Taxpayers Increasingly Victimized in Obamacare Exchanges

-18(A version of this Health Alert was published by The Hill.)

Recent news has renewed attention on Obamacare’s health insurance exchanges (misleadingly called “marketplaces” by the Administration).

America’s largest health insurer, UnitedHealth Group, will all but withdraw from the Obamacare exchange business. Having sold plans in 34 states this year, the company will participate in only a “handful” next year. With 795,000 beneficiaries, UnitedHealth Group indicates it will lose $650 million in the exchanges this year – over $800 per enrollee.

Other insurers are sticking it out. Notably, Anthem, another leading for-profit insurer, which has nearly one million Obamacare enrollees, is positive about its future in the exchanges. In its latest quarterly earnings call, Anthem anticipated a profit of three to five percent. However, that is not likely to happen until 2017. Further, the insurer said it needs the federal government to take unspecified actions to “stabilize” the market. Anthem’s optimism is surprising.

Republicans in Congress have railed against taxpayer-funded “bailouts” of health insurers which operate in the exchanges. Unless Democrats retain the White House and win compelling majorities in both chambers of Congress this November, it is unlikely insurers will restore the cozy relationship they had with the federal government when they succeeded in getting Congress and the President to impose a mandate to buy health insurance through the Affordable Care Act in 2010.

In fact, the exchanges are quickly turning into toxic pools of surprisingly expensive patients who seek coverage when they need treatment and then drop out. The individual mandate and limited open enrollment have not addressed this problem. Optimistic Anthem runs Blue Cross or Blue Shield plans in 14 states. However, the Blue Cross Blue Shield Association, which represents 36 Blue Cross and Blue Shield plans covering 105 million Americans, has released a study of its members’ claims data in Obamacare exchanges in 2014 and 2015. Obamacare enrollees are sicker and more expensive than enrollees in pre-Obamacare individual plans or employer-based plans. Medical costs for the Obamacare enrollees were, on average, 19 percent higher than employer-based group members in 2014 and 22 percent higher in 2015. The average monthly medical spending per member was $559 for individual enrollees versus $457 for group members in 2015.

An independent study conducted by scholars at the Mercatus Center confirms significant Obamacare exchange losses in 2014. The Mercatus study shows how badly insurers mispriced their exchange products in Obamacare’s first year, despite a taxpayer-financed reinsurance fund designed to backstop losses in Obamacare’s first three years. Losses were well in excess of $2.2 billion, after receiving net reinsurance payments of $6.7 billion. Further, these reinsurance payments were at least 40 percent more per enrollee than insurers had expected when setting premiums.

And, don’t forget the underperforming reinsurance program itself expires this year. Where will insurers look to cover their losses next? Although insurers are unlikely to convince Congress to solve their problem without wholesale reform to Obamacare, it looks like insurers are nevertheless – very quietly – figuring out how to get taxpayers to finance their losses.

The average Obamacare exchange premium increased from $346 in 2014 to $386 this year. That comprises 12 percent growth over two years. However, almost nine of 10 Obamacare enrollees are subsidized by tax credits, which significantly reduce the share of premium they pay themselves.

Examining premium hikes in Obamacare’s second and third years separately, 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. 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.

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.

The solution to insurers’ gaming this tax credit is a transparent, fixed-dollar tax credit, defined and appropriated by Congress, which allows individuals to buy insurance that satisfies their health needs, not insurers’ needs to cover their losses.

Comments (24)

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  1. Devon Herrick says:

    The exchanges are increasingly becoming high risk pools for people who are older, sicker and poorer than the average American. I suspect if not for the cost-sharing subsidies, the system would collapse even faster than it is currently doing.

    • Steve says:

      I’m still waiting for the day I can get car insurance after an accident and home insurance after my house burns down.

  2. Barry Carol says:

    Fixed dollar tax credits might be OK for healthy people who can pass medical underwriting but they likely wouldn’t come close to enabling the unhealthy and already sick to afford coverage and many couldn’t buy it at any price if they can’t pass underwriting.

    If we had actual high risk pools instead of the de facto high risk pools that the exchanges are becoming, taxpayers would be covering the bulk of the costs for those too.

