The ACA’s “Impending Implosion”: Fact or Fiction?


Image (C) Gage Skidmore (permission granted via Wikimedia Creative Commons)

Speaker Paul Ryan – Image (C) Gage Skidmore (permission granted via Wikimedia Creative Commons)


After Speaker Paul Ryan pulled the American Health Care Act (“AHCA”) bill from the House floor on March 24, 2017, President Donald Trump explained that he and the rest of the GOP would no longer pursue legislation to repeal and replace the Affordable Care Act (“ACA”).

 

In a statement to the press, President Trump said, “I’ve been saying for the last year and a half that the best thing we can do, politically speaking, is let Obamacare explode. It is exploding now.”

 

Indeed, many Republicans have promised to “fix” the ACA, claiming that the federal healthcare law is “imploding,” “collapsing,” or is “in a death spiral.”  In recent years, the GOP has frequently voted to repeal the ACA, claiming that the law will lead to a collapse of the healthcare system.  These repeal votes were largely symbolic as President Obama held a veto over these bills.

 

Now that the GOP holds the White House in addition to the majority in Congress, the AHCA was the GOP’s attempt to make good on the promise to repeal the ACA.  This attempt failed, and the administration must now decide whether to renew legislative attempts to repeal or change portions of the ACA, focus on policy changes through administrative rulemaking, or let the ACA stand.  President Trump and Speaker Paul Ryan have both asserted that the latter option would harm the American people because the ACA is in a “death spiral.”

 

But, under the ACA, are the insurance marketplaces truly “in a death spiral”?

 

Insurers use the term “death spiral” to refer to a phenomenon where a greater number of individuals with high healthcare costs enroll in a particular health plan, which drives up costs.  These higher costs incentivize healthier individuals to drop their coverage and switch to a lower cost (and potentially lower coverage) plan, thus leaving behind an overall sicker pool of people.  The sicker an individual is, the more health care goods and services they tend to use, which drives up their healthcare costs. As a result, premiums for the plan they chose go up the next year as well.  Higher premiums mean even fewer people enroll, thus continuing the cycle until the market collapses. This process is known as the “death spiral.”

 

Drafters of the ACA designed the law to avoid a death spiral.  They knew that by keeping healthier individuals in the markets, risk of a costly medical event spreads among a broader pool, which can help keep premiums down for the group and prevent a death spiral.

 

To do so, the architects of the ACA created the individual mandate, a requirement that most Americans have health insurance. The individual mandate also had accompanying enforcement (a stick) and assistance (a carrot).  The enforcement largely comes through tax reporting, and corresponding penalties for non-compliance with the mandate.  Assistance comes in the form of subsidies and tax credits to help people afford the insurance the ACA required them to obtain.  These intersecting components of the ACA, taken together, were designed to increase coverage for individuals, while preventing a death spiral in the insurance markets.

 

So how has that worked out?

 

Decreased Enrollment in 2017

 

The ACA has allowed 22 million people to gain insurance coverage, whether through the implementation of subsidies and the Medicaid expansion, or through various other policy changes, such as allowing those 26 and younger to stay on their parents’ plans.  According to a Gallup poll, the U.S. uninsured rate for the fourth quarter of 2016 was down to 10.9%, a historic low. With only 56% of employers reported providing health insurance to employees in 2016, down from 68% in 2000, more Americans are relying on Medicaid and the exchanges for insurance coverage.

 

However, critics of the ACA point to a decrease in enrollment in 2017 as evidence that the ACA death spiral has begun. In 2017, enrollment on the exchanges proved lower than expected, possibly because the premiums increased from 2016 (more on premiums below).  Many Americans were unable to afford the plans either because they did not receive a subsidy or the subsidy they could receive was not enough to offset the costs.   Some insurers have lost money because not enough healthy customers have signed up.

 

The decrease in enrollment may also have been due to the change in political climate.  For instance, HealthCare.gov reported that from Election Day to mid-December last year, over 30,000 people called its hotline to ask whether to sign up on the marketplace because of Trump’s vow to dismantle the ACA.  How many individuals failed to sign up for insurance because of Trump and the GOP’s promise that they would repeal the ACA remains unknown.  Additionally, the new administration pulled scheduled advertisements for the marketplaces, which also may have impacted the number of enrollees.

 

Health Insurance Premium Increases

 

Health insurance premiums have spiked significantly for 2017 enrollment.  According to a research brief published by the Department of Health and Human Services (“HHS”), marketplace premiums increased 22% on average in 2017.  Kaiser Family Foundation reported that the increase varied dramatically from state-to-state, with some regions seeing an increase of 145%.

 

The New York Times explained that these premium increases were expected.  After all, certain programs designed to stabilize the markets after the implementation of the ACA ended at the end of 2016.  Furthermore, medical costs increased in 2017, and many insurers charged too little to cover their costs in 2016.

 

Experts say no direct evidence supports the claim that lower enrollment triggered the premium increases, and began the death spiral.  Yes, those signing up for ACA policies have been, on average, older, sicker and more expensive to care for than originally expected in 2010 when Congress passed the law.  Companies have had to raise premiums, and some have stopped offering exchange policies altogether.  However, the ACA’s subsidies generally protect customers in the exchanges from the increased premium costs.  The costs should therefore have little to no effect on the enrollment rate.

 

Furthermore, the age demographics signing up for insurance on the exchange have remained roughly the same from 2016 to 2017.  In particular, young adults signed up at the same rate as in 2016.  Experts agree that if the markets were entering a death spiral, this population would be amongst the first to see decreased enrollment numbers, as they are the healthiest and most likely to drop the plans if premiums increased too much.

 

The bottom line: the increases here do not amount to the numbers one would expect if there was a true death spiral as the GOP suggests.

 

Insurance Company Withdrawal from Marketplaces

 

Another factor that the GOP cites to as evidence that the ACA is imploding is the withdrawal of insurance companies from the marketplaces.  Prominent Republicans point to Aetna’s 2016 departure from the exchanges in eleven states as a sign that the market is collapsing.  When Aetna withdrew, it explained that its decision was due to the mounting losses it was experiencing on the exchange market.  Aetna’s claim, if true, might signal that more insurers may leave the exchanges in the future, possibly leading to a complete collapse.

 

However, Aetna’s purported reason for leaving the exchanges appears to have been false.  Aetna did not leave because of alleged losses; rather, as a federal judge ruled in January 2017, Aetna left those markets to “evade judicial scrutiny” over its merger with Humana.  According to a July 5, 2016 letter from Aetna to the Department of Justice:

 

…Based on our analysis to date, we believe it is very likely that we would need to leave the public exchange business entirely and plan for additional business efficiencies should our deal ultimately be blocked.  By contrast, if the deal proceeds without the diverted time and energy associated with litigation, we would explore how to devote a portion of the additional synergies (which are larger than we had planned for when announcing the deal) to supporting even more public exchange coverage over the next few years.

 

Regardless of Aetna’s true motives in leaving the exchange, other insurers have pulled out of the marketplaces in certain regions, and particularly in rural counties.  Companies say the rural marketplaces have generated huge losses since they started paying claims in 2014.  According to a report by the Associated Press, “insurers have struggled to enroll enough healthy people to balance the claims they pay from high-cost customers, and they have complained about steep shortfalls in support from government programs designed to help them.”  Additionally. many insurers are unwilling to offer coverage to these less densely-populated areas as there are not enough people to tempt companies to participate in these areas.  As a result, customers in those areas often face incredibly high premiums.

 

These higher premiums hinder the ability of the ACA to fail to meet one of its purposes: offering coverage to people who could not previously afford it.  However, they do not impede it entirely.

 

For example, under the ACA, an individual or family may receive a premium tax credit.  These set a cap on the amount an individual or family must spend on their monthly payments for health insurance if they enroll in a marketplace plan.  The cap depends on the family’s income; lower-income families have a lower cap and higher-income families have a higher cap.  If the cost of the enrollee’s benchmark silver plan exceeds their premium cap, then the federal government will pay any amount over the cap.

 

These tax credits, the cost-sharing subsidies, and other safeguards offer some protection for rural areas.  

