The irony of Obamacare is that its health insurance exchanges are suffering from a problem that was supposed to be avoided – what health economists call adverse selection. When health insurance plans must cover people with preexisting conditions and they are not allowed to charge premiums that reflect the risk of those conditions, then people have every incentive to wait until they are sick to enroll in an insurance plan. This forces insurers to deal with a greater number of expensive policyholders compared to healthy members in their risk pools.
The individual mandate was supposed to prevent the exchanges from collapsing. It was supposed to force young, healthy customers to purchase health insurance plans that are generally expensive and aren’t necessarily tailored to their medical needs. But when claims costs are drastically outpacing premium revenues, resulting in hundreds of millions of dollars in losses for a business, it’s a signal that the individual mandate is failing. And it’s no wonder that newspapers were inked with breaking news headlines that UnitedHealth Group, the nation’s largest insurer, will be backing out of a majority of states’ Obamacare exchanges in 2017.
It is ironic that, just hours before the news broke, the Charlotte Observer editorial board featured an article on how Obamacare is, ahem, working.
It’s not like customers weren’t forewarned, however. The company made it known back in the fall of 2015 that it was contemplating going forward with this decision.
And Then There Were Two
The impact is very real in North Carolina. United’s exodus means that just two insurance providers, Blue Cross and Blue Shield and Coventry, a subsidiary of Aetna, will be offering federally-approved health plans to those who do not receive insurance benefits through their employer. United currently provides insurance in 77 of the state’s 100 counties. Moving forward, one quarter of North Carolina’s 600,000 exchange enrollees, those who reside in 39 counties will lose their second insurer option and be left with Blue Cross and Blue Shield as their only one.
The pickings are slim for some as is. After entering information to make it appear that I qualify for a special enrollment period on healthcare.gov, North Carolina’s federal exchange portal in which consumers can shop for individual policies and compare plans offered in their respective zip codes, I was able to determine that 23 counties are already limited to just one option – Blue Cross and Blue Shield.
The map below shows the number of insurance companies offering health plans on North Carolina’s federal exchange. The dark blue counties, concentrated in the northeast, currently have just one insurer offering plans. Those in light blue will have only one from 2017 once United ceases to participate.
What will the exchange landscape look like for those 62 counties in years to come? Blue Cross and Blue Shield posted its first financial loss in over 15 years amounting to $50.6 million in 2014, just one year after the exchanges opened for business. Granted, the company did recover with a $500,000 net income at the close of last year due to other products they were providing, such as employer-sponsored plans, which helped offset its $282 million loss on exchange customers.
But CEO Brad Wilson has said himself that the federal health law’s exchange design is simply unsustainable. It’s certainly possible that the state’s largest insurer will announce its departure from Obamacare’s overhaul of the individual health insurance market, given that 5 percent of its customers consumed $830 million in health care costs during the first year of the law’s exchange rollout in 2014. From that population, the carrier received just $75 million in revenue from collected premiums and funding streams (two of which are temporary) that were built into the law to mitigate initial market instability for insurers participating on the exchange. To date, the company has taken a $400 million hit on its ACA business.
There are other factors at play that put the non-group market on precarious footing. When the exchanges first went live in 2014, insurance companies knew they were in for an initial financial hit. To mitigate resistance to participating in the exchanges, the federal health law offered temporary funding streams to help balance initial destabilization.
Those temporary funding streams, otherwise known as risk corridors and reinsurance, will go away starting in 2017. These provisions were built into the law to help offset initial the adverse selection many carriers are currently experiencing with their Obamacare customer pools. Risk corridors operate where funds are shifted from plans with lower than expected claims to offset other plans where actual payments have surpassed projected amounts. Meanwhile, reinsurance acts as an insurance company’s own insurance policy, in which a fee is assessed on each person, including dependents, covered by most employer-sponsored health insurance. The fund will total over $20 billion up to 2017, and insurers can dip into this fund and be reimbursed 80 percent of a consumer’s annual claims that exceed $45,000.
Let’s not forget that the risk corridors weren’t really all that reliable. Experts are now saying that insurers won’t be enjoying balanced risk pools – where enough young and healthy enrollees will offset the costs of expensive enrollees – until 2018.
While Blue Cross and Coventry continue to experience the array of unintended consequences within the parameters of Obamacare, they will also end up picking up costly enrollees who once were United members. This leaves them no choice but to make a plea for another round of average double digit premium increases come rate filing season.