    The 3 R’s were intended to give insurers time to learn how to price policies in a guaranteed issue environment. They made mistakes the first couple of years but are learning quickly. Insurers, given sufficient time, can easily take care of themselves. The unhealthy, already sick and low income people can’t unless they receive significant subsidies that make it possible for them to buy insurance that works for them at a price they can afford while allowing insurers to cover their medical claims costs and administrative expenses including a modest profit margin. The only viable alternative to do that in the absence of the ACA is adequately funded high risk pools but they won’t come cheap.

    • Our preferred solution is health-status insurance, as initially proposed by John Cochrane of University of Chicago. However, we have not figured out what do do about people who fail to pay their premiums.

      It may be the best way to ensure individual coverage is risk adjustment with government subsidy. I lean towards allowing underwriting, and sending a check to the beneficiary who is very expensive. However, that is not a policy we at NCPA have proposed.

  3. Big Truck Joe says:

    Obamacare’s exchanges will become to healthcare like what the US Post Office is to shipping packages. They are destined to lose billions of dollars but the government, especially if it’s a Democrat administration, will have no choice but to continue subsidizing the ongoing boondoggle or otherwise be forced to admit it’s a complete failure. The death spiral has begun as the only participants attracted to the Obamacare exchanges are the old and sick.

    It has become such a failure, with more than half Obamacare co-op exchanges closed, that I don’t think employers will dump their employees into the exchanges (as I think was the plan) which would equal out the wellness of the patient population.

    It doesn’t seem that there a Plan B or some other escape plan other than to plow more good money after bad. The only question, as economic feasibility is no longer an option, is how this pig is dressed – does it all close down or is it out on forever financial life support like the post office?

    • PJohnson says:

      While I agree with your sentiment there is one glaring difference. The Post Office is empowered by the Constitution whereas Obamacare is not. The former is a nightmare to fix, the latter not so much. At lease in comparison.

  4. The Big Ham says:

    Hillary was just on TV saying collage will be free and the states should pay for most of it!


    adverb: free
    1. without cost or payment.

    Guess she doesn’t understand the definition of free much like her husband doesn’t understand the definition of “IS”

  5. Don Levit says:

    55 percent of individual claims are $25,000 and below
    Any one who incurs that level of claim is a high risk
    Insurers should compete at that level with every person buying insurance thru the exchanges purchase such a policy
    It would be community rated and resolve 55 percent of the risk

    • Barry Carol says:

      Don — To clarify, are you saying that individual claims that are incurred over the course of the year of $25,000 or less account for 55% of total claims or the first $25,000 of claims, including the very high cost cases, account for 55% of claims? What percentage of the insured population incurs more than $25,000 of claims in any given year? It can’t be a very high number, can it?

  6. Don Levit says:

    Your first statement is what I am saying
    While claims above $25,000 May be 5 percent of a credible group they account for 45 percent of the claims dollars
    Stop loss insurance above $25,000 is not cheap due to the volatility of claims, especially with no annual or lifetime caps
    The medical loss ratio on quotes is about 45 percent due to the unpredictabity of claim amounts

  7. Barry Carol says:

    Don — If insurers sell community rated policies to cover the first $25K of claims, presumably subject to some reasonable deductible, who exactly will cover the catastrophic claims above $25K especially if reinsurers price that coverage very high in terms of the projected medical loss ratio? Would it be taxpayers picking up the very high cost claims? If so, it sounds like a pretty stiff tax increase would be needed to cover those costs. The money has to come from somewhere.

  8. Don Levit says:

    I am proposing policies that start at $25,000 and go to infinity
    Policies below $25,000 build balances under the deductible
    To reduce adverse selection monthly build up at $250 a month to $25,000 assuming no claims

    • John Fembup says:

      Don, I would suggest a larger catastrophic expense threshold than $25,000.

      It’s my understanding that a normal delivery now costs in the vicinity of $25,000 and that is hardly a catastrophic event.

      The CNN report linked below is from 2013 and cites average normal delivery costs of about $18,300. I’s guessing the data that figure is based on dated from 2100. Applying a 5% trend for the five years since 2011 yields a 2016 estimate of $23,000 – $24,000 for 2016:

  9. Don Levit says:

    Monthly build up over a 35 month period

  10. Bob Hertz says:

    Several observations:

    1. If the average spending on Blue Cross plans is $559 a month and the average premium is $386 a month, then Houston we have a problem.

    2. In my own state of MN, at last count about 38% of the enrollees in the Exchange plans were over 50. This is not necessarily a high-risk pool, it is just old.

    3. I do not think that any private insurer anywhere in the world makes money on guaranteed-issue health insurance without government support.

