Large Insurer May Exit Exchange: The Exchange System is Collapsing Under its Own Weight
I reported earlier this week that the Obamacare Marketplace is slowly failing. Three days later the largest health insurer in America, UnitedHealth Group, announced it expects to lose $500 million on exchange plans next year and may exit the market in 2017.
The issue for many insurers is they were encouraged to participate in the exchange in return for a temporary risk sharing program called Risk Corridors. Under this program, all insurers paid into a pot of money and the firms suffering excessive losses were to share the funds based on a formula. However, a budget deal passed late in 2014, the ‘Cromnibus’ Spending Bill, required the program to be budget neutral. The losses far exceeded the pot of money collected by the program. Insurers have only received about $0.13 cents on the dollar of what they would have gotten under an opened-ended program.
The Centers for Medicare and Medicaid Services (CMS) has affirmed insurers will get their money. But the question is: where it is going to come from? CMS has $363 million to divvy up while insurers have requested $2.87 billion.
Why are insurers losing so much money? In my original article, I stated the exchange plans are suffering adverse selection due to the perverse regulations which drive up costs – making health coverage a bad deal for all but the sickest enrollees. The only people enrolling are those who are eligible for the most generous subsidies. Consider what Larry Levitt, a health insurance analyst with the Kaiser Family Foundation, told Bloomberg.
“The ACA marketplaces are not yet profitable for most insurers,” “It’s going to take enrollment growth, especially among healthy people, to make it an attractive market for insurers. If enrollment stagnates, we could very well see insurers thinking twice about their participation.”
The solution cannot be gouging healthy people so runaway costs are covered. The Affordable Care Act was support to slow the growth in health expenditures. Just about any economist will tell you the current system is not accomplishing that. Slowing spending requires appropriately-designed health plans with positive incentives among enrollees. The ACA’s cost-control mechanisms are the opposite of that; they’re akin to pouring gasoline on a fire in hopes it will put it out.
Why not scrap the perverse ACA regulations and admit it was a pipe dream to ever assume young, healthy people could be coerced into paying several times their expected costs to cover other people’s excessive spending. Young people already have a lower demand for health coverage because they don’t expect to need care. As I reported earlier in the week, healthy people also know they’re getting a raw deal when they are expected to pay $5,000 for health plans that require an additional $6,000 in spending before the plans will begin to pay claims. Justice Roberts called the penalty a “tax.” I know people spending $5,000 for health plans they get no benefit from. They certainly think in terms of their $5,000 premiums as another Obamacare tax they can ill afford.
While health insurance is expensive mainly because healthcare is expensive, adverse selection is also a significant contributing factor in the case of the ACA exchange plans. There also appears to be some gaming of the system going on. On its conference call, United said that enrollees who signed up after the open enrollment period, on average, used 20% more healthcare than enrollees who signed up during the open enrollment period. Those who enrolled in off-exchange plans did NOT use more healthcare services if they signed up outside of the open enrollment period.
Massachusetts experienced something similar under Romneycare. People who knew they would need care such as maternity benefits or an upcoming hip replacement would sign up for insurance under the guaranteed issue rules. Then, once they got their care and recovered, they would drop the insurance. Harvard-Pilgrim reported at the time that its medical cost ratio attributable to these enrollees was roughly 600%! Obviously, that is not a sustainable business model.
The alternative of returning to medical underwriting might solve the problem of the healthy paying premiums that significantly exceed their actuarial risk but it would create problems for the unhealthy and the already sick. Those folks either will not be able to buy coverage at any price or they will be quoted an unaffordable premium. Even a healthy person who is able to buy an inexpensive policy for years and then gets sick will likely be told by the insurer that he or she is no longer profitable to serve so it either won’t insure you at all or will have to drastically increase your premium. That’s not a sustainable model either, at least for those who need expensive care beyond the expiration of the year that their insurance was in force.
My long term prediction is that we will ultimately wind up with something like Medicare for all with Medicaid folded into Medicare and financed by a dedicated value added tax that could be at a rate of at least 15% plus a beneficiary premium that covers 25% of the cost of the program.
The new Medicare version for the under 65 population would look more like traditional insurance with perhaps a choice of deductibles and a reasonable out-of-pocket maximum exposure. Employers that previously offered health insurance will raise salaries by the amount they were previously spending on insurance and tax rates will be lowered to ensure that income tax collections remain revenue neutral. States will be told to use the funds they previously spent for Medicaid to fund their underfunded pension liabilities and any obligations they may have to provide retirees health insurance to supplement Medicare.
That’s a prediction with plenty of specifics.
