Who knows?

Photographer: Andrew Harrer/Bloomberg

Obamacare Premiums Are Going Up. Again. Now What?

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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If you haven’t been following the Obamacare news recently -- and given how much else has been going on, there’s a good chance you haven’t -- then you may have missed the news that insurers' rate-increase requests for 2017 are quite large. A new report from the Kaiser Family Foundation says the cost of the “benchmark” plan (the second-lowest-cost silver plan in a market, which is the price used to calculate subsidies) will go up 10 percent this year, double the rate at which prices increased last year. The lowest-cost silver plans are also seeing substantial hikes. This matters because these are the most frequently purchased plans.

The usual caveat applies to these preliminary requests: Regulators might not approve them. But that caveat was hauled out last year by the law’s supporters, who seemed to think that this was simply the opening stage of a negotiation in which insurers asked for the stars in the hope of settling on the moon. In fact, regulators approved large rate hikes, and the state of Oregon actually made some insurers raise rates by more than they’d planned. Regulators dislike high insurance premiums, of course, but they also dislike insurance companies suddenly going out of business and leaving their customers without insurance. They are not going to approve rates that they believe will cause insurers to lose large sums of money.

And thus far, everything we’ve heard from insurers indicates that they have lost large sums of money. Last year, it was possible to believe that this was simply a one-time problem, because the rates for 2016 were the first that had been set with a full year’s worth of data on the new Obamacare markets. Insurers, analysts said soothingly, had initially underpriced, but now they were correcting their mistake, and things would quickly stabilize.

That has proven to be a false hope. If anything, losses have widened, and rates need an even bigger correction this year. Some of this may be due to the expiration of the temporary risk-adjustment programs, and now the uncertainty over whether the Department of Health and Human Services will be allowed to keep cutting checks for another subsidy program aimed at customers whose family income is under 250 percent of the poverty line (a judge recently ruled that the payments were illegal, but the ruling will be appealed). However, that’s not the whole story here. A big part of it is simply that the insurers cannot make a profit at current prices.

What does that mean for the future? A few months back I was on a panel with a very smart health-care reporter who said, basically, “Yes, there will be rate hikes, but there is some price at which insurance can be sold profitably, and eventually, insurers will figure out what that price is.” My response was that this isn’t necessarily true. Insurance markets have some interesting features, one of which is that it is quite possible for there to be no price at which insurance can be profitably sold.

In health insurance markets, this phenomenon is known as the adverse-selection death spiral. Basically, every time the price of insurance goes up, many of the people in the insurance pool who use the least health care decide that it makes more sense to go without the insurance and bear the risk themselves, and they drop their coverage. That means you’re left with the more expensive patients to cover, which means the average cost goes up, which means prices have to go up … and, well, you get the idea. The price the market eventually finds may be so high that very few people want to buy the insurance.

Now, there are factors weighing against this, most notably the mandate and the subsidies. So far, the mandate seems to have had very little effect on people's propensity to buy insurance. I’ve been careful to say in the past that that might change, because the mandate penalties were phased in over a few years and are only now at full strength. However, next year will pretty much tell us whether the mandate is going to work. If we don’t see a substantial increase in the number of people buying insurance for 2017, then it will be safe to say that the mandate was too weak, and that we are not going to get the hoped-for surge of young, healthy people into the Obamacare exchanges. Which, in turn, will be bad news for prices.

The subsidies, on the other hand, are obviously affecting behavior, because most of the people buying exchange policies qualify for substantial subsidies. The good news is that this will blunt the desire for healthier people to drop their coverage as the price of policies rises, because those cost increases will be passed on to the government rather than the consumer. The bad news is that health is positively correlated with income (on average, the richer you are, the healthier you are likely to be), so a market in which the poorest people are the least likely to drop their coverage is a market in which you are selecting for a sicker, more expensive pool.

The worse news is that, unbeknownst to most people, the subsidies are actually capped at a little over 0.5 percent of gross domestic product. We’re nowhere near that level yet -- the Congressional Budget Office expects us to spend about $43 billion in 2017 on premium tax credits, while 0.5 percent of GDP would be a hair over $90 billion -- but it doesn’t take too many years of 10 percent increases to get there.

Does that mean that we’re entering a death spiral? No. This could be the year insurers finally get it together and find an equilibrium price for insurance at which the customers are willing to buy, and at which the insurers can actually make money. It’s been a hairy few years for insurers selling policies on the exchanges, but the pool seems to have stabilized at about 10 million people, and maybe now they’ll finally able to get an accurate cost forecast.

What recent news tells us is simply that a death spiral remains possible, because despite last year’s big increases, they still haven’t found that equilibrium price. Since we don’t know what that price may be, we can’t say whether it will make a viable market. And even if there is no viable equilibrium price, that still doesn’t mean we’re in for a death spiral, because we don’t know what the government will do. Say some state-level exchanges start going into death spirals. Does Congress just sit around and watch the market die?

That’s a genuine question; I don’t know the answer. But if the Obamacare exchanges die, they will take the entire individual insurance market with them in the affected states, because the law no longer permits insurers to separate the pools. There’s at least some chance that Republicans will weigh ideology against screaming voters, and decide the voters win.   

What it comes down to is that three years in, we still don’t know what this program is going to look like or what it is going to cost. The number of people covered could go up; it could go down; it could flatten out about where it is right now. And the same is true of premiums. All we can say for sure right now is that eventually, we’ll find out.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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

To contact the editor responsible for this story:
Brooke Sample at bsample1@bloomberg.net