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A Scary Obamacare Mystery

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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Pop quiz: Are the Obamacare exchanges a success? Your answer should take into account three recent pieces of news about the online marketplaces created by the Affordable Care Act:

  • The U.S. Centers for Disease Control's latest report on the uninsured shows that 8.6 percent of the population was uninsured in the first three months of 2016. This is a record low.
  • A survey of Blue Cross/Blue Shield companies, the backbone of the exchanges, indicates that about half their customers in the individual market are buying insurance without subsidies.
  • Arizona has managed to persuade its Blue to sell insurance in Pinal County. That was one of a handful of localities nationwide that faced the possibility of losing all the providers in their Obamacare marketplaces after insurance giants like Aetna announced in August that they were pulling out.

You may be wondering what these three seemingly disparate facts have to do with each other. The answer is, quite a lot. Let me explain.

QuickTake Obamacare, Assessed

Conservatives should acknowledge that the coverage expansion is real, it is large (though not as large as we were led to expect), and that while it is not necessarily going to make people much healthier, it is probably going to reduce financial hardship among at least some of the people who have gained coverage.  That’s significant, though we can still argue about whether the benefit was worth the cost. (If Obamacare were being voted on today, I would still oppose it).

Liberals, however, should also acknowledge uncomfortable facts. The first is that most of the decrease in the uninsured population came in 2014 and 2015, and is now leveling off. Unless younger and healthier people start buying insurance in much larger numbers, we’re probably not going to see huge improvement. The fact that so few young, healthy people are buying insurance may not only mean that the number of uninsured people stops going down. It could mean that that figure starts going up again.

Why? Because outside of the near-poor, uptake of Obamacare policies is not as high as we’d like. As health insurance consultant Bob Laszewski has written, “Historically, insurers want to see a 75-percent participation rate.” In other words, they want to see three-fourths of the eligible people sign up.

That's because insurers can predict their costs when a representative cross-section of people buys their plans. But when too few sign up, the insurer has to ask, “Who’s declining to buy insurance?” and the most likely answer is, “Healthy people who don’t expect to use it much.” The remaining pool, then, will be sicker. The lower the participation rate, the more likely it is that you’ve got a small group of people who are going to make expensive claims.

This is a phenomenon known as “adverse selection.” And it tends to get worse as premiums rise to reflect the cost of covering this sicker pool, because more people start dropping the ever-costlier insurance, and usually the folks who drop out are the healthiest ones.

Obamacare’s individual mandate was supposed to prevent this death spiral by levying a tax penalty on those who refused to sign up. But the fine appears to be too small to get young folks to buy in.

And that brings us to our second point: the split between subsidized and unsubsidized patients. Because right now, the main thing standing between Obamacare and a death spiral is the fact that subsidies shield customers from the true cost of their plans. So the law’s supporters hope that the second, really vicious part of the death spiral, where rising premiums produce even more adverse selection, will never kick in.

Most of the exchange customers are subsidized; the off-exchange customers are not. But that doesn’t matter, because under Obamacare, insurers have to treat their exchange policies and their off-exchange policies as a single actuarial risk pool, rather than adjusting for the different risks in the different markets. If the exchanges have too many old, sick people on them, and not enough young, healthy ones, those costs will leak over to the unsubsidized off-exchange policies in the form of premium hikes.

That may explain why we’ve seen some insurers pull out of the exchanges while continuing to offer individual policies. That means the older, sicker exchange customers don’t show up in their pools. However, that obviously creates a problem when the number of plans available on the exchanges dwindles. Which brings us to our third data point.

Regulators have tools to combat this sort of strategic withdrawal. They can force all individual policies to be sold through the exchanges, for example, as my own home city has done. But that creates the risk that insurers will simply exit the individual market entirely. Alternatively, the regulators can beg insurers to do them a favor, possibly offering sweeteners in the form of leeway on premium-setting, or favorable treatment in other insurance markets.

But it’s questionable whether this is a viable long-term solution. How many favors can insurance regulators give companies to get them to keep taking losses, year after year? And if the favors come in the form of, “We’re not going to quibble over how much you want to charge people for the insurance you offer on the exchanges,” this will translate into big premium hikes that the subsidized buyers don’t see, but that deliver a nasty shock to the folks in the unsubsidized market. At some point, adverse selection seems likely to set in once again, threatening the gains that reduced the number of uninsured Americans.

The correct answer to the pop quiz, therefore, is “We don’t know yet.” While Obamacare’s grander claims about lowering health-care costs and rationalizing our crazy health-care system have mostly failed to come to pass, the one thing supporters have been able to point to is the falling number of uninsured people. If that number starts to rise again, that argument will become harder to make.

  1. This is complicated because the high deductibles on the plans mean that a lot of people won’t get any benefit from their policies. Sicker people, who are more likely to blow past those deductibles, seem to be much more likely to buy policies.

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:
Jonathan Landman at jlandman4@bloomberg.net