Correction: I meant to say we will probably wind up with Medicare Advantage for all, not Medicare for all. I think private insurers can do a much better job at mitigating fraud than the government can.
I also think Medicaid will stay in place for long term care coverage beyond the limited circumstances under which Medicare pays for some of it now. The poorest people will be eligible for both programs (dual-eligible).
Premiums for individuals will likely be risk adjusted, at least for age, and pay vary from county to county or at least region to region. Health plan payments from the government will also incorporate health status risk like Medicare Advantage does now.
Barry, you might be right if Hillary wins but the Republicans have very different ideas than you.
Think about it, United Healthcare just dropped their agent commissions to ZERO for on the exchange business but they still pay commission for Short-Term-Medical STM for healthy people. So, UHC keeps the healthy people then when they get sick these people jump on the exchange and UHC is leaving the exchange next year. It’s a perfect business plan. Why pay agent’s commissions on the exchange when you got government people that will enroll these sickos for nothing.
Ron – I agree that Republican ideas about health insurance are very different from mine. My perception is that the Republicans’ priority with respect to health insurance is to find a solution that works well or at least reasonably well for healthy people. They don’t really care about addressing the insurance needs of the unhealthy and already sick. Why is that? Well, healthy people are where the votes are. We’re talking about the vast majority of the non-Medicare and non-Medicaid population.
You probably have better data than I do on this but my perception is that in any given year, no more than 15% of the population generates more than $5,000 in claims. Very few people have high claims every year and those that do either require very expensive specialty drugs to treat a rare disease or need long term care or home health aides to assist them with the normal activities of daily living (ADL’s). Even among the Medicare population, only about 15% of those with Part D drug coverage reach the donut hole in any given year and less than one-third of those come out the other side into the catastrophic coverage zone.
From a political perspective, addressing the health insurance needs of the unhealthy and the already sick simply costs too much money relative to the number of votes that might be in play. With both the federal government and most state governments already fiscally challenged to put it mildly, it’s not worth the time, effort and political capital to fight that battle.
It’s not an irrational strategy if your goal is to win elections and hold on to power. It is, however, unfortunate, that nobody at least on the Republican side seems all that interested in finding ways to bring affordable health insurance coverage to those who need it the most.
We’ve written about that in the past — that is what we’ve referred to in the past as the politics of medicine.
The political aspect is especially true with respect to national health systems. The British NHS uses a cost per life year saved formula to determine what they will pay for.
That is a very difficult issue to solve. How much of health care should be dedicated to the very sick, versus prevention to maintain health. Then there’s the issue of how much responsibility should patients have for their own illness. Sovaldi is a good example. It’s $1,000 per pill (retail) and works very well. But a large proportion of people with Hep C acquired it through risky behaviors. What about obesity and its effect on cancer?
Notice I’m posing questions rather than dispensing opinions. If I were in a position to allocate resources, I’d probably first go for the low-hanging fruit. I’d try to do the most good with the least money. If one therapy has a low cost per life year saved, I spend money on that. Then, go up the ladder to therapies with a higher cost per life year saved. That assumes health resources are a public good. A way around the overt rationing I’m speaking of would be to have personal medisave accounts like Singapore where patients saved throughout their lives and controlled more of their own funds.
Devon — What we as a society decide to pay for and not pay for as part of an effort to control healthcare costs is an important issue and I think QALY metrics are a reasonable approach to help determine those choices. However, that’s a very different issue from helping the unhealthy and the already sick to access health insurance at a price they can afford.
Interestingly, this is not an issue with insurance financed largely by taxes including Medicare and Medicaid.
Employer based coverage is at least community rated but if you’re too sick to work and are forced to quit your job or are unable to land a job in the first place, you’re out of luck.
The private non-employer health insurance market just isn’t equipped to accommodate unhealthy and already sick people on affordable terms and still make money so they can stay in business. That’s where the challenge is. I don’t think high risk pools can work either for a variety of reasons.
Barry! Your points regarding the politics in devising plans for providing healthcare to everyone are well taken. But you’re missing the most important point, or at least failing to address the problem in the proper light. And that is funding the cost of this social program.
96 million Americans are no longer considered part of the “workforce”. And so you can’t expect these folks to contribute in paying for health insurance for themselves, let alone others. And then you have to consider the BLS statistics addressing the income history for 90% of those people who do work. They have seen their median incomes decline on an inflation based calculation during the last 15 years. So they are not making more money to come out of pocket to spend on others. Household formations are on the decline in America because the younger generations cannot afford their student loan, mortgage payments, or child care with income from available jobs. Just how many young workers are we going to tell to continue living in their parents’ homes because they can’t even afford to pay rent elsewhere. Slap a value added tax on their backs and they will never be able to move out!
