Just keep chanting the mantra: "Rates will settle down."

Photographer: MIKE CLARKE/AFP/Getty Images

Eight Possible Fates for the Obamacare Exchanges

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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A lot's been happening in the health-care markets. California announced that premiums would rise by an average of 13.2 percent on its exchanges, after years of being one of the standouts for low premium growth. Meanwhile, Anthem, a large insurer, said it would expand its presence in the Obamacare exchanges -- but only if its merger with Cigna is allowed to go through.

Aetna is only the most recent insurer to struggle to make money on these policies; after expressing optimism in April, the company now expects to take large losses in these markets and is cutting back on its offerings for 2017. The market, says one quoted analyst, is still “very volatile.”

I’m not sure "volatile" is quite the right word, because volatility implies both large potential losses and large potential gains. So far in these markets, few people seem to be seeing the gains; most of the success stories I’ve heard have come from Medicaid managed-care companies that have successfully migrated their plans to the exchanges -- presumably by providing Medicaid-like narrow plans to the population that floats between Medicaid and the exchanges. For people who want better-than-Medicaid service, the plans are a lot more pricey -- and because those people use a lot of care, the plans keep getting more expensive.

This comes on top of news last month that the prices of the lowest-cost silver plans -- which tend to be the most popular options on the exchanges -- would be going up by a lot more this year than they did last year. If the insurance companies keep getting more bearish on these markets, then we can expect big hikes next year as well.

Where are these markets going? We can sketch out a few possible futures:

