JAMA Forum
August 25, 2015
Why Are Private Health Insurers Losing Money on Obamacare?
By Uwe Reinhardt, PhD
The report last week that Aetna, one of the major US health insurance companies, would leave most of the health insurance exchanges established under the Affordable Care Act (ACA) of 2010 follows similar accounts the media that Anthem, Aetna, and other large private health insurers are contemplating withdrawing from the so-called ACA marketplace. The companies say the reason behind these actions is they are losing hundreds of millions of dollars on the business coming to them from these exchanges. To make up for the losses, some insurers, though by no means all, have quoted premium increases in excess of 25% for 2017.
This development seems puzzling, as it comes in an era of historically low growth in total national health spending. The latest estimates published by the Centers for Medicare & Medicaid Services (CMS), which provides estimates of current and projected national health spending, indicate that spending growth at only 4.8% in 2016 and project health care spending growth to be only 5.8% per year for the decade 2015-2025.
Furthermore, as a report published by the Urban Institute notes, even in 2010, the year the ACA became law, its impact on total national health spending was estimated to be an increase in annual spending of only 2.5% above what would have been spent anyway. In addition, the report also notes that the CMS now projects that total US national health spending during 2014-2019 will be $2.5 trillion lower than projections made in 2010.
Why, then, in the face of these historically low growth rates, have premiums on the ACA health-insurance exchanges for 2017 increased at such high rates?
The core of the answer to this question can be read in the chart (at the link below), showing the highly skewed distribution of per capita health spending across the US population. The phenomenon is known as the "80-20 rule," indicating that 20% of any large insured populations tends to account for 80% of all health care spending on that population.
Individuals in the high spending categories typically have multiple health problems requiring expensive treatments. A question that has troubled US health policy for decades has been what kind of health care these individuals with multiple conditions should receive and who should pay for it, assuming that only few very well-to-do US residents could afford to purchase their health care with their own resources. Here, it is helpful to remember that the US median disposable family income is only about $54 000, not even enough to cover the annual cost of some effective specialty drugs.
The contributions individuals make out of their paychecks toward employer-sponsored health insurance are community rated, which means that they are the same for all employees of the firm, regardless of their health status and even age. So healthy employees are forced to subsidize less healthy colleagues through the premiums they pay. With the ACA, the Obama administration sought to provide the same deal for US individuals purchasing health insurance in the individual market.
For health insurers, however, this approach can be called an unnatural act, because it forces them knowingly to issue policies to very ill people at premiums evidently far below these individuals' likely claims on the insurer's overall risk pool. Actuaries and health policy analysts understand that this approach can work only if all individuals, healthy and ill, are mandated to purchase coverage for a defined, basic package of benefits, at the community-rated premium—thereby forcing young and healthy individuals to subsidize with their premiums the health care of individuals with medical conditions in the insurer's risk pool.
However, for purely political reasons, the ACA mandate for all persons in the United States to be insured was rather weak, leading many younger or healthier individuals simply to forgo purchasing health insurance and paying the relatively low fines for doing so. Over time, this practice naturally will drive up the community-rated premiums, inducing even greater numbers of young and healthy individuals to forgo insurance coverage, leaving private insurers with ever-more expensive risk pools.
The result of this adverse risk selection (the scenario in which sicker-than-average people purchase insurance while young and healthy people do not) has been that some private health insurers underpriced their policies on the ACA exchanges, perhaps to gain market share early on or because they simply did not anticipate quite the adverse risk selection that occurred.
It is hard to see a way out of this dilemma, given the current political climate. The task is doubly difficult in the United States, because the health care system is structured to yield prices for health care products and services that are twice as high or higher than the prices of identical items in other countries, driving US per capita health spending also to be twice as high as in many other developed countries. Thus, it is much more expensive in the United States than in other countries to provide health care to all residents, especially those who are ill and poor.
If health care costs in the United States were lower, most people would probably agree that ill, low-income citizens should receive the needed health care that is available to better-off individuals. The problem is that our health system is in danger of pricing kindness out of our souls.
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Comment by Don McCanne
Although many readers are quite familiar with the concept of adverse selection presented here, the take-home message today is contained in the last three paragraphs of Uwe Reinhardt's article. By relying on private insurers to control spending, we have driven per capita health care spending up to twice the average of nations with far better health care financing systems. According to Reinhardt, "The problem is that our health system is in danger of pricing kindness out of our souls."
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