Health Insurers Shift More Costs To Taxpayers In Obamacare Exchanges

money-burden(A version of this Health Alert was published by Forbes.)

America’s health insurers are undergoing a crisis of consensus with respect to their engagement with Obamacare. Between 2010 (when the Affordable Care Act was signed), and 2014 (the first year of taxpayer-subsidized coverage in the health insurance exchanges), it was widely understood that health insurers had scored a big win. After all, which other industry could get the federal government to pass a law mandating individuals purchase its product or service as a condition of residency in the United States?

This view was reflected in the stock market’s valuation of health insurers, which outperformed the S&P 500 Index. Since then, of course, we have learned that insurers have been losing money on Obamacare’s exchanges. Further, they have lost the sympathetic ear of the Congressional Republican majority, which has prevented insurers extracting as much taxpayer funding as they had expected from the Treasury. We should not expect insurers which continue to participate in exchanges to just keep losing money. In fact, the evidence indicates some insurers have quickly learned how to shift more costs onto taxpayers, despite failing to win an explicit political commitment to do so.

Insurers are divided about how to respond to this challenge. UnitedHealth Group (NYSE: UNH), for example, will bail out of all but a handful of exchanges next year. Anthem (NYSE: ANTM), on the other hand, had pledged to stay committed to Obamacare’s exchanges, although it insists the Administration has to make some changes. Only time will tell which carrier is making the right decision. However, it is worth noting that investors appear to have more confidence in UnitedHealth Group, although both insurers have done well versus the broad market.

Back in March 2011, after the market had digested both the Affordable Care Act and the insurer’s 2010 annual earnings, UnitedHealth Group traded at a trailing price/earnings ratio of 10, Anthem at nine, and the S&P 500 Index at 16. Today, UnitedHealth Group’s P/E has slightly more than doubled to 21, Anthem’s has increased by just two thirds to 16, while the S&P 500’s has increased by half to 24.

In the latest budget update, published in March, the Congressional Budget Office estimated 10 million people would be enrolled in taxpayer-subsidized Obamacare health plans with a total subsidy (via tax credits) of $32 billion this year. That would amount to an average subsidy per enrollee of $267 per month.

In April, analysts at the government agency running Obamacare reported the average Obamacare subsidy will be $290 – higher than CBO estimated. That may not be a big deal, but what is interesting is how much more of Obamacare’s costs have been shifted onto taxpayers in the program’s third year.

According to the same government agency, the average Obamacare exchange premium increased from $346 in 2014 to $386 this year. That comprises 12 percent growth over two years. The average tax credit subsidizing coverage increased from $264 to $280, or just six percent. Therefore, the average net premium increased from $82 to $106, or 29 percent.

However, when we look at each year individually, it is clear insurers have learned how to shift more costs to taxpayers. The change in gross premium from 2014 to 2015 was ten dollars per month, or three percent. The tax credit actually declined by ten dollars, or four percent. So, the net premium increased by $20, or 24 percent.

People were unhappy. So, this year, the average gross premium increased by $30, or 8 percent from 2015. However, the average tax credit increased by $26, or four percent. The net premium, therefore increased only $4, or four percent.

Despite gross premiums growing three times faster in 2016 than 2015, Obamacare beneficiaries will actually see a significantly less painful increase in the net premium they have to pay. Taxpayers are shouldering a higher share of Obamacare’s costs.

Accident? Probably not. Obamacare’s tax credits are based on the lowest-cost Silver plan in a region. The same subsidy will result in a very different net premium if a person chooses Bronze, Silver, Gold, or Platinum. The evidence suggests insurers have learned quickly how to design their “metal” plans to drive enrollees towards plans with the highest share of premium borne by taxpayers.

I expect this will continue, and the Congressional Budget Office’s cost estimates continue to be too low.