  1. Rates will settle down because insurers are just finding their footing. For the first few years, supporters of the law had a mantra: "Look how great Obamacare is; rates are lower than expected." They had to stop chanting that in 2015, when insurers started asking for -- and getting -- great big price hikes. The new mantra became: "It's a new market and insurers needed time to figure out how to price, but rates will settle down."
    Which also works for a limited time only. Obamacare sharply limits the ability of insurers to charge different rates to different people, or take significant profits, which means pricing should be pretty simple: the average expected claim, plus a modest profit margin. Sure, they could have mispriced for a year or two. But one or two years of price hikes ought to clear that up, especially because enrollment growth seems to have leveled off. If prices don’t stabilize soon, at some point -- maybe 2018 -- we have to concede that what we’re seeing is not an initial mispricing, but a market where consumer behavior is evolving in tandem with pricing, so that the latter can’t catch up to the former. That’s a very different problem, and one that could end in something like a death spiral in the unsubsidized portion of the market. Or a new law to patch up a system that doesn’t work right.
  2. Rates will settle down because the exchanges will turn into Medicaid-with-premiums. From what we’ve seen over the last year, the plans with the biggest problems seem to be plans that cost more and allow you lots of choice: choice of doctors, choice of hospitals, choice of treatments. Plans, in other words, that are a lot like employer-provided health insurance.
    Who are those plans attractive to? Upper-middle-class people, for one. But also, people who are sick, who want to be sure they can go to the best oncologist, not just whatever random oncologist the plan has available. Those plans may simply not be viable at prices anyone wants to pay. So the entire market may end up moving in the Medicaid-managed-care direction, with a very limited number of doctors and hospitals available.
    There are some issues with that, however. For one thing, such plans are pretty viable in urban areas, but in a rural area where there’s only one hospital, insurers can’t gain negotiating leverage by threatening to leave that hospital out of their network. Those insurers may end up leaving the exchanges altogether. It seems telling that Humana’s pullback will radically reduce the number of counties it covers, but involve much less radical surgery on the number of states it expects to serve.
    Also, while these ultra-narrow-network plans may be economically viable, it’s not clear that they’re politically viable. We tried narrow networks before, and had great success at controlling health-care costs for a few years. The organizations that made this work were called HMOs, and everyone hated them. A combination of political and market pressure gutted their ability to control costs, and that was that.
    Medicaid patients have long accepted not-very-good insurance because it was free and because the Medicaid population doesn’t have much access to employer coverage. Its low quality was politically sustainable because poor people tend to vote at lower rates than other Americans. But pushing Medicaid-style coverage upward onto middle-class people who do pay premiums and vote … well, you're back to that combination of market and political pressure.
  3. Rates will settle down at a much higher level, and unsubsidized people will stop buying insurance. With so much subsidy money sloshing around the system, a true “insurance death spiral,” which just keeps going until the market collapses and no one at all has coverage, seems unlikely. On the other hand, it’s certainly possible to see a sort of modified death spiral, where the only folks who buy insurance are people whose monthly premiums are capped at a few dollars. That insurance would be very expensive, but because the government would be picking up almost all of the tab, those consumers wouldn’t care much.
    This would lead to some interesting outcomes. For one thing, the number of insured people would peak and then start going down again, as the middle class exited the market. For another, we would have gone from a situation in which the uninsured were mostly poor people who couldn’t afford insurance because their incomes were too low, to a situation in which the uninsured are mostly middle-class people who can’t afford insurance because the premiums are too high.
    As with the Medicaid-for-all scenario, I’m not sure how politically stable that is. But I’m also not sure how politically viable a fix would be. Providing large subsidies to people with higher incomes would be very expensive. It was hard enough to find the money for Obamacare; taxes were raised, lucrative unrelated programs were attached to the bill in order to add their cash flows to the kitty, and deep cuts were made to Medicare that cannot now be made again to find another $50 billion or so for the middle class.
  4. Premiums stabilize or fall because healthy young people start flooding into the market. There are reasons you could see this happening: the individual mandate penalty could finally begin to bite; word of mouth and familiarity could breed enthusiasm for the program; employers could start dumping employees onto the exchanges. These things remain possible, but after three years, I’m getting pretty skeptical that they will happen.
  5. Premiums stabilize or fall because Obamacare starts hacking away at provider incomes to get health-care prices under control. I am skeptical that this will happen. Very, very, very skeptical.
  6. Insurers will just give up on a bunch of markets, leading to a crisis in which a number of exchanges have no policies at all offered. I assume that the government does something at that point. Not sure what. Maybe we get the public option. Maybe Democrats are hounded from office by angry voters and Republicans get to actually try having a health-care plan. Maybe the sweet meteor of death arrives while we’re still arguing about it.
  7. Premiums increase so much that they bump up against the subsidy cap (total subsidy expenditure is supposed to be capped at a little over half a percent of GDP). Whoever is in charge of the government at that point will have four very, very unappealing options:
    1. Pass a law that increases the subsidies, funded by some combination of new taxes and cuts to existing programs.
    2. Cut subsidies to some of the people who are currently getting them (with all the risks of market shrinkage and modified death spirals outlined above, plus angry voters calling their representatives).
    3. Have the Department of Health and Human Services siphon money out of other accounts to patch up the holes in the subsidies. I’d expect this to be the first thing they try, but it’s a pretty short-term strategy. There’s always a little extra cash sloshing around almost any budget, but it’s not unlimited, and tapping it often consists of doing things like delaying repairs, which means you cannot play these games indefinitely.
    4. Pass a series of one-year “fixes,” like the Medicare “doc fix,” that temporarily abate the problem, while turning it into an ongoing political crisis. If I had to lay money on the government’s ultimate response, this would be my best bet.
  8. A Sanders-like figure, on the right or the left, gets elected on a promise to gut-renovate the U.S. health-care system, and all this is rendered moot.

I have left out a few scenarios, like global thermonuclear war or alien invasion (see above: "meteor of death, sweet"). But short of these, the above outlines the possible futures I see for our health-care system. It’s not an accident that so few of them make one clap one’s hands in glee and say “Oh, splendid!”

When Obamacare was being debated, it was common to hear supporters of the law say “America is the only civilized nation that doesn’t have universal coverage.” We stood out in another way: Health care occupied relatively little of the government’s political time. In other countries, the minister of health can be as important as the minister of defense, and a great deal of political energy is expended arguing endlessly about health care: what to pay for, and how to get the money to pay for it.

We seem well on our way to being one of those normal civilized nations. You can certainly argue that this represents progress, that it’s a good sign when the government spends more time thinking about how to heal people.

On the other hand, those countries made that transition at a time when populations were still growing, delivering economic growth and a demographic profile that eased the burdens of paying for it all. They implemented their systems before the kind of hypertrophic growth that U.S. health-care prices underwent in the 1970s and 1980s. Slowing the rate at which costs grow is a much easier political task than actually cutting reimbursements.

And of course, other nations did this all under the umbrella of a gargantuan U.S. defense budget that enabled them to transfer most of their defense budgets into domestic welfare systems. The U.S. doesn't have that luxury. Which suggests that our political arguments over the health-care system cannot follow the path established by those nations. The Obamacare adventure has wandered off the map now.

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

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Megan McArdle at mmcardle3@bloomberg.net

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