The nation’s largest health insurer, UnitedHealth Group, recently announced an operating loss of some $700 million and warned it may exit the Affordable Care Act (ACA) exchanges after next year because policies sold there lose too much money. Furthermore, 12 of the 23 Obamacare health insurance co-ops launched in 2014 — more than half — have pulled out of the market, forcing their customers to look elsewhere for coverage; most of the remaining co-ops report losses of millions of dollars.
As these examples illustrate, the current system is not working. Private health insurance is not a viable enterprise in the new environment created by the ACA. However, for many backers of the legislation, that may be a feature not a bug. As private insurers consolidate their plans, limit patient choice, raise deductibles, and find other ways to stem losses, Americans will become ever more dissatisfied with the bureaucracy and quality of care. At that point a wave of pundits and politicians will be there to save the day, saying we need a single-payer system to get those pesky insurance companies out of the way.
True, we are still in a transition period, and millions of healthy people may enter the insurance pools once the “individual mandate” penalty rises to 2.5 percent of income (or $695, whichever is more) for 2016. Perhaps with this huge penalty hanging over their heads, enough healthy people will enroll so that the insurance companies can at least break even. Even here, it is a weak defense of Obamacare that millions of people need to be threatened with a large tax to coax them into purchasing the “affordable” insurance ostensibly guaranteed by federal law.
But there are other things in flux as well. For example, since the opening of the ACA exchanges, premiums have been artificially reduced through risk-sharing between the federal government and the health insurers. Under the “risk corridor” program, for instance, the government uses a formula to determine whether a given health insurance company charged premiums that were too high or too low compared to the “allowable costs” they incurred in granting coverage.
“Risk corridor” refers to the splitting of losses/profits between insurers and the Department of Health and Human Services (HHS), the split depending how much insurers either under- or overcharged their policyholders relative to claims paid. For big enough losses, HHS would absorb 80 percent of the tab.
The point of the “risk corridor” program and other such measures was to reassure private health insurers to stay in the market, even though the ACA was going to wildly upset the industry. The program was supposed to convince insurers not to jack up premiums too much in the immediate wake of the ACA and thus give Americans sticker shock. If it turned out that health claims were much higher than anticipated, no worries: the feds would absorb most of the mistake.
Ah, but on October 1, the Centers for Medicare and Medicaid Services announced that during 2014 insurers owed the “risk corridor” program $362 million, while they were owed $2.87 billion in reimbursements. The government thus decided it would only pay out 12.6 percent of the reimbursements theoretically owed to insurers who had suffered larger-than-expected losses. The original ACA legislation was not explicit on whether the “risk corridor” program had to be revenue neutral, but a December 2014 budget reconciliation deal said that it would be — meaning health insurance companies would only get paid pennies on the dollar, a somewhat ironic outcome.
In this environment we can expect health insurance companies to do whatever they can to save money. This includes charging high deductibles that make insurance a bad deal for many Americans and restricting the “in-network” doctors or hospitals so that, say, cancer patients will go elsewhere. Over time the current system will prove to be clearly unsustainable, leading to renewed calls for a single-payer system–exactly what some of the ACA architects, such as Senator Harry Reid, are openly advocating.
Robert P. Murphy is a Research Fellow with Independent Institute and research assistant professor with the Free Market Institute at Texas Tech University. He is the author of Choice: Cooperation, Enterprise, and Human Action.