Comments (15)

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  1. Devon Herrick says:

    Interesting. It makes perfect sense. Middle-class Americans who do not qualify for a subsidy find the exchange premiums unaffordable. However, lower-income people who have their premium capped bear little of the cost. The only risk for insurers is that low-income enrollees may balk and decide the coverage just isn’t worth the paltry premium they own. So, insurers create bronze plans where the subsidy can be used to pay a higher percentage of the premium. Over time the exchange system is turning into a high-risk pool for sick people and a low-income people.

  2. John Fembup says:

    Devon I think you are correct. And while ACA is behind this trend, ACA was also, at one time at least, behind a similar trend toward building “private exchanges”. But while we read every day about the ups and downs of the public exchanges, I don’t see much at all in the media about private exchanges.

    As you point out, public exchanges are evolving into markets for individuals, primarily (over 80%) lower-income individuals, and individuals who are perhaps too ill to hold a job. In contrast, it was my understandinge that private exchanges were being created by insurers and large benefit consulting firms, to provide – in theory – more economical benefits markets for large employers whose group health plans together cover an enormous number of people.

    Yet the news has seemed focused on public exchanges vs. private exchanges. i wonder why?

    • Because private exchanges are marketed to large groups. They are boring for general media and the vendors have no need to get daily media coverage. The government exchanges are a political football and therefore exciting for general media.

    • Ron Greiner says:

      Fempup, you say the exchanges are for “individuals who are perhaps too ill to hold a job.”

      Where did you come up with this information?

  3. Barry Carol says:

    The private exchanges don’t seem to be gaining traction as quickly as some hoped. Large employers who were interested in them wanted to provide a menu of choices from which employees could choose a health insurance plan that worked best for them. The employer would provide a defined contribution that would cover all or most of the cost of the lowest cost plan and employees could add their own money if they wanted a more expensive plan. The plans would be priced on a community rated basis. For insurers to agree to participate, they required employers to produce all or almost all of their employees to minimize the chance that large numbers of healthy people might choose to go elsewhere.

    One downside for employers in moving from a self-funded approach to employee health insurance to a full risk approach is that the self-funded approach is 6%-10% cheaper on average, a meaningful difference. Also, employees were probably not thrilled with the defined contribution approach if it would only buy a plan that most would consider inadequate. I think Walgreens moved ahead with the private exchange approach but I haven’t heard much about any other large employers following suit. Instead, more companies, including my own former employer, are moving toward high deductible plans paired with health savings accounts while continuing to self-insure.

    Separately, on Anthem’s most recent quarterly earnings conference call, management noted that it picked up considerable market share especially in states where the co-op failed. Interestingly, Anthem’s offerings were significantly higher priced and well above the next cheapest plan in the market after the co-op. Management called it a “flight to quality” by customers. Anthem claims to be roughly breaking even on its exchange business in the 14 states where it is a Blues licensee. The longer term target profit margin is 3%-5% pretax which is comparable to the Medicaid business. Medicare Advantage targets a 5% normalized pretax margin.

    UnitedHealth Group, for its part, will earn over $180 billion in revenue this year. The exchange business was never going to be a big contributor in the scheme of things even if it earned the target margin instead of losing $1 billion or so over a two year period.

    The loss of the federal reinsurance protection at the end of this year, by itself, will require a 6% premium increase to offset it. That will be mitigated by the suspension of the premium tax at least for a couple of years and, hopefully, a significant tightening of the rules related to the special enrollment periods in order to reduce gaming the system by sick people who buy insurance, get expensive care, and then drop the insurance.

    • Thank you for this excellent comment. There is an agency problem with large employers that is hard to overcome. I think it is just easier to offer high-deductible plans than private exchanges. I had high hopes for private exchanges. However, until we equalize the tax treatment of individual versus group health insurance, HR & benefits bureaucracies will not really feel enough pressure from their group beneficiaries to improve.

