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Life Under Obamacare

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Two years in, there's a lot we still don't know about Obamacare. How many people will it end up insuring? What will the premiums look like? How much will the program cost?

Some of these questions won't be answered satisfactorily for a while, if ever. Even the most basic data point, on how many people have gained coverage, comes from Gallup polls and is a little murky. The percentage of people saying they don't have health insurance has fallen from about 17 as enrollment kicked off to about 12 now. The easing of the recession has presumably helped that.

Other answers, however, will come into focus in the next year or so. The most important being: What will the market for individual insurance look like once Obamacare is in full effect?

Policies for 2016 will be the first ones priced after insurers have a full year of claims data. The prices will increasingly also reflect the disappearance of a safety net: the reinsurance and risk corridor programs that were designed to protect insurers from unexpectedly high claims. As written into the health reform law, these programs didn't have to be budget neutral, meaning they could spend more on subsidies than they took in from insurer fees, hopefully preventing the dread problem known as the "death spiral." However, as Republicans complained that this amounted to a slush fund to pay off insurers for keeping premiums low (at taxpayer expense), the administration promised to make sure the risk corridors didn't pay out more than they took in -- and the "Cromnibus" budget resolution in December wrote that into law.

new report from Standard & Poor's shows just how much difference that could make: S&P expects there will be enough money to pay only 10 percent of claims. This suggests that at least a substantial minority of insurers are expecting to lose a lot of money on the policies they have already written. The typical response of insurers who lose money is to raise premiums in future years. There's some evidence that this is already happening.

Oregon's insurers have filed their 2016 rate requests, and they're large. More than half of the insurers in the market are requesting double-digit increases, with one insurer trying to raise rates by more than 40 percent. Oregon's current moment is just a small sample, of course. But it raises the concern that premiums are about to rise a lot higher and faster than many people were expecting.

This is of concern for two reasons. The first is, of course, the cost to the taxpayer: as premiums rise, so will the subsidies we pay. And the second is what this might portend for the structure of the insurance market. There's already quite a bit of concern that enrollment may be stalling out, with people who get huge subsidies eagerly snapping up the product (who doesn't like things that are practically free?) but higher-income consumers, who get smaller subsidies or none at all, saying "thanks but no thanks" to the relatively pricey high-deductible plans on offer.

What will the insurance market look like under those conditions? We can sketch some broad probabilities:

  • If most of an insurers' customers are subsidized, pressure on prices will come from the government rather than consumers. Folks whose premiums and cost-sharing are capped as a percentage of their income are going to shop on benefits rather than price. Regulators, of course, will want lower prices, and will bring the full force of their powers down on insurers to get them. But this will lead to the sort of tortured dynamic that appears so often in the public choice literature: Regulators will care a lot about price and specific metrics, not a lot about the actual preferences of consumers. So mandatory birth control may stay while ability to see a doctor in a timely manner may suffer. Insurers have already used up one of the easiest tricks, cutting pricey teaching hospitals out of their networks. It will be interesting for health wonks, but potentially painful for consumers, to see what goes next.
  • Larger insurers are more likely to stay in the market. We've already seen a few insurers fail or exit, and they tend to be smaller ones -- start-up co-ops, or this elderly Wisconsin firm. This makes pretty good sense. For a big health care firm, exchange policies are a tiny portion of revenue, so the company can afford to sell these policies at or below cost in order to stay on the good side of HHS. This does create a potential vulnerability, however: To the extent that Obamacare really does break the link between employment and insurance, as many advocates have dreamed, and employers start shifting their workers into exchange policies, HHS will be asking insurers to cannibalize their profitable sales for unprofitable ones. 
  • Writing exchange policies will be a riskier business. Thanks to the law of large numbers, bigger insurance pools are more stable and profitable insurance pools. If you insure only 1,000 people, an unluckily high number of cancer patients or neo-nates can break the bank. If you insure millions, you have a little more cushion. A smaller market means more risk -- and remember that the millions of people who have bought exchange policies are not in a single market, but are scattered across a lot of regional markets? You, the consumer.
  • The exchanges will require continued infusion of state funds, or high fees. Exchanges enjoy considerable economies of scale, which allow you to amortize hardware and development costs across lots and lots of policies. Size is no guarantee that an exchange can cover its costs, of course. Even Covered California is far from being self-sustaining. But the smaller the insurance pool, the more subsidies the exchanges will require.
  • The exchanges will be more politically vulnerable. If exchanges are mostly a transfer to low-income groups -- and so far, that's what they are -- rather than the broad middle-class program that was sold to the public, that will eventually become clear to voters. Those voters will look at the money being transferred from their pockets and into insurance subsidies, and ask whether those subsidies couldn't be trimmed a bit.
  • The subsidy caps could put the whole market at risk. So far most consumers seem to be interested in exchange policies only if the government picks up most of the cost. Right now, that's not a huge problem for consumers, because the subsidies cap premiums at a percentage of income. However, starting in 2019, if exchange subsidies exceed 0.54 percent of GDP, the subsidy formula shifts, so that future increases in subsidies are pegged to consumer price index -- which means that consumers would have to pay more out of pocket, and the taxpayers' risk would shrink. Of course, this is very speculative, because we don't know what health care costs will look like, and a smaller pool could mean that total subsidy payments would be lower, even if per-capita spending continued to rise.

Overall, I think that this is a real potential threat to the future of the insurance market. But as yet, it is only a highly speculative threat. We'll know more as the risk-adjustment programs begin to expire, insurers get more experience in setting rates, and states begin to publish more data on what insurers plan to charge.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
Philip Gray at philipgray@bloomberg.net