'Repeal and Delay' Won’t Prevent Obamacare Repeal Chaos

Republican plans to phase out the Affordable Care Act slowly still might upend health insurance markets in the short-term.

Lucy Nicholson / Reuters

Over the next few weeks, Republicans will probably vote to repeal Obamacare. Though Republicans and vice president-elect Mike Pence are huddling to come up with replacement plans, the general framework of action over the immediate term seems clear. Republicans will likely delay its phase-out so as to not immediately cancel millions of plans and “create a transition and bridge so that no one is left out in the cold,” as per Speaker Ryan. Barring defections, Democrats have little power to stop them.

There’s one big problem with this approach, however. While the “repeal and delay” tactic seems like a way to keep people from becoming suddenly uninsured or having to make inconvenient changes—or to keep kicking the can down the road—in reality the mere announcement of a legally-binding repeal or pledge to end government support for federally-backed markets could cause severe disruptions in how those markets operate. And those disruptions could mean turmoil for millions of people.

The secondary currency of any insurance market is risk—or the amount plans can be expected to pay in claims for each beneficiary. Originally, insurers hedged against risk by finding healthy patients and charging sicker patients more or denying them coverage altogether. Obamacare effectively eliminated many of those hedges by creating qualifying health plans, by removing lifetime spending caps, and by prohibiting companies from refusing to insure based on pre-existing conditions bans. In order to make the health plans work work and entice health insurance companies to participate in the health insurance exchanges, Obamacare mandates healthier people to join and offset sicker people’s costs, and also uses federal money to offsetting risky bets in several different ways. Those shopping for plans on the exchanges are often inherently risky bets, and only federal funding and the promise of more such funding in the future keeps insurers insuring them.

Even in 2016 before Donald Trump’s presidency became viable and the threat of an Obamacare repeal became real, the exchanges had grown increasingly unstable and brittle. The administration had difficulty in attracting younger, healthier people to sign up, so enrollees were sicker and riskier than expected. Although stakeholders expected risk to be high as the country adjusted to a brand-new healthcare paradigm and the individual mandate pushed stragglers into exchanges, Congress later authorized lower payments than expected to offset that risk. The highly-publicized premium increases of exchange plans and the withdrawal of major insurers like Aetna were signs of this inherent instability. Although they are certainly fixable problems, fixing them requires money, which requires action by Congress.

Though some of this instability can be attributed to hype from insurers seeking to maximize government subsidies and payments to offset risk, several firms do run in the red now with the expectation that they’ll be in good position to make money when the market settles down.

What’s the incentive for them to continue to insure people if they believe the market will no longer exist—or if they believe that the tax credits in a Republican replacement plan are less than what they receive now? Insurance plans have to decide by May of 2017 if they’ll participate in the exchanges, and it might not be a surprise to see insurers with smaller enrollee bases or higher losses bow out. Also, those plans that do stay can pass on the costs of increased uncertainty in the markets in the form of increased premiums, which would cost the federal government and enrollees even more money.

At MarketWatch, former health-insurance executive J.B. Silvers explains how this might all work in practice:

Some in Congress seem to think that passing the “repeal” part immediately but delaying its implementation for two or three years will somehow leave everything as it is now. But this naive notion misses the fact that the riskiness of the Obamacare individual insurance exchange markets will have been ramped up to such a level that continuing makes no sense.

Even if a company reaches break-even in the “delay” years, it will lose when the repeal is effective. If the premium subsidies now available to lower-income enrollees go away immediately and the mandate to sign up for an insurance plan disappears, then the number of people purchasing individual policies on the exchanges will drop like a rock. In fact, it is clear that even debating this scenario is likely to be self-fulfilling, since insurers must decide on their participation for 2018 by the late spring of 2017. Look for many to leave then.

A plan to repeal and delay would also likely have some effects on the individual mandate to purchase insurance. If that plan immediately eliminates the mandate, the final lever to maintain the health of exchange risk pools evaporates, and there will be much less impetus for healthier, younger people to participate in them. Even if the plan phases the mandate out over time, news of a repeal might be easily misconstrued as eliminating the mandate, which could still spur millions of healthy people to leave the exchanges and penalize them at tax time next year for doing so. At the same time, even the rumor of a repeal can send millions of sicker people into the exchanges to receive some kind of vital services before the well runs dry, which are bound by law to cover them. In fact, this may already have happened. As long as an indefinite purgatory between repeal and replacement exists, adverse selection will be impossible to fix, as would be the “death spiral.”

The worst-case scenario would be the large-scale withdrawal of insurers from markets and the inversion of risk pyramids, with sicker and sicker patients seeking coverage while they can. Without available insurers or a public option, people without employer coverage or who make too much to qualify for Medicaid might just not have any insurance to buy. If Congress and state governments don’t actively enforce “rate review” and medical-loss ratio rules that give states oversight over large premium increases and mandate that insurance plans spend a certain percentage of premiums on healthcare, insurers could enter markets that don’t have plans and raise premiums for vulnerable people who need insurance most. Alternatively, short-term insurers—which already profit on the mandate despite providing barebones services that don’t qualify as full plans—could continue to fill in the gaps.

Millions of people in the exchanges may have to change insurance or enter the ranks of the uninsured. And though the delay may not immediately affect people with employer coverage or public coverage, downstream challenges for insurers in exchanges could affect the products they offer for those markets. None of this would be good politically for Republicans, who already have to contend with a voter base that actually kind of likes having insurance. Compare that scenario to the political damage that Democrats suffered in the 2016 elections over much less dire and far-reaching problems. Republicans could pin these woes on Obamacare itself, but then their inability to fix those woes despite campaigning on promises to do just that could come back to haunt them.

As conservative think-tank American Enterprise Institute reports, the fact that Republicans are aware of the destabilizing effect that a delay might cause and intend to build a reform in increments indicates that there isn’t really a plan in place. But the longer the delay goes, the more political capital will have to be expended in fixing the issues that it causes. A piecemeal plan with a delay could also exacerbate the instabilities in the marketplace, and continue to widen gaps in the current healthcare system. The market risk grows with each day without a clear picture of what comes next, and many people who have children, lose jobs, lose spouses or have other serious life events in the interim will be placed at the mercy of a volatile market, where life-saving plans might evaporate, subsidies may suddenly dry up, or death spirals may collapse entire markets altogether. What comes next for them?