    Our own Medicare Advantage system has a very large amount of federal fiscal support. It is a million miles from pure free enterprise.

    This is what made me so annoyed at the Rubio-led Republican crusade to end the so-called ‘bailouts’ of ACA risk adjustment funding. It was a combination of their desire to harm Obama plus pure actuarial ignorance.

    The intelligent discussion would be whether to let insurers charge what they need to but then beef up the subsidies, or whether to just hold down premiums but back up the insurers, or whether to bring older and sicker persons into Medicare.

    As Barry points out, all these steps cost money. However the monies required are not enormous given the federal cash flows we already have.

    If the 10 or so million persons on the Exchanges saw their subsidies go up by $2,000 more a year, that is just $20 billion. If subsidies were extended to all income levels, so as to help the middle class, that might cost another $20 billion.

    $40 billion could be raised if the Medicare payroll levy was increased by one half of one percent. That could be divided between employer and employee assessments. The net effect for a person making $40,000 a year would be $200 total per year, or $8 a month for both sides.

    I grant that there is no will to repair the ACA, but there certainly is a way to do it.

    • I think you are quite right. Here at NCPA, we have always supported a universal tax credit. We have not yet dealt adequately with risk adjustment.

  11. Bob Hertz says:

    If anyone is interested, here is a well-written summary of the changes that Hillary Clinton proposes to the ACA. All the changes described here would make individual market policies more affordable to middle class persons.

    The ACA has been a rousing success for persons making less than 250% of poverty (less than $28,000 a year for a single person.) That is a huge bloc of people, (sad to say), but it is not a huge voting bloc — which is why the ACA is unpopular.

    The Clinton reforms are I suppose the nightmare for Bill Kristol and similar Republican strategists, in that they would make some real voters more thankful toward Democrats.
    This is what happened roughly during roughly three decades after 1936, when millions of voters felt personally thankful to Franklin Roosevelt.

    Although I roll my eyes and grind my teeth whenever I see Hilary on TV, I do like that her staff tends to put out practical programs that might actually make it into law and might actually work. This attention to legislative detail is utterly absent from Sanders, Cruz, or Trump.

  12. Barry Carol says:

    I’ve long thought that the ACA subsidy’s abrupt phaseout at 400% of the FPL was unfair and wrong. It would make much more sense to eliminate the income cutoff entirely and the cost would be comparatively modest.

    Also, the family glitch issue would normally be resolved through a technical corrections bill which is pretty standard procedure for legislation like the ACA. Unfortunately, that solution was precluded by the bitter politics surrounding the ACA.

  13. Allan (formally Al) says:

    John, I don’t know if health-status insurance is the only solution, but it certainly helps protect the free market. I can perceive of other ways or combinations that could do the same thing though I don’t know which solution would be the best.

    However, the earlier idea that insurers are quick learners and can solve the existing problems (with government aid instead of a free market) appear a bit naive. Insurers are quick learners as to how they can make a better profit and avoid losses (that is what they are supposed to do) so that some of the above ideas only lead to higher costs and further problems in paying for healthcare down the road. Some people don’t learn from history. Socialism doesn’t work. There is a limit how much one can steal from another’s pocket before the system falls apart from gaming and non-compliance.

  14. bob hertz says:

    History is elusive sometimes. Venezuelan socialism has collapsed after 15 years. Greek socialism collapsed after 25 years.

    But German socialism started in 1880. Scandinavian socialism is going strong after 50 years. I suspect that wealthy nations with favorable balances of trade, plus citizens who work hard and willingly pay taxes, can continue socialism for quite some time.

  15. John B says:

    Mr. Graham,
    I like the comment “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”.
    It seems as though the insurers have found the inevitable loop-hole that make the taxpayers responsible for the majority of the final costs for coverage. The taxpayer subsidy for plan deductibles and other out-of-pocket costs for income-eligible persons enrolled in the exchanges whom choose a silver-level health plan and are covered for up to 70 percent of the average total medical expenses, and must pay the rest through deductibles and co-payments. The high deductible plan had scared people away and according to Moffit, (2016) “the actuarial value level for a bronze plan is set at 60 percent, and the more expensive gold and platinum plans are set at 80 percent and 90 percent, respectively” (n.p).

    Moffit, R., E. (2016). Year six of the affordable care act: Obamacare’s mounting problems. The Heritage Foundation. Retrieved from: