The real reason insurers are jacking up rates for Obamacare

  • Obamacare is lurching towards a bizarre form of stability thanks to subsidies.
  • Obamacare subsidies gives insurers the cover they need to jack up rates.
  • Even if rates rise dramatically, subsidized customers will still be profitable for insurers.

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While some health care experts have stated recently that the insurance market is "by and large" stable under Obamacare, troubles are clearly piling up.

In the weeks since mid-April alone, these new developments are cause for concern:

  • Aetna announced that is will pull out of the Iowa health insurance exchanges in 2018 and the only statewide carrier left, Medica, has said that it can't continue as the lone statewide health plan without more government support.
  • Aetna will also pull out of Virginia saying that it expects to lose $200 million this year in just the four states it is operating in.
  • Virginia, one of the first states to report requested rate increases for 2018, said that the state's largest carrier, Anthem Blue Cross, has requested an average 2018 increase of 37.7 percent while CareFirst Blue Cross is requesting a 35 percent increase in Virginia.
  • In Maryland, the dominant exchange insurer, CareFirst Blue Cross, said that it has lost an accumulated $600 million since it started selling Obamacare plans and is requesting an average 50 percent rate increase for 2018. This is on top of CareFirst's 2016 increase of 26 percent and 2017's increase of 25 percent. CareFirst is also requesting an average increase of 29 percent in the District of Columbia.

CareFirst CEO Chet Burrrell told the Washington Post, "What we're seeing is greater sickness levels. The pool of beneficiaries is becoming sicker, in part because healthier people are not coming in at the same level we hoped."

He went on to say that the factors he described will "lead to instability and to a spiral, and we think that we are in the beginning of that."

He added that these rate increases assume that the Trump administration will continue to make the cost sharing subsidy payments. If they do not, the rates would be 10 percent to 15 percent higher.

This is exactly what I have been hearing from my health plan contacts around the country.

A big factor in 2017 has been the impact this year's generally large rate increases have had on the unsubsidized market, that made up almost half of those buying Obamacare compliant policies in 2016.

Because these people are taking the full brunt of the higher rates, the unsubsidized market is starting to melt off in what appears to be the early stages of a classic death spiral. Not only has the CareFirst CEO used that term but so did the Aetna CEO earlier this year.

The Trump administration hasn't helped the market's stability. President Trump has threatened to withhold $7 billion in annual out-of-pocket subsidies for the poorest exchange participants and the Trump administration has effectively directed the IRS not to enforce the individual mandate.

President Trump has repeatedly said that the Obamacare individual health insurance market will "explode."

Not exactly.

What makes Obamacare unique is that not everyone will be hurt by the big rate increases.

"Ironically, the people most likely to be hurt are the working class and middle-class Trump supporters."

The lowest income people who get the best premium subsidies, and also have their deductibles and co-pays reduced, are not feeling these increases. The taxpayers are paying those costs in a program that limits a low-income person's cost exposure to a small percentage of their income.

The people who are and will get hurt are the almost half of the 2016 Obamacare exchange participants whose incomes are too high to qualify for the federal premium and out-of-pocket reduction credits.

These people are now being forced out of the pool by these high costs and that will only accelerate with more big increases in 2018. Ironically, the people most likely to be hurt are the working class and middle-class Trump supporters.

The health plans can't any longer tolerate these losses. As one Blue Cross CEO told me recently, "My Board has been clear, you will not lose [X] hundred million dollars on Obamacare ever again."

As a result, the health insurance companies' defensive strategy is simple: Limit the plan offerings available to ones that bring in the most premium and then drive the rates as high as they need to be in order to protect the insurance company's solvency. Health plan executives realize this will push the unsubsidized and partially subsidized people off the rolls but leave a core enrollment of taxpayer subsidized people insulated against the costs and ultimately profitable for the insurers.

Some experts have said that a death spiral by its very nature cannot be stabilized. Under Obamacare that is not necessarily true. Because of the uniqueness of the program's subsidy system there is likely a point where a health plan can concentrate its pool of covered people from among the most highly subsidized participants and collect enough premium to end the red ink. That is what these latest big increases are about.

Then there is political stability for Obamacare. So long as the middle-class is getting the short end of this stick Obamacare can never be politically stable.

So, President Trump is right that this will only get worse.

But, Obamacare advocates could also get what they want: The markets, if not the politics of Obamacare, could well begin to stabilize at least for the lowest income and most highly subsidized corner of the market.

But it would be a pretty bizarre form of stability.

Commentary by Robert Laszewski, the president of Health Policy and Strategy Associates, LLC, who has twenty years of experience in the insurance industry, serving as a chief operating officer for nine of those years, before beginning his Washington, D.C. policy and market consulting business.

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