How Do You Fix A Marketplace That Is ‘Too Big To Fail’?

It has been a rocky start for the Affordable Care Act (ACA) marketplaces. From website glitches to insurer exits (Aetna’s scale back is only the latest) to lower-than-expected enrollment, few people could claim that the marketplaces have been perfect in their infancy. But they are still a source of health insurance for millions of Americans; giving up on them would plunge the health insurance landscape into crisis. In the coming years, it is imperative that the most pressing issues facing the marketplaces be identified and reforms be put in place to address them.

The two biggest challenges facing the ACA marketplace right now are closely related, and unfortunately, mutually reinforcing. The first is that enrollment is below expectations—fewer people have signed up and the people who have selected a plan are sicker than previous estimates. The other challenge is that the plans offered on the marketplace are overpriced from the perspective of potential enrollees yet, at the same time, priced too low from an actuarial perspective for many carriers to see the financial upside. While there is certainly significant geographical variation in the nature and extent of these problems, we must diverge from Tolstoy here, and acknowledge that each of these unhappy markets is by and large unhappy in the same way. Luckily, that suggests that successful reforms should be largely generalizable and should also be mutually reinforcing – that is, improvements in the risk pool should, in turn, foster greater affordability.

The stakes are high. Approximately 20 million people receive coverage in the ACA regulated individual market, counting both the “on” and “off” exchange segments. Fewer people are in pre-ACA non-compliant non-exchange plans and this number is getting smaller. The fortunes of the “on exchange” and “off exchange” components of this individual market rise and fall together as they share a common risk pool. While 85 percent of the on-exchange market may be subsidized, roughly 40 percent of the individual market as a whole is unsubsidized. This means that plans must be affordable for those earning 400 percent of poverty, roughly $97,000 for a family of four. Last year, the individual market generated about $90 billion in premiums. As a source of coverage for millions of people, and revenue for thousands of health care providers, the individual market is arguably too big to fail.

Yet significant challenges exist. Since enrollment is relatively low among young and healthy people, marketplace claims have exceeded those of the average employer plan. Additionally, marketplace rules have enabled relatively easy entry and exit by consumers, leading to various attrition problems that impact whether paid premiums can actually cover the total claims costs. While people who have not enrolled say that marketplace plans are too expensive, carriers as a group appear to have underpriced plans significantly. For the individual market as a whole, the ratio of claim costs to premiums per member per month has risen; for example, for HCSC it rose from .81 in 2013 to 1.17 in 2015. Because of this, many carriers have found their way to the marketplace exit doors, some voluntarily, others in body bags, and most of those remaining are requesting to raise premiums prices significantly in 2017. A round of recent high-profile exits has led to new questions about the future of the marketplace.

Despite these headwinds, a path forward is being forged, primarily through adjustments made by carriers and improved regulation. The aforementioned price increase is one such necessary adjustment. But there are also nascent signs of innovation in the marketplace. Significant changes to plans have occurred since 2014, as carriers learned the hard way that traditional employer-type plans appeal primarily to sick people. The young and healthy have more transactional interests in health care, and value cost and convenience most. While many new plans have foundered, others are offering novel business models with the potential to both build brand loyalty and reduce exposure to high costs. Even some of the Blues are forming partnerships with health systems to offer new kinds of plans. Tighter regulation of the market will prove helpful, as well. The Centers for Medicare & Medicaid Services recently made some needed modifications to rules governing Special Enrollment Periods, and wisely have proposed to put short-term plans on a shorter leash.

These changes will probably allow the individual market to survive, but what will it take to make it thrive? The Robert Wood Johnson Foundation recently funded a Georgetown University study, Strategies to Stabilize the Affordable Care Act Marketplaces, which draws lessons from challenges faced during the creation of Medicare Part D and Medicare Advantage. Some of these challenges will sound familiar, as they concern premium stability, poorly served markets, and the potential for carrier exit. Strategies contemplated or deployed to improve those markets may be relevant for the ACA, and there are many other possibilities too.

A non-exhaustive list of ideas is below:

Improve incentives. Lack of affordability is the main reason given for failure to enroll, and premium increases will only worsen that problem. The premium subsidies could be made more generous across the board, or to those at the higher end of the eligibility scale. Additional tax credits could improve affordability by reducing out of pocket costs.  

Continue to stabilize the market. While risk adjustment will always create winners and losers, options are being considered that may increase accuracy in assessing and compensating for risk. Risk adjustment will continue, but the risk corridors program is set to expire this year, as is reinsurance.  All three stabilization programs are permanent components of Part D. Many believe that the continuation of reinsurance would have a beneficial effect.

Change the risk pool. Increased outreach and marketing may help boost enrollment among underrepresented groups. But there are other less organic strategies to alter the risk pool.  The tax treatment of health insurance in the small group market could be changed in ways that encourage more migration to the non-group market, or in some states it may be beneficial if the small group and individual markets were merged. Or more targeted initiatives could be pursued that seek to limit leakage of important groups into short term or student health plans.

Change the plans. Standardized plans have been promoted by federal and state regulators, but it is too soon to say how they impact the marketplace.  New and more appealing products may promote additional enrollment, while bad consumer experiences will have the opposite effect. Other product changes may be worth considering, such as requirements about metal levels, or the comprehensiveness of coverage. There is a balance between supporting consumer decision-making and promoting innovation, and it is important to find ways to do both.   

Support weak markets. As recent events have demonstrated, some markets, largely in rural areas, present unique challenges and will struggle to be competitive. When designing Medicare Part D, policymakers created a public “fallback” plan, which would get implemented only if competition in a particular area was too meager. While never actual deployed, it may be a useful option for the ACA marketplace.

These ideas are not new, and all come with tradeoffs. Some, but not all, have received at least a smattering of bi-partisan support. Little is known about their potential impact, however, and in the current environment, implementation is very challenging. Allowing more state experimentation through the use of 1332 waivers would go a long way toward helping stakeholders learn what types of changes may improve the functioning of the market. If conditions improve sufficiently, many of these reforms may not be needed. But one thing is certain – if maintaining our historic coverage expansion is an important goal, there is no greater priority than ensuring the continued vitality of the individual market.

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