  4. The Big Ham says:

    The numbers are way worse John. Remember that kids are forced to SCHIP at income levels. States that expanded Medicaid have the majority of children forced to SCHIP. United health care administrates a lot of of the state SCHIP plans. Even though united healthcare is not participating in the exchange the actually are. They get the tax payer money covering the kids.

    • Thank you and I agree. However, that was not the point of the article. Yes, most insurers profit very well from government, whether it be through Medicaid, SCHIP, Medicare Advantage, etc.

  5. The Big Ham says:

    my point is the numbers in the artical do not take into account all of the children who’s parents are receiving tax credits that are forced to SCHIP. Very few children are on exchange plans. New York has kids up to 400%, New Jersey up to 350% Alabama 312%,
    Illinois 313% , Iowa 302%, Massachusetts 300%, Missouri 300%, Oregon 300%, Pennsylvania 314%, Vermont 312%, …

    The numbers in the artical look cheaper because the parents who are receiving tax credits with incomes below the poverty level % are not allowed to,add the kids.

  6. William Moore says:

    I don’t disagree with the theory on the whole: insurers will cut exchange losses anyway they can. This includes shifting more costs to the government where possible. But the assumption that this is evidenced in large part by the difference in subsidy value from 2015 rates and 2016 rates ignores a key factor in the 2015 rate filings, which was the attempt by many Obamacare “CO-OP” plans to make significant enrollment gains from ’14 to ’15 in hopes of staying afloat.

    CO-OPs knew from 2014 enrollment experience that the exchange population shopped mostly on price. They also knew that their 2015 rates were insufficient to cover claims, but were told by HHS that their losses would be covered by HHS, basically giving them the “green light” to underprice their plans and undercut the market. Thirdly, they knew that by coming in low on the Silver level plans–and thus reducing the premium subsidy–they could magnify the effective rate increase of the exchange market leaders, hopefully driving even more members to CO-OP plans.

    So, what you saw in 2015 rate filings was considerable increases by national carriers and Blues plans, while CO-OP rates either decreased or remained relatively flat.

    This served two key political purposes for the Administration. One, it temporarily showed CO-OP “success” stories via increased enrollment. Two, the artificially low rates would undercut the double digit increases by the national carriers and Blues plans when assessing the rate increases “on average” across the country. This allowed for headlines that touted only a 2 percent average increase for second-lowest silver plans nationwide. Obama administration could brag about how the ACA was “working” by “holding the line” on premium rate increases.

    Of course, what followed for CO-OPs was a significant increase in enrollment, even bigger losses, and HHS reneging on it’s guarantee. 2016 rate increases were huge and 2017 will be larger.

    That’s a long way of saying I think 2015 rate filings were an anomaly. This doesn’t disprove your theory, of course. (As I said, I agree.) But I think the biggest difference in 2016 rate filings was the 2015 failure of so many CO-OP plans–they were no longer in business and could not skew the “average” premium data.

    It would be interesting to remove the failed CO-OPs from the 2015 dataset and see if that changes the 2015 subsidy value. I suspect it would. I also suspect it would show more of a steady increase trend among exchange plans from national carriers and Blues plans from 2014-2016.

    • Thank you for a very valid comment. The latest news is that the Administration has found a way to bail out (partially) the remaining CO-OPs, so the future of the exchanges continues to depend on how much the Administration is able to bend, fold, and mutilate the law to keep sending money to insurers.

  7. Bob Hertz says:

    Thanks to Wiliam Moore for a thoughtful post.

    What it really shows is what a complex market health insurance actually is.

    In commodity markets, (think paper clips), if you can tout a lower price for a decent product, you get more business and make more money.

    In health insurance, with guaranteed issue, if you offer the lowest rates then you will get more business, but in year two you may go broke.

  8. lane says:

    As my Dr’s billing clerk states: ‘You get to pay for your insurance, and since it doesn’t cover much you get to pay us out of your pocket, and you get to pay for everyone else too. Is this a great country or what?’