded Medicaid under Obamacare.

The Affordable Care Act was written with the idea that states would expand Medicaid, the insurance program for the poor, to cover people earning up to 138 percent of the federal poverty level, or $16,400 for a single adult. But a 2012 Supreme Court case made that expansion optional, and so far 19 states have rejected the expansion. People earning below 100 percent of the federal poverty level, or about $12,000 annually, in those states aren’t eligible for subsidies to buy private insurance on the Obamacare exchanges or, in most cases, for Medicaid. They fall in an insurance no-man’s land, the “coverage gap.”

People earning between 100 and 138 percent of the poverty level in those Medicaid-rejection states, however, do qualify for subsidies to buy insurance on the Obamacare exchanges. Many of them enrolled in Obamacare, and they make up about 40 percent of the Obamacare enrollment population in the non-expansion states, compared to 6 percent in the expansion states.

The catch is, poor people tend to be sicker than rich people are. And having so many poor, sick people in their Obamacare marketplaces might have made it more expensive for insurers to operate in the non-expansion states.

In Alabama, for instance, Blue Cross Blue Shield is the only insurer participating in the exchange in 2017, and it’s spending $1.20 for every $1 it collects in premiums—an unsustainable ratio, as insurance writer and analyst Louise Norris points out.

So, then, what happened in states that did expand Medicaid but nonetheless have very fragile insurance markets? Iowa, for example, expanded Medicaid, but it has had so many insurers pull out of its exchange that there might be no Obamacare plans on offer this year. In Iowa and several other Medicaid-expansion states, a different Obamacare-related choice might have contributed to the high cost of insuring their Obamacare enrollees.

Before Obamacare, insurers could reject customers they thought would be too sick and too expensive. After Obamacare was passed, about 35 states continued to allow the sale of non-Obamacare-compliant plans. (The states that didn’t allow this tended to be more liberal—New York, Vermont, and the like.) Therefore, the people on these so-called “grandmothered” plans were likely to be healthier than average, since they had to pass the healthiness test that insurers were formerly allowed to use to screen their customers. These plans can also raise peoples’ rates as they get sick—something that’s not allowed under Obamacare. Many healthy people in the grandmother states were, in a sense, kept out of the Obamacare marketplaces, only joining Obamacare if and when they get sick. Thus, the grandmothered plans might have made the Obamacare pool sicker in those states.

Average 2015 State Risk Scores
“Transitional” states are those that allowed grandmothered plans. (Kaiser Family Foundation)

According to a 2016 KFF analysis, states that both did not expand Medicaid and allowed the grandmothered plans had an average “risk score” that was 8 percent higher than those that that did expand Medicaid and did not allow the grandmothered plans. The Kaiser researchers caution that there could be other hidden demographic factors at play, but write that the study “does suggest that state policy decisions may have had a noticeable effect on risk pools.”

Karen Pollitz, a KFF senior fellow, gave an example of how this worked in Iowa, via email:

In Iowa, most of the Wellmark (BCBS) market share continues to be in non-compliant plans (the grandmothered/grandfathered pre-ACA plans), so Wellmark cherry picks its own market share. Over three years, news reports show Wellmark lost $90 million on ACA compliant plans, with one enrollee accounting for $18 million in claims for one year alone. So for 2018 Wellmark will not only leave the marketplace, it will stop offering all ACA compliant plans, keeping in force just their pre-ACA policies.  

Today, of course, insurers have even more to worry about, like whether the Trump administration will continue to make payments called cost-sharing reductions to defray medical costs for low-income people on Obamacare. House Republicans successfully sued the Obama administration in 2014 to stop the payments, and the Trump administration could simply drop the appeal. In that case, insurers participating in Obamacare would be on the hook for billions of dollars in medical expenses. (The House health-care bill would eliminate the payments as well.)

As Cori Uccello, senior health fellow at the American Academy of Actuaries, put it to NBC News, “Insurers need to know if they are going to get paid.”

What's more, some insurers are skeptical that the Trump administration will enforce Obamacare’s individual mandate, so they are raising their rates as a precaution.

And of course, with the Senate currently debating its own version of the Obamacare repeal bill, the entire future of Obamacare is uncertain. Indeed, “uncertaintycomes up a lot in stories about insurers leaving Obamacare.

At this rate, Republicans might live to see the Obamacare “death spiral” they have long been prophesying. But insurance markets don’t just collapse on their own. Decisions by states, Congress, and the Trump administration can—and have—given them a hefty nudge.