Medicare or similar plan is obviously not the answer. Medicare is underfunded by more than $27 trillion and it is just a matter of time before that financial train wreck takes it’s toll.
It’s all about the money. If we are going to provide expensive social services to those who can’t afford them, any new plan must realistically provide the actual cost of such a program with a clear roadmap of how and who will pay for it. With a declining economy, I doubt a value added tax will be the answer. Such a tax will crucify a weak economy.
People vote with their pocketbooks. Those without a pocketbook will vote for free benefits. This is what we call democracy.
“adverse selection is also a significant contributing factor”
Yes, it is, I agree. And yet the presence of adverse selection illustrates once again that trying to fix the problem of high insurance premiums by tinkering with insurance, can lead to even higher insurance premiums. Meanwhile the root cause goes untouched.
Even deductibles illustrate this. Insurance with a “high” deductibles tends to experience cost trend that is higher than insurance with a lesser deductible, In either case, presence of a deductible increases the insurance cost trend above the actual medical cost trend. ACA is riding the back of this tiger too, although few yet realize it.
Believe it or not, I have a lot of respect for the original plan design of Medicare Part D. People often lamented the convoluted structure of cost-sharing, but I believe it had a specific purpose that served it well. It is also a concept that should have been borrowed in exchange plans.
The original Medicare Part D had a relatively modest deductible of $250. The next $2,000 in annual spending was subject to 25% cost-sharing. At that point, there was a coverage gap requiring an additional $3,000 (as I recall) in out-of-pocket spending. Then, once the beneficiary had experienced a total drug expenditure of $5,250, coverage was 95%. A senior whose total drug expenditure reached $5,250 would have contributed a total of $3,750 towards that cost.
Why do I think this is good plan design? Because it was specifically designed to have a benefit for seniors with various levels of drug spending. As such, it motivated more seniors to enroll in a drug plan that otherwise would have enrolled. The people it enticed to enroll where the healthy seniors who didn’t take many drugs. Consider this: would as many healthy seniors enrolled if the deductible had been $3,750, with 95% coverage after the deductible? Probably not. I cannot imagine any healthy senior paying $400 to $600 per year for a $3,750 deductible.
In summary, it provided something of benefit to almost any senior taking a drug. But, did not begin to pay most of the cost until seniors had experienced significant spending. I believe exchange plans should have been designed that way. If they were, more people wouldn’t assume they offer nothing worth paying for.
Devon, you would know better than me but isn’t it in the cards that in the future Medicare may switch so that seniors have a 5% co-pay all the way so they are always concerned about expenses?
If the donut hole could have been eliminated by making the deductible $500 instead of $250, I think that would have been a better approach. Most Part D plans use the tiered formulary approach now to determine copays on each prescription. We could then have started the catastrophic coverage zone after total OOP spending reached, maybe, $4,000. I think that would have made more sense.
It would take an actuary to decide. But the donut hole was a moat (of sorts) around the castle of unlimited drug coverage. The donut hole effected few seniors. Some estimates were as low as 3 to 4 million — even fewer surpassed it. But it provided strong encouragement for seniors to ask about genetics. I’m afraid a higher deductible and no donut hole would have raised expenditures more than having a coverage gap. Some Part D plans didn’t have a donut hole for generic drugs.
But that is they last thing we need in this country is for a stronger genetics encouragement program scamming these old people out of their last thin dime.
The TRUTH is these old people should be thanking their lucky stars for the tax-free HSA because without that they wouldn’t have W’s Medicare RX program.
W’s Medicare RX program was the price we paid for the tax-free HSA.
Ron, my last post serves as an example of why you should never post a blog comment while using an iPhone 5 without reading glasses. I meant to say generics (not genetics). I’ve already ordered an iPhone 6 Plus with a bigger screen. Now I need to hunt down my reading glasses.
An actuary can tell you relative numerical values but the logic sometimes doesn’t get thru to insured people, or doesn’t make sense to them, or is simply rejected because of varying personal situations.
IMO modest deductibles together with percentage coinsurance and annual “TROOP” limits work best. The plan designs are simpler, easier to understand, and easier to administer. Deductibles have an undeniable impact on overall benefits cost. But I think it’s a mistake to place too much reliance on high deductibles – at least, without some fill-in mechanism such as HSA, and without a concerted, successful effort to persuade buyers why they should prefer “comprehensive” insurance i! The first place. Note our government politicians and planning gurus took exactly the opposite path.
Why do I think relying on high and ever increasing deductibles is a mistake? Because, at some point, high deductibles have the effect we are observing now. People come to view their insurance as not insuring them at all. And many people might well feel swindled.
