Introduction
Exchanges are the centerpiece of the new ACA legislation and
are due to cover millions in January 2014. Unfortunately, there are many flaws
in the concept and roll out that may just cause the program to fail. That said
the definition of success and failure will be significantly different based on
the two political factions.
My definition of failure would be enrollment less than
projected, covering less currently uninsured than projected and the financial
failure or withdrawal of more than 5 plans nationwide after the first year.
Based on this definition here are some of the reasons I think the exchanges
could fail.
Exchanges
The concept is simple – offer preset plans from many
different insurance carriers for small groups and individuals at competitive
rates with no pre-existing limitations. The initial foray will be offered to
groups fewer than 50 and individuals. Anyone under 400% of the FPL will be
eligible for subsidies. Also to help prod enrollment amongst the young and
healthy there is a negligible penalty ($95) if one does not carry health
insurance post January 2014. The goal is to cover at least 25 million of the
currently uninsured and shift many small groups to individual coverage.
Challenges
There are many intrinsic flaws in the plan for exchanges. I
will endeavor to explain a few. First the penalty to not having insurance is
ridiculous when compared to the cost of a plan on the exchange. The young and
healthy that are not covered by their employers plan will not be motivated to
sign up by a $95 fine or 1% of their adjusted income. Plus it will not be levied till after the next
tax filing since the IRS will be policing the deal based on tax returns filed.
These youngsters will definitely choose to spend their money on other things –
cars, trips, smart phones etc. Since most exchange rates released thus far are
on average well over $300 a month or $3600 a year for single coverage, I doubt
that the target enrollment of young and healthy will be achieved. Even in 2016
when the percentage goes up to 2.5% of adjusted income or a $695 fine
(whichever is greater) they will still pale in comparison to the cost of a
plan.
The currently uninsured is an interesting demographic. There
are several distinct groups within this population. The truly uninsured which
makes up the largest portion; the under insured which is also a big number and
then the rollover “uninsured” from the high risk pools (developed in 2010 as
part of the ACA legislation). I will review them in reverse order.
The rollover folks from the high risk pools (PCIP) will join
the exchanges as long as the rates are not higher than the prior PCIP programs.
My guess is that most rates will be about the same so I expect most of these folks
will join an exchange plan especially if they can also qualify for a premium
subsidy. This is bad news. We know from looking at the results in the PCIP
plans that these folks are really very sick and as such will rack up massive
claims. Since the feds totally missed their numbers in these PCIP plans I
suspect nothing different here. Most of the exchange rates were developed
assuming regular risk distribution not these very expensive high risk folks.
The under insured segment will only join the exchange if the
subsidies are great enough to make the rates equal to or less than what they are
paying now for inferior coverage. The exception to this will be the folks in
this segment that are very ill and need better coverage. Again this is bad news
for the exchanges. This segment will deliver members with higher than average
claims and will strain the funding by the plans.
Finally there is the true uninsureds. This is a big group and
they probably need healthcare badly since they have not had it (except for emergency
care) for some time. I think many of these folks will sign up because they
often fall below the 400% of FPL and can get subsidized. Not all of this
population will participate though. As the CBO estimates we will still have
well over 30 million uninsured after the ACA is fully implemented. The ones
that participate will have utilization that will be higher than an average
population and because they are a very large group they will again skew the
losses in the plans negatively.
The next group of potential members for the exchanges will
be coming from small groups. They will by regulation have to be fewer than 50
lives. This means that most will come from Community Rated programs which
traditionally have been lost leaders for insurance carriers (bad risks). Since
the employer mandate to cover employees for health insurance has been postponed
the exodus to the exchanges is probably going to be delayed somewhat. I am
certain that many micro groups (fewer than 20 lives) will dump their current
group plans and drive their employees to exchanges. Again a great deal of this
activity will be driven by two factors – exchange rates versus their current
plans and the subsidies their employees can garner. My guess is we will see
less migration than expected (7 million) but those that come over will be poorer
and less healthy than the general population. Once again this will drive up
losses in the exchange plans.
