One component of the Affordable Care Act (ACA) draws more attention than all the rest: the individual exchanges that now provide insurance for more than 14 million people nationwide. For most Americans, these exchanges are "Obamacare."
Supporters note that the exchanges provide coverage for people who never had it before, that insurance in the exchange is available to all regardless of medical history or condition, and that the exchanges (at least theoretically) provide participants with a menu of alternative plans. Critics point out that the exchanges have had shocking rate increases (approximately 25 percent for 2017), have seen most of the "co-op" plans fail, have had many of the nation's largest carriers leave, and have reached the point where 40 percent of the counties in the nation are only served by a single carrier.
As a health system that sponsors the largest health insurer in our state (Utah), we see both sides of this issue clearly. After the exit or failure of several major carriers, we now cover more than 60 percent of the exchange members in the state. Our data show that approximately 80 percent of the people who joined the exchange previously had some other source of insurance (they were not uninsured)—and in most of these cases, the former source of insurance no longer exists. So simply eliminating the exchange options would result in larger numbers of uninsured than was the case prior to the initiation of the ACA.
We believe it is self-evident that the people who, acting in good faith, now depend on insurance provided through the exchange must be protected. However, we also believe it is indisputable that the exchanges in most states are structurally unsound and unsustainable. To understand what can be done, either through repair or through repeal and replace, it is helpful to understand what is currently broken.
At the heart of the issue is that the exchanges are built around three incompatible approaches: 1) guaranteed issue; 2) rate regulation; and 3) voluntary participation.
"Guaranteed issue" requires that an insurer take all comers regardless of their medical condition.
Rate regulation takes several forms, but the two most important are "community rating" (where all participants, regardless of their health or illness, pay the same premium) and "age-based price bands," which require that the oldest, most expensive, individuals pay no more than three times as much as the least expensive age group (those in their 20s).
Each of these rate regulations distorts markets, since people with chronic disease, or those having babies, or those who are approaching Medicare age will predictably cost many times more than those who are young, healthy, and not contemplating any encounter with the healthcare system. We note, for example, that the actual cost difference between average 64-year-olds and 24-year-olds is more than a seven-fold difference versus the three-fold payment difference allowed. The 24-year-olds are subsidizing the 64-year-olds in a dramatic fashion.
While the goal of broad coverage with lower premiums is laudable, it is incompatible with the idea of voluntary participation in the exchanges. People who can receive care through their employer, or through a "legacy" plan ("if you like your plan, you can keep it") or who choose to pay the relatively mild penalty for not having insurance can opt out.
Furthermore, people can join the plans throughout the year if they experience "life events," such as changing jobs (or losing jobs), having a baby, changing residences, or changing income levels. And they can leave plans at any time simply by stopping premium payment. Not surprisingly, many obtain coverage when they anticipate a medical expense and then drop it when the event is over. It is like buying auto insurance after an accident and dropping it once the damage is repaired.
The authors of the ACA recognized these problems and attempted to mitigate them using various mechanisms to pay insurers if total enrollee claims exceeded expectations. However, the magnitude of the problems has vastly exceeded what was expected—or funded. Insurers have been left to deal with huge shortfalls (more than $400 million in the case of just our organization), leading to the demise or departure of many insurers.
As the largest provider and insurer in a very red state, we suggest an actuarially sound approach that would protect the millions of people who placed their trust in the exchanges and who lack other options. We believe this approach could receive bipartisan support since it meets the needs of individuals, provides sustainability, and harnesses market forces. Here's an outline:
- Reinstate high-risk pools like those that existed in at least 35 states prior to the ACA. These pools, which existed in both red and blue states, provided subsidized coverage for those with known expensive existing conditions and chronic diseases. The number of people in this group is small, but the costs are very high, and removing that destabilizing cost would allow the exchanges to function more like other types of insurance—dealing with unpredicted risk.
- Continue to provide guaranteed issue and community rating. Providing an alternative venue (the high-risk pools) for those with known expensive conditions would make this possible and attractive.
- Allow insurers to match premiums to actual expense based on age. This would eliminate the inequity and market distortion caused by the young subsidizing their older neighbors. With notably lower premiums, insurance would become much more attractive for the millennial population.
- Continue to provide tax subsidies based on income. However, subsidies should not be so attractive that people forgo other insurance alternatives (like insurance sponsored by their employer). Subsidies would protect people with low incomes, especially those who are older with higher expenses.
- Provide significant penalties for those dropping insurance. Consumer products like cell phones show how this can be done using market principles.
- Allow penalties for those entering an insurance off-cycle or those entering without insurance. For example, preexisting conditions could be excluded for 6 to 12 months. This is also a proven market dynamic that encourages people to maintain insurance coverage.
- Give states considerable leeway in defining the specifics of exchange policies. We note that Utah and Massachusetts—states that practically define opposite political poles—both started exchanges prior to the ACA. Innovative states such as these can test approaches and prove concepts.
This approach is compatible with additional reform initiatives. For example, allowing insurance to be purchased across state lines could be accommodated within this framework, as could expansions in consumer-directed care, and it could directly support coverage portability.
Dropping the exchanges would leave millions without a fallback option. However, the exchanges in most states cannot go on as they have—they are in a death spiral. We believe the basic exchange structures can be infused with market forces, allowing them to provide a secure and affordable future to millions of Americans.
Commentary by Dr. A. Marc Harrison, president and CEO of Intermountain Healthcare, a health system based in Salt Lake City, Utah, with 22 hospitals, 1,400 employed primary care and secondary care physicians at more than 185 clinics in the Intermountain Medical Group and health insurance plans from SelectHealth.
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