So what can the government do then? Try to persuade people that catastrophic insurance is really what they should have expected all along? Or proceed to transform the whole system into a welfare program like Medicaid?
I know what I expect to see.
Worse, the people most likely to feel swindled are the healthy enrollees — who are the very ones plans want to attract (plans probably hope the sick feel swindled, so they go elsewhere).
Attracting more healthy enrollees could help plans lower their deductibles (and premiums). That’s why I wonder if having a low deductible of, say, $500 followed by $2,500 with 25/75 coinsurance; and then a coverage gap of, say, $5,000 before health insurance pays 100% might attract more healthy enrollee than a plan with a $6000 deductible.
Devon, I have never seen an actuarial evaluation of this design for medical – only for Rx. I agree it would be more “saleable” than a $5,000 deductible plan. At the same time, you know it would only take a few minutes for the call to eliminate the “donut hole” to arise from some quarters.
Barry I’ve seen the same data on distribution of claims over / under $5,000, and I agree with the conclusion you draw from them. However, I think the conclusion helps illustrate what I say above, i.e., a plan may be actuarially logical but still fall short of being “psycho”-logical. I think that’s where Obamacare finds itself today, How can the gap be addressed? I see two ways – begin a re-education campaign to persuade people they really want high-deductible plans or move toward a welfare program like Medicaid. I think it’s clear Government progressives prefer the latter course. That’s one reason the 2016 elections are so important,
If the ACA exchanges implode into an adverse selection death spiral, I can see us moving toward a Medicare Advantage for all approach. As I said previously, it might be financed by a combination of a dedicated value added tax covering 75% of the cost and beneficiary premiums covering the other 25%. The benefits package would probably look something like the ACA’s package. There could be a choice of deductibles ranging from $1,000 to $10,000. Beneficiary premiums would be age adjusted and based on per capita cost in each county or region. The savings from choosing a high deductible plan would accrue to the beneficiary. Low income beneficiaries would get means tested help to pay their share of the premium as they currently do with Medicare Part B.
To mitigate the effect of Medicare’s dictated prices, we could even experiment with allowing balance billing at least for non-hospital based care and non-emergency care that can be scheduled at least 48 hours in advance. Doctors employed by hospitals and hospital owned freestanding facilities would not be eligible to balance bill. At least at first, balance billing would only apply to the under 65 population.
Providers who expect to balance bill would have to fully disclose their fees above the Medicare allowance in advance. The French system allows this. Their public insurance system pays doctors 70% of the official rate and the beneficiaries pay the other 30%. In addition, doctors can charge more than the official rate as long their fees are fully transparent to the patient.
One important aspect of all this, I think, is to make sure there is a strong role for insurance companies because I think they will do a better job of mitigating fraud than the government can do and they are more likely to find innovative ways to bring enhanced value to patients including experimenting with new payment models. One area that still needs a lot of improvement is scoring individual risk to minimize the incentive insurers would have to attract the healthy and avoid the sick.
I wish I could believe that insurance will evolve toward a clone of Medicare Advantage. But I’m less enthusiastic about a “comprehensive” benefits package like ACA.
Besides, the present administration has made no secret it would like to destroy Medicare Advantage. Fortunately their time is running out.
Not so fortunately, the progressives / Democrats haven’t changed their minds and are not likely to do so,
Having gone around this barn yet again, I come to the same conclusion: the outcome of the 2016 elections are extremely important as regards how the country proceeds with its badly-needed health care reform.
John and Devon –
While I think people should be prepared to pay for routine healthcare costs out-of-pocket but should be covered for catastrophic events, they seem to have an unrealistic perception of what catastrophic health insurance, which I define here, as a $5,000 deductible, should cost. Lower income people should get some means tested help in paying for healthcare costs below $5,000.
A number of years ago, I asked an expert in the insurance business what percentage of healthcare costs were accounted for by the first $5,000 of claims including the first $5,000 incurred by patients with very high claims. The answer was 25%-33% of medical claims were attributable to the first $5,000. This makes intuitive sense because, in any given year, half of all people use very little healthcare or none at all. Even within the Medicare population, the healthiest 50% of seniors account for only 4% of program costs in any given year.
This all implies that a $5,000 deductible health insurance plan will be only 25%-33% cheaper than a zero deductible plan. Most people seem to expect a $5,000 deductible insurance plan to cost perhaps $100 per month when it’s more likely to cost $300-$400 per month at least under ACA rules. Moreover, they seem to feel cheated if they pay more in premiums and deductibles than they get back in paid claims. At the same time, they may pay their homeowner insurance premium for their entire lives without ever having to file a claim and feel lucky that their house didn’t burn down and wasn’t severely damaged by a hurricane or tornado. Go figure.