Finally there is the currently insured individual
population. This is estimated at just over 20 million people today. Will these
folks trade in their current plans for an exchange plan? I think again it will
all come down to pricing and subsidies. If your current plan is competitively
priced and provides good coverage you would have no reason to migrate. My guess
is that about 5 million of this population will migrate because exchange rates
will be better and many will qualify for subsidies.
Performance
So how will the exchanges perform? Initially the
administration and HHS will tout every enrollment success. They will find folks
to testify about how these exchanges are saving their lives (and they might
really be). Over time we will see if the initial rates approved state by state
for these essential benefits will be able to pay the claims for this mixed but
generally ill population. I predict four things will happen over time:
1)
Rates in the exchanges will start to rise
rapidly to cover growing costs
2)
A few plans will fail or withdraw after the
first year
3)
Enrollment will miss its marks and everything but
the exchanges will be blamed for the failure
4)
Exchange participants will find that seeing a
provider will be harder than they think (long waits) and many will think they
were better off going to free clinics and the hospital ER’s.
Other Issues
With ACA comes the death of pre-existing limitations and the
advent of unlimited maximums. Why is this critical for exchanges? Well, without
any time to accumulate reserves by using pre-existing exclusions, the plans
face immediate critical claim utilization. With unlimited maximums the plans
will see record setting single claims. The provider community is gearing up for
producing higher top end claims to compensate for lower Medicare and Medicaid
reimbursements. One carrier has reported seeing a $15 million dollar claim this
year. The highest recorded prior was well under $5 million.
Federal subsidies are not just for the participants in the
exchanges. Several plans in various states are being given up front federal
money to subsidize their entry into the exchanges. While this might sound smart
it is actually going to be an issue later. As these plans enroll sicker than expected
people and their claims are higher than expected, they are going to run out of
money. Then the states/feds will have to decide to either give them more or
face the embarrassment that a plan they subsidized failed and now there are
thousands of folks without coverage. They will fund more and this means we will
be propping up failing plans with tax dollars. Not an efficient way to deliver
health care.
The exchanges themselves are an issue. The Federal
government originally assumed that only 6 states would not set up their own
state exchange. In the end 26 states opted out. This means that the feds have
had to find the funds to set up and run 20 extra exchanges. With the states
opting out the feds are under pressure to prove these exchanges will work but
they will get no help from the states. This further decreases their chance of
success and increases the rates these exchanges will charges in those states.
(Feds are tacking on a fee for having to run these exchanges).
There is competition. Several private exchanges are popping
up all over the country offering an alternative to the state/federal exchanges.
Many are reporting good enrollment and strong mixes of population thus
spreading the risk. We will see if they fare better.
If we use the High Risk pools as an indicator on how well
the federal government can predict enrollment or cost in a plan we are in for a
rough ride. Originally the CBO estimated that the PCIP’s would enroll over
375,000 people. At last count that number maxed out at 56,257. Or stated another way they only hit 15% of
their enrollment goal. They also estimated that each enrollee would cost about
$13,026 but after just one year of data the average cost per enrollee was
$28,994. They only missed by 123%. They also missed on the age of participants
saying that about 55% of the uninsured pool would be under age 35. Actually the
enrollment shows that only 21% were under age 35. These statistics do not
inspire confidence in the exchanges.
Insurance carriers are not all playing. Many large national
carriers have decided not to enter certain state exchanges. For example both
Aetna and United have opted out of the California exchange (the largest in the
country). When this happens there is less competition and usually limited
choices. This means less distribution of potential risk and the higher chance
of failure or withdrawal.
Summary
Despite all the hype I am not convinced that exchanges will
work as planned. I think there are some intrinsic flaws in the approach and
these will affect the results. I am however convinced that the government will
do everything in its power to drive the exchanges including but not limited to
subsiding them further. All this translates to a financial fiasco that will
hurt the American people and economy. This could all have been avoided with
better planning and a bit more insight. Sadly for the estimated $1.4 trillion
this mammoth law is expected to cost over the next ten years, we could have
gone out and bought, at close to street prices, a plan for 25 million Americans
who are uninsured or underinsured. Per the CBO estimates for coverage in ACA, this
would have been a better result. And we would have had no additional
bureaucracy, no political fighting and no change to the current private sector
system – just more folks covered.