 

Despite Setbacks, the CBO Says the Exchanges Are Stable

 

Despite the obvious setbacks the ACA has faced, there is no evidence that the exchange markets are in a death spiral.  In the Congressional Budget Office’s (“CBO”) recent report on the AHCA, the agency predicted that the insurance marketplaces will remain stable under the ACA.  Specifically, the CBO stated that the availability of subsidies combined with the ACA’s penalties “are anticipated to cause sufficient demand for insurance by people with low health care expenditures for the market to be stable.”

 

However, on President Donald Trump signed an executive order establishing the administration’s policy to seek complete repeal of the ACA.  In that document, the Trump administration orders the Secretary of the HHS and other heads of executive departments to waive, defer, grant exemptions from, or delay provisions under the ACA that impose a fiscal burden on states, individuals, health care providers, insurers, and medical device companies.

 

As a result of this order, the Internal Revenue Service (“IRS”) implemented a last-minute change to the enforcement of the individual mandate.  Earlier this year, the IRS had changed its system so that it would reject tax returns during processing where the taxpayer did not provide information related to health coverage.

 

However, after reviewing the executive order, the IRS will continue to accept electronic and paper returns for processing even where a taxpayer does not indicate their coverage status.  The IRS assures that “taxpayers remain required to follow the law and pay what they may owe‎,” but that the agency will ask follow-up questions and correspond with the taxpayers at a later date.  The agency says this is similar to how it dealt with healthcare coverage in previous years.

 

Still, this could signal a change in enforcement of the individual mandate.  If the IRS chooses to not enforce the penalties on a wide scale, this could affect the stability of the ACA.  Furthermore, if consumers do not feel obligated to keep their insurance because of Trump’s assurances, this could lead to mass amounts of people leaving the marketplaces.  This could prompt a death spiral.  It is unclear whether the CBO accounts for the political climate and change in agency policies in its evaluation.

 

Conclusion

 

The ACA has had some bumps in the road; premiums are higher than originally projected, and many regions have limited options when choosing plans on the marketplace.  However, the numbers here do not signal a death spiral.  The ACA’s subsidies protect customers from the premium increases, and should therefore have little to no effect on the enrollment rate.

 

Furthermore, there is no evidence that healthy people are leaving the marketplaces.  Although the younger demographics are not as strong as the ACA’s original drafters envisioned, in 2017 they still accounted for 27% of the enrollees, a very solid number.  If the markets were entering a death spiral, this population would be amongst the first to see decreased enrollment numbers.

 

Although the markets are not reaching a death spiral, even proponents of the ACA acknowledge that the law has its problems that Congress and HHS need to address.  For instance, although rural regions have not yet reached death spiral numbers, insurers are pulling out of the markets.  Only one insurer provides plans to the Alabama, Alaska, Oklahoma, South Carolina, and Wyoming exchanges.  This leaves consumers with little competition, raises premiums, and, if left unchecked, could lead to a collapse in these markets.

 

However, just because the ACA has had challenges does not mean that policymakers should abandon it altogether.  If, as Republicans claim, the ACA has forced markets into a death spiral, then ignoring the issue will not make it go away.  Failing to provide support for HealthCare.gov, for example, may have done more harm than good for these rural markets.  In order for the exchanges to function properly, it is crucial for the federal government to encourage healthy populations to sign up.

 

Policymakers should also ensure that rural regions have access to affordable healthcare before certain markets reach a death spiral.  One way of accomplishing this is through managed competition, which is where a sponsor acts on behalf of a large group of subscribers.  That entity structures and adjusts the market so that insurers cannot avoid price competition.  Here, the federal and state governments could take a pool of money from all plans and use it to support the rural communities that are facing adverse selection.  This would allow those populations to continue to sign up for health coverage on the marketplaces without facing higher premiums, and thus prevent a death spiral.

 

Doing nothing, as the GOP and President Trump propose, could spell disaster for certain populations.  Hindering the implementation of the ACA, such as no longer enforcing the individual mandate through an executive order or some other piece of legislation, would do more harm than good.  These actions would begin, or at the very least accelerate, the death spiral that the Republicans hope to avoid.