Sg2 Letter: Unraveling of the Public Exchange Markets: Now What?

In the early spring, Sg2 smelled smoke in the public exchange markets. There were accounts of consumers stopping payments on their premiums and a few notable insurers were reporting financial losses. Those early signs of smoke have given way to a raging, 5-alarm fire that threatens to bring the roof down on the 11 million Americans who buy their health coverage on the exchanges—along with the doctors and hospitals who care for them. Can the public exchange markets be saved? How do the scenarios look different depending on the outcome of the November presidential (and congressional) elections? And what can and should you do about it?

To start, let’s pin down some facts about where we are and what got us here. The exchanges have been a contributor—but just the third-largest contributor—to the roughly 7-point decline in the uninsured rate since the passage of the Affordable Care Act.Old-fashioned, employer-provided coverage and Medicaid expansion have been far more impactful. Today roughly 150 million Americans get health coverage through their employers, 66 million through Medicaid and 50 million through Medicare. So the exchange markets are important (especially to those 11 million), but they are just a piece of a much larger pie.

Why are the exchange markets in trouble? It’s multifactorial, of course, but a few key factors are worth noting. First, exchange enrollees are older and sicker than expected. Policymakers and insurance company actuaries had to guess at what the profile of this new pool would look like, and they guessed wrong. A national Blue Cross Blue Shield analysis showed that their plans’ exchange enrollees had a 52% higher rate of depression, 94% higher rate of diabetes, 38 more admissions per thousand and 22% higher medical costs than non-exchange enrollees.

Flaws in the law’s design and execution are partly responsible for this result. A weak individual mandate with low opt-out penalties (as little as $695 per year in 2016), means that only those eligible for large subsidies (the poorest among us) are buying insurance in any numbers. It is a cardinal principle of insurance that for a risk pool to be representative and stable, at least 75% of those eligible must be enrolled. We are currently at 40% participation in the exchange markets. Why so low? The plans are expensive, of course, in return for fairly slim benefits. Stringent benefit regulations and a lax policy on/off–period enrollment (hey, I can wait to see if I get sick, and then enroll!) have only compounded the weak participation rate. To belabor the fire metaphor, flaws in the design and execution of the Affordable Care Act were the gas cans and oily rags that put the exchange markets at risk. The early influx of high-cost enrollees lit the match that got the fire started.

Insurers were the first to run from the flames—but, to be fair, they also have sustained most of the burns. Collectively, insurers lost $6 billion on the individual exchange market in 2015, while hospitals have seen improvements in payer mix. Also, to be fair, those improvements in payer mix have been modest and not equally distributed. One by one, the nation’s largest for-profit insurers have announced their exit from some or all of the exchange markets they serve (not-for-profit Blues has reported losses but mostly stood pat). The net result? An analysis by Avalere projects that 19% of exchange enrollees will have a single marketplace choice in 2017—effectively, the death of competition. Absent corrective action, we can expect an adverse selection spiral of higher premiums and lower enrollment until the exchange markets wither away on their own—no need for a high-profile roll-call vote to repeal.

Now what? You can hear the approaching sirens of the first responders in the distance. In a few months the trucks will roll up to our exchange market fire and out will jump…either Hillary Clinton or Donald Trump…along with the newly elected 115th Congress.In their platforms and public pronouncements, neither candidate has shown much focus on the exchange markets. Hillary Clinton is on record advocating for the introduction of a public option and the opening of Medicare to those over age 55. Her approach seems to be to let the exchange markets play out as they will and fill the gap with government coverage, a plan sure to face stiff opposition from Congressional Republicans and some Democrats. Donald Trump has offered less-specific guidance, beyond a pledge to repeal the Affordable Care Act and replace it with “something great”—to include nibble-around-the-edge conservative solutions like the sale of insurance across state lines and the block-granting of Medicaid. Of course, the arcane intricacies of exchange markets do not make for good campaign fodder. So does nobody care about the 11 million exchange enrollees? Should we?

We should, of course, for the good of our institutions and our patients. It is far from clear that the administrative tightening undertaken by HHS will be enough to put out the fire. More likely, stabilizing the exchange markets will require a significant increase in the penalty for opting out of health insurance and at least a short-term increase in government subsidies to both individuals and insurers. Either of these measures would face massive political hurdles. With a Democratic sweep of the White House, Senate and House, those hurdles would be only somewhat less high. There is a counter-argument to trying to save the exchange markets—there are 2, actually. The contrarian on the left argues that we should let the exchange markets wither away (we tried, right?) and edge closer toward a single-payer solution. From the right, the counter-argument wishes the same end for the exchange markets, with the slack picked up (we hope?) by tax credits and a deregulated private insurance market. Choose your poison.

What’s a health care executive to do? Start by understanding just how much the Affordable Care Act has meant (or not meant) to your organization—are the stakes low or high for you? Form your own opinion about what you’d like to see happen—new subsidies, new types of insurance products, different ratings bands? Talk to your local payers and even your state insurance commissioner about their experience and ideas. There are parts of the country—Florida, in particular—in which the exchange markets seem to be working just fine, so far. Is there common ground that you can advocate for? And prepare, at least in the short-term, for the possibility of reversals of some of the recent payer mix gains.

When the Affordable Care Act passed in 2010, Sg2 advised you to think of it not as a thunderclap but a continuously evolving, rolling experience that would last a decade. Six and a half years in, the rolling continues and promises to go on far past the November elections.


Steve Jenkins                                               Bill Woodson

Senior Advisor, Sg2                                     Senior Vice President, Sg2

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