The Less Affordable Care Act?

A spate of news stories about the undeniable successes of the Affordable Care Act in providing insurance coverage to the vast majority of Americans also underlines one of its core failures: That coverage remains unaffordable for many of those who don’t have employer or public insurance.

While a record number of people—around nine in 10 Americans—now have insurance, private insurers on Obamacare exchanges have signaled to the federal government their intent to increase premiums by double-digit percentages this fall. Some insurers active on the exchanges have gone out of business entirely, and many have lost millions of dollars. As the fall looms, some enrollees might be facing as much as 50 percent increases on premiums. Whether or not the Affordable Care Act can live up to its name is a bit of an open question.

On the one hand, despite the ominous news from insurers, everything could still be going according to plan. Supporters of the ACA knew that it would shake up insurance markets in rather unpredictable ways. Specifically, opening up plans to direct competition via Obamacare exchanges was likely to force some insurers out of the market; larger insurers that could afford losses would be tempted to accept them to provide artificially low costs to squeeze out competitors. Some major insurers that have left the exchange markets, such as UnitedHealth, either entered them late or did not adapt to the profile of exchange beneficiaries, which saddled them with sicker, costlier patients to cover.

Jockeying for position among insurers has also led to people jumping from plan to plan hunting for the cheapest deal, which makes it difficult for plans to accurately model expenses or provide cost-saving primary care preventions and interventions that make care more affordable over the long term. Among those who’ve selected plans on the exchanges attrition has been high, with as many as 20 percent failing to pay even the first premium. As the market stabilizes and as people become used to the ACA’s regulations, those patterns should settle down.

Also, proposed premium hikes may not reflect the final premiums, since they are based on a number of factors including regulatory approval. Despite some high proposed premium increases last year and similar warnings about financial ruin, premiums only rose about 8 percent on average. The doom-and-gloom today just might not match up with reality come fall. System-wide costs can be expected to be held in check by the general expansion of coverage, as providers now have a more robust source of funding for low-income patients through Medicaid. Accordingly, the Kaiser Family Foundation reports that hospitals have been seeing reductions in uncompensated care costs.

There is, however, a real case for pessimism. One of the most important ways that Obamacare has controlled costs in the exchanges so far has been the use of “risk corridors,” or payments to insurers whose costs exceed revenue by a certain amount. That provision expires in 2017, though, and its expiration will remove a powerful incentive for exchange insurers to keep premiums low. The risk corridors program has already run into legal challenges as disruptions in funding from Congress have led to lawsuits by big insurers for hundreds of millions of dollars.  And if artificially low prices do exist, insurers that have used them and have taken a loss will have very little reason to keep premiums low at the end of the year, now that many competitors have been weakened and the federal government is no longer subsidizing that deflation. In 2017 the training wheels come off.

The Obama administration is also clearly worried about the lack of enrollment from young people and the prominence of short-term insurance plans, two problems that likely go hand in hand. The financial viability of Obamacare’s exchange risk pools hinges upon two things: the sheer number of enrollees and their overall health. Young adults are the most likely adults to be uninsured and the healthiest, which means that their participation is critical to the continued viability of the exchanges. A surge in young-adult enrollment last year brought the exchanges closer to working financially, but it was only a start, and potential premium hikes at the end of this year could make it impossible for more young adults to sign up. Those premium hikes could also erase the surge itself and push many enrolled young adults with unstable means back into the ranks of the uninsured, thus increasing the pressure to increase premiums even more.

So-called “short-term insurance” programs directly exploit the disconnect between young adults and the exchanges, and the federal government is moving now to limit them. These programs do not meet Obamacare-required coverage levels, and still place their enrollees at risk of incurring a penalty under the individual mandate. However, these policies, often pitched as “Obamacare alternatives” have been adept at using anxiety about the individual mandate to attract young adults—which removes them from regular exchange risk pools. The administration is now seeking to tighten a loophole for short-term coverage, limiting it from a year to three months and eliminating the option for immediate renewal. If the proposed rule holds, it would decrease the functional options that some people have for coverage outside of the exchanges and force them into the risk pools. That rule and a collection of other rules designed to shore up exchanges indicate the height of the federal government’s concern about premium hikes at the end of 2016 and beyond.

In the end, the entire success of the Affordable Care Act hinges not only on how many people have coverage, but whether that coverage is affordable. Just a few years in, the exchanges in a highly experimental phase of external and self-regulation. Turmoil should be expected, but with that turmoil comes with real costs for millions of Americans. How officials respond to that turmoil and to substantial premium increases will dictate if those costs will ultimately be in the service of a program that makes American health care better and cheaper in the long run.

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