On Election Day, the health care and financial security of 20 million Americans will be at stake. That’s the number of people who have gained health insurance under the Affordable Care Act. And news that premiums for plans under the law are set to increase by an average of 22 percent, just before voters head to the polls, has thrown another curveball into an unpredictable election.
The increase will affect only about 3 percent of Americans who have private insurance, but that fact has done nothing to quell Republican outrage, aided by wall-to-wall news coverage. (“Obamacare” and “death spiral” appeared in headlines from the New York Post, the Wall Street Journal and Forbes.) But this outrage is totally divorced from any context and obscures the real choice before us.
It’s easy to forget that health insurance markets before the Affordable Care Act were much, much worse. Back then, premiums often increased by double digits, and few insurance choices were available in rural areas.
But these were not the only problems. Insurance companies charged women, older people and sick people much higher premiums. They restricted or denied coverage entirely for people with preexisting conditions. They charged consumers much more in deductibles and other out-of-pocket costs. And they did not cover essential benefits such as prescription drugs, mental-health care and maternity care.
The Affordable Care Act changed all of that. The law replaced fragmentary markets that worked only for healthy people, and not for those who need access to health care the most.
The current premium increases in Affordable Care Act markets can best be understood as the growing pains of brand new markets — exacerbated by deliberate political opposition to sabotage the functioning of the law.
When the new markets opened in 2014, there were new insurers, new market rules and a new consumer population. Insurers did not have experience or claims data to accurately price their plans.
What’s more, the markets were hyper-competitive as insurers jockeyed to establish a foothold. Some of these insurers, the “co-op” plans, priced their plans way too aggressively, and then folded in subsequent years — but not before they had prompted other insurers to price their plans too aggressively as well.
The drafters of the Affordable Care Act anticipated the potential for pricing uncertainty in a new market. The law included a “risk corridor” program to act as a cushion so that insurers would not need to pad their premiums to account for uncertainty.
But Republicans in Congress intervened to hamstring this stabilizing mechanism. Even worse, they did so after insurers had already priced their plans (for both 2015 and 2016) under the assumption that they did not need to be overly conservative. This sabotage was responsible for about two-thirds of the financial losses incurred by insurers in 2014, losses that are now necessitating premium increases.
State governments, for the most part controlled by Republicans, also made decisions that are now resulting in higher premium increases. Most important, states that refused to expand their Medicaid programs have higher premium increases as a result. This is because a population with poorer health is enrolling in private plans in these states. In addition, states that took a longer time to fully transition to the new markets have higher premium increases than states that did not.
Despite these political headwinds, Affordable Care Act markets will stabilize. The premium increases for 2017 represent a market correction for the underpricing that occurred in early years. Although this correction is significant, the law’s premium tax credits act as a buffer — which analysts such as McKinsey think will prevent a “death spiral” of the sort that plagued markets in the past.
Even though there is no risk of a death spiral, the next administration, insurers and states must work together to accelerate the transition to equilibrium. As early as next spring, insurers will develop and file their premium rates for the 2018 plan year, so there is no time to waste.
The administrative action that would help the most is to adopt a balanced approach to “special enrollment periods” — during which consumers with special circumstances can enroll in plans outside the normal open enrollment period. There is some evidence that some people are abusing this process, driving up costs for everyone else. At the same time, only a small fraction of consumers who are eligible for special enrollment are enrolling in plans.
A balanced approach would verify eligibility for special enrollment in a consumer-friendly manner to guard against abuse, while taking measures to broaden this enrollment. For instance, insurers could agree to reinstate fees for brokers who help consumers enroll through this process.
More broadly, just as states made decisions that are causing premium increases now, they could make decisions going forward that moderate premium increases. Consider the red state of Alaska, which has gone from having the highest premium increases to one of the lowest premium increases for 2017.
This reversal is not a coincidence. In June, Alaska enacted a “reinsurance fund” to reimburse insurers for the costs of high-cost enrollees. The previous year, Premera — the only insurer in the state — had paid out 24 percent of its claims for just 37 high-cost enrollees. But after enactment of the reinsurance fund, Premera lowered its premium increases for 2017 from 40 percent to 9.8 percent.
Alaska’s example is an important one. States with steep premium increases such as Arizona, Minnesota and Oklahoma could follow its lead. The solution is simple and proven to work. And the next administration could provide these states with flexibility to implement reinsurance with help from federal savings.
The choice in this election, in short, is between pragmatism and ideology. The Affordable Care Act is working, although it is undergoing a temporary market correction. We know with certainty what steps might help stabilize the markets sooner. The alternative is to repeal the legislation with no shred of a plan to replace it, causing chaos in the markets and leaving 20 million Americans hanging in the balance.