The “no-confidence” vote of the health insurance giants clearly imperils the Affordable Care Act. Unchanged, enrollees face rising premiums, fewer plan choices and increasingly narrow provider networks. Soaring premiums could squeeze out middle-income households, further skewing risk pools in a reinforcing insurance “death spiral.” How might this affect employers? What is to become of the ACA?

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Aetna to Exit ACA Exchanges: Why It Matters to HR

Thu Aug 25, 2016

Aetna, the country’s fourth-largest health insurer, announced August 15 that it would stop offering health plans in most Affordable Care Act health insurance exchanges in 2017. This follows similar moves by UnitedHealth Group and Humana.

Citing more than $430 million in pretax losses in its exchange business since 2014, Aetna said it will pull out of 11 of the 15 states or 536 of the 778 counties where it now operates. The action by Aetna and the other carriers calls into question the financial viability of the exchanges and indirectly the sustainability of the Affordable Care Act itself.  

Insurance companies have lost money in their exchange business because claims costs have consistently outpaced revenue from premiums—a mismatch attributable to risk pool demographics. Contrary to government and industry actuarial forecasts, exchange enrollees have tended to be older and sicker than expected, while younger, healthier individuals have largely opted out.

Wasn’t ACA designed to prevent insurance losses?
Yes! Lawmakers wrote three mechanisms into the 2010 healthcare reform bill to blunt “adverse selection” and prevent big insurance losses.

First, with the law’s ban on pre-existing condition exclusions and strict limits on how much insurance companies could charge in premiums, it was thought that an “Individual Mandate”—requiring everyone, younger and older, healthy as well as sick, to have insurance—would achieve a balanced risk pool. Penalties for failure to have coverage were later upheld by the U.S. Supreme Court.

But many younger and healthier Americans have decided not to enroll in the exchanges, perhaps because the required 10-category “essential health benefits” plans make exchange offerings too expensive.

Second, the ACA authorized government subsidies, premium tax credits and cost-sharing reductions, as a new entitlement available on a phased-out basis to households earning up to 400% of the federal poverty level (FPL), or about $97,000 in 2016.  

The problem with the subsidies, however, is that they have not attracted enough people to the exchanges. To be sure, lower-income households who qualify for the highest subsidies have enrolled in larger numbers. But as the subsidies telescope down with rising incomes and thus cover a smaller and smaller portion of plan premiums, fewer individuals enroll.

Economist Greg Ip, writing in The Wall Street Journal August 18, showed that 81% of the eligible population earning between 100 and 150% of the FPL enrolled, but only 17% of those with incomes between 301% and 400% of the FPL did.

The bottom line: instead of the ACA exchanges covering over 20 million individuals by now, as the non-partisan Congressional Budget Office (CBO) originally forecast, only about 10 million people have signed up and paid for coverage—a much smaller risk pool than insurance companies were counting on.

The ACA included a third provision as a special backstop against large losses and to prevent sharp increases in exchange premiums. These programs, called risk adjustment, “risk corridors” and “transitional re-insurance,” were to compensate for the difficulties in accurately pricing insurance risks in the new world of the ACA.

The plan was to have the government transfer funds from profitable carriers to money-losing companies and at the same time impose special fees on plan sponsors, including employers, to finance “reinsurance” payments to carriers. But the backstops were authorized for three years only, and will generally not be available to help insurance companies in 2017.

What does this mean for the ACA and why does it matter to HR?
The “no-confidence” vote of the health insurance giants clearly imperils the Affordable Care Act. Unchanged, enrollees face rising premiums, fewer plan choices and increasingly narrow provider networks. Soaring premiums could squeeze out middle-income households, further skewing risk pools in a reinforcing insurance “death spiral.”

Clearly the new president and Congress will need to come together on a legislative plan to make the exchanges financially sustainable. And this is why Aetna’s pull out from the exchanges matters to HR.

Notwithstanding sharply divided Republican and Democratic opinions on the Affordable Care Act, and regardless of who wins the White House, a 2017 ACA rewrite will be hammered out. Democrats want to save the exchanges and the ACA; Republicans want to make big changes as well. Compromise will happen.

Here’s how. First, Democrats and Republicans agree that legislation needs to tighten up the exchange enrollment process. Individuals should not be permitted to “game” the system by enrolling when they get sick and dropping out when they are well—as many do now in the so-called “special enrollment periods.” And there must be strict verification of income eligibility for premium tax credit subsidies.

Second, legislators on both sides of the aisle may need to compromise on extending the reinsurance backstop program—at least temporarily. Democrats want to save the Affordable Care Act, of course, but Republicans will be supportive too since insurance companies are quitting the exchanges in states that have substantial Republican constituencies. Aetna, for example, is pulling out of Arizona, Florida, Georgia, Kentucky, North Carolina, South Carolina and Texas, leaving residents with few insurance options.

Third, Capitol Hill Republicans have a big incentive to make changes in the Affordable Care Act in order to push their own agenda to “replace” the 2010 law. They would like to allow insurance to be purchased across state lines, give the states more discretion to innovate in covering the uninsured, strengthen health savings accounts and possibly replace ACA’s 40% Cadillac Tax with a cap on the present law unlimited tax exclusion for employer-sponsored coverage. Republicans might also wish to allow insurance companies to offer more flexible—and cheaper—health plans.

Finally, the employer “play or pay” mandate to offer affordable and minimum value coverage to full-time employees or pay IRS penalties will be on the table in 2017. ACA’s “Employer Shared Responsibility” compliance burden is clearly excessive and costly—and runs the risk of discouraging employers from offering coverage, exactly the opposite of what was intended.

One question is how far are Democrats willing to go to defend the employer mandate? With many of the architects of the 2010 law no longer serving in Congress and a new occupant in the White House, the mandate is likely to be a bargaining chip in achieving the consensus on healthcare reform both Democrats and Republicans say is needed.

The Aetna pull-out does not mean the end of the 2010 Affordable Care Act. But it could mean the beginning of the 2017 Affordable Care Act.