The large percentage of healthcare costs attributable to the highest cost patients ties into the need to find ways to better control healthcare costs. This includes just saying no, we won’t cover very expensive specialty drugs that only extend the life of cancer patients for a few weeks and with very low quality of life. We need to provide less futile or marginally useful care at the end of life. We also need to enact sensible tort reform and then have the medical specialty societies revise recommended practice patterns to better reflect the new, more sensible litigation environment. Along with mitigating fraud and providing patients with useful price and quality transparency tools, maybe we can slow the growth of healthcare costs. If we do all that, it will be reflected in lower or at least slower growing health insurance premiums.
Lot of good comments here.
Note to Barry:
My homeowner’s insurance costs about $1500 a year (in MN) and I pay it with zero complaints, knowing that I may never file a claim.
If my wife and I both had to buy health insurance, our premiums would be $15,000 a year and that is for a $5000 deductible. And this is with the supposed price break for older insureds! (the 3:1 ratio) Something does not compute here.
Let me go back to the pure insurance questions that started these posts.
a. Health insurance is fascinating because some consumers actually cost you money. When a high tech company sells an app, each consumer brings more revenue. In health insurance, there are some consumers who make you lose money.
b. The same insurance commpanies that are pulling back from the ACA (Humana, UHC, etc) are spending millions of dollars on TV ads to get Medicare Advantage and Medigap costomers.
Medicare is relentlessly guaranteed issue.
What goes on here? One observation is that the feds have been very helpful on helping Medicare insurers over their rough spots.
Whereas with the ACA, Republicans led and Dems followed to make the ACA risk adjustment program “budget neutral.”
I am a great fan of an economist named Dean Baker. He says that if you look behind many large industries, you see that federal subsidies are the key to their prosperity.
Bob –
I think a good part of the high insurance premiums for ACA plans is due to adverse selection.
With respect to Medicare Advantage, insurers have told me in the past that CMS’ risk adjustment mechanism is pretty good but far from perfect. At the end of the day, it still overpays for the healthy and underpays for the sick.
As I understand it, people choosing Medicare Advantage plans have an average risk score of between 0.80 and 0.85 with 1.0 defined as average risk. As Medicare Advantage beneficiaries’ age and their health starts to deteriorate, they often return to standard FFS Medicare to ensure maximum provider choice.
There are ways that MA insurers can limit the number of sicker beneficiaries who sign up for coverage with their company. One approach is to hold information sessions on the second or third floor of non-handicapped accessible buildings. Another is to deliberately not contract with the best cancer and heart centers. Another is to provide lousy customer service on purpose for members with very high claims.
At the same time, they have plenty of sicker members and pay out lots of claims. The average profitability of this business is about 5% before taxes. For managed Medicaid, it’s 3%-5%. The margins are low but the premium dollars are large so it’s a pretty good business in the aggregate for the big players, especially United and Humana.
By the way, every insurance company will have some clients who cost it money. It’s the nature of the business. The guy who totals his car or has his house burn down shortly after buying a policy is a financial loser for the insurer. So is the guy who buys a life insurance policy and dies soon afterward. It comes with the territory.
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Thanks to Barry for the detail on how insurance policies are constructed.
Here is a simplistic way of looking at the same thing:
Say that you are an insurance company and you are going to insure 100 people. You lay on a $6000 deductible to hopefully limit claims and therefore provide lower premiums.
Now you find that 10 of your 100 insureds have a major medical event costing $50,000 each.
Subtracting the deductible, you have $440,000 in claims even though you paid nothing for office visits, etc.
Add in your 15% for reserves, overhead, and profit, and you must collect about $500,000 in premiums. That means $5000 per policyowner or more than $400 a month.
The risk pool in ObamaCare probably looks a lot like this.
A risk pool in the old underwritten plans had a lot fewer big claims, thus the lower premiums.
As you say, the new $400 monthly premiums feel like a waste of money for healthy persons.
I do not have a solution here. But I do want to throw cold water on the idea that just going to “more catastrophic policies” will solve things, which I believe that Jeb Bush is claiming.
Hera above is well considered commentary.
My take is that ACA was intended to fail, with the calculated result being a stronger popular call for single-payer (let’s just call it what is is, rather than some euphemism like “Medicare”).
@Devon Herrick You state “Insurers have only received about $0.13 cents on the dollar” Clearly you’ve mixed your units. Have they received 13 cents on the dollar or 0.13 cents on the dollar? The first sucks. The second 100 times more.