The nation's largest health insurer, UnitedHealth Group, surprised investors last month. The company revealed that it was incurring substantial losses on the Obamacare exchanges — and that, consequently, it would scale back marketing its exchange plans in 2016 and possibly exit the exchanges in 2017.
The poor results for United's exchange business seem to have taken even its own management by surprise. In the prior quarter, management had talked quite positively about its plan to offer exchange coverage in a dozen more states next year.
How did the nation's largest health insurer get it so wrong? What can its competitors learn from this? And does United's experience tell us something about the future of Obamacare?
The answers to all these questions lie in understanding how the new exchange market differs from other health-insurance markets.
With a few notable exceptions, policymakers, health insurers, and the broader public have treated the exchange market as a subset of the individual health-insurance market. Yet the two markets actually operate differently, and that is mainly because Obamacare's coverage subsidies apply only to the exchange market.
The exchanges offer premium tax credits to enrollees with incomes between 100 percent and 400 percent of the Federal Poverty Level. However, because each enrollee's credit is linked to the premium for the area's second-lowest-cost Silver plan — and enrollees cannot receive more than that plan costs — the credits typically phase out at around 250 percent of FPL for single individuals and between 300 and 350 percent of FPL for two- and three-person families. Also, enrollees with incomes below 250 percent of the FPL can benefit from reduced cost sharing if they pick a Silver plan, with the federal government separately paying their insurer an additional subsidy to offset the increased expense.
Obamacare's subsidies are heavily skewed toward the lower end of the income scale, in other words. Further, people who don't qualify for subsidies can often find more choice of carriers and plans elsewhere.
In that regard, it is worth noting the experiences of two Blue Cross carriers that stayed off the exchanges. One of them, Mississippi Blue Cross and Blue Shield, has actually seen 14 percent growth in its off-exchange individual-market enrollment since the exchanges opened. The other — Wellmark, the parent company of the Blue Cross plans in Iowa and South Dakota — saw its off-exchange individual-market enrollment shrink by only 8 percent over the same period. These results suggest that there is little downside for insurers in not joining, or exiting, the exchanges.
Given all of this, it is no surprise that the most recent exchange enrollment report from the Department of Health and Human Services shows that 84 percent of exchange enrollees qualify for tax credits, and that 67 percent (two-thirds) of that subset are also enrolled in reduced-cost-sharing plans.
What this means is that the exchange market is much more similar to the Medicaid managed-care market — in which private plans contract with state governments to cover the poor, and aim to keep costs down by limiting their provider networks to doctors and hospitals willing to accept lower payment rates — than to the traditional individual-coverage market.
Interestingly, some insurers, notably Molina and Centene, picked up on that difference between the two markets, while United and others apparently did not.
Molina is a publicly traded Medicaid managed-care insurer. Prior to 2014, it had very little individual-market business. Yet Molina began offering exchange coverage in 2014 in all nine states where it had Medicaid managed-care contracts. During its first 18 months of offering exchange coverage (the available data end in June of this year), Molina's individual-market enrollment grew from 28,000 to 265,000 individuals, and the company reports that its exchange business is profitable.
Centene is also a publicly traded Medicaid managed-care insurer that previously had few individual-market enrollees. It entered nine states' exchanges in 2014, expanded its offerings to two more states in 2015, and will serve an additional two in 2016. It is now in the process of acquiring Health Net, which offers exchange coverage in two states where Centene does not currently operate. In its first 18 months on the exchanges, Centene's individual-market enrollment grew from 22,000 to 210,000 individuals, and it, too, says its exchange business is profitable.
So, why has exchange coverage been profitable for Molina and Centene, but not for United?
The explanation appears to be that, unlike United, Molina and Centene anticipated that Obamacare's subsidy structure and benefit mandates would produce an exchange market that looked more like Medicaid managed care, and designed and priced their plans accordingly.
Evidence for that can be found in the companies' plans for the lowest-income subset of exchange enrollees. Half of United's 2015 plans for that category charge copays of $10 to $40 for each primary-care visit and a coinsurance rate of 10 to 25 percent for emergency-room visits — meaning that for an ER visit to treat a minor condition that resulted in a bill of $200, the enrollee would pay $20 to $50. In contrast, for primary-care visits, Molina's plan charges no copays, and Centene's plans charge only nominal fees ($1, $2, or $5). Yet Molina also charges a flat $100 for each ER visit, and Centene's plans require copays of $50 to $150 per ER visit.
Plan designs that encourage patients to use primary care and go to ERs only for true emergencies are a good idea regardless of enrollee income. However, they are particularly important for steering low-income patients (who make up the majority of exchange enrollees) toward getting better and more consistent care at a lower cost. Indeed, the fact that Medicaid rules don't permit charging copays high enough to discourage inappropriate ER use is one reason why Obamacare's expansion of Medicaid to able-bodied adults is not the best policy for that population.
All of this put together offers some insights into the future of the exchanges, reveals the fundamental flaws in Obamacare's basic policy design, and suggest ways for Congress to avoid those mistakes in any alternative legislation.
By combining overly regulated coverage with a subsidy structure targeted to the lowest-income enrollees, Obamacare significantly limits the potential market for exchange coverage. That means current exchange enrollment patterns aren't likely to vary much in the future, and total exchange enrollment — now about 9 million people — is likely to soon plateau, growing only modestly at best from its present level. Over time, the exchanges are likely to settle into being a niche market offering heavily subsidized plans to low-income individuals and served by a limited number of insurers with expertise in Medicaid managed care.
For reformers, the first step should be to reduce coverage costs by removing Obamacare's new benefit mandates and age-rating rules that increase premiums. That way, even lower-income workers — especially young adults, who are most likely to be uninsured — could afford coverage without the need for Obamacare's large subsidies.
The next step should be to replace Obamacare's skewed and complex subsidy design with a simpler one that distributes assistance more evenly across the income scale. That would mean providing uniform health-care tax relief to middle- and upper-income Americans directly — instead of only through employer-sponsored plans — with supplemental assistance for lower-income individuals. Americans could then apply their tax benefit (or low-income subsidy) to purchase the plan of their choice from among the options available to them. For most working Americans and their families, that would still likely be a plan offered by their employer. Those without access to employer-sponsored coverage could go directly to insurers or use insurance brokers — either online or in person — to shop for coverage.
A simpler design would also eliminate the need for government-run exchanges. Administering the law's complicated eligibility criteria and subsidy calculations are the only functions the exchanges perform that were not already offered in the private sector before the law.
A simpler, broader, and less regulatory design would also enable reformers to ditch Obamacare's unpopular employer and individual mandates. The employer mandate serves mainly to prevent workers who already have insurance from migrating to more subsidized exchange coverage, while the individual mandate exists to force those who don't qualify for subsidies to buy coverage made more expensive by the law's regulations and benefit requirements.
In short, the lesson for those crafting legislative alternatives to Obamacare is to make their designs simpler, broader, and less prescriptive. That way, the details of insurance-plan design can be left to a competitive private market, where insurers will succeed or fail based on how well they meet the needs of their customers — not based on how well they adapt to a system micro-managed by federal laws and regulations.
Ed Haislmaier is a senior research fellow in health policy studies at the Heritage Foundation.
This piece originally appeared in Real Clear Policy.