Health Care

Anthem Threat Highlights Obamacare’s Big Test

Are the latest premium increases a correction or a trend? For insurers and consumers, the stakes are huge.

Feeling Blue.

Photographer: Andrew Harrer/Bloomberg

Anthem Inc. is threatening to leave the Obamacare exchanges

"If we do not see clear evidence of an improving environment and a path towards sustainability in the marketplace, we will likely modify our strategy in 2018,” Anthem Chief Executive Officer Joseph Swedish said on a call Wednesday discussing his company’s third-quarter results. “Clearly, 2017 is a critical year as we continue to assess the long-term viability of our exchange footprint.”

QuickTake Health Insurance Exchanges

This may seem like same-old, same-old at this point. After all, lots of health insurers are threatening to leave the exchanges. You could be forgiven for yawning at the news that yet another company might pull back.

But in fact, this is huge news, because Anthem runs the Blue Cross/Blue Shield organizations in 14 states. And though Anthem doesn't appear to be the sole company offering exchange coverage in any of those states, the Blues are generally the backbone of the exchanges. Where others have quailed, the Blues have by and large stuck with Obamacare. If they pull out, then it’s likely that we’ll see more counties, and possibly entire states, with no Obamacare policies on offer.

Anthem doesn’t run all the Blue Cross organizations. But it’s still a bellwether for what may be happening in other markets. Whether the Blues pull back -- and how far -- will tell us a lot about how Obamacare is going to go.

As Swedish’s words highlight, 2017 is going to be a make-or-break year for the exchanges. When we get the 2018 rates starting next summer, we may finally answer to the mystery that health care wonks have  long pondered: Are rates going up because insurers mispriced their insurance? Or are they going up because these markets are too unstable for insurers to make money at any price?

There’s some reason to think that the answer is that they mispriced. Obamacare is a new product. Selling insurance with a mandate, selling it on exchanges, selling it with all the mandated coverage and without the ability to price insurance based on health status -- all these things are new, meaning insurers were necessarily sailing into uncharted waters. It wouldn’t be surprising if they mispriced.

That's especially true because so many things haven’t turned out as experts were predicting. First, employers haven’t “dumped” employees onto the exchanges, meaning that the influx of low-wage workers currently covered by employer health insurance has failed to materialize. Second, young people have declined to sign up in larger numbers than anticipated.

Third, when it became clear in 2013 that a lot of folks who already had individual insurance were going to lose their plans, Obama decided to keep his “if you like your plan you can keep it” promise by grandfathering in people with existing plans -- which meant still fewer people buying on the exchange. All of those developments have resulted in a smaller and sicker pool of customers than insurers -- and everyone else -- were anticipating. No wonder they set the prices too low.

That said, there are also reasons to think that this might be more than simple mispricing. Health insurance markets can experience something called a “death spiral.” In brief: If you have too many sick people and not enough healthy people, average costs are high, and insurers have to price accordingly. This makes the insurance a bad deal for the healthiest members of the remaining pool, and they tend to drop out … which means that insurers have to raise prices … and after a few rounds of this, you’re left with insurers charging sky-high rates for insurance no one wants to buy.

QuickTake Obamacare, Assessed

Could such a thing happen in the individual market? No one knows. A huge percentage of folks on the exchange get subsidies. On the other hand, there are people buying insurance on and off the exchanges who don’t get subsidies -- and though relatively little is known about them, it’s possible that these folks are healthier and more reliable purchasers of insurance, and are currently keeping prices from going even higher. If they pulled out en masse, it could theoretically topple an already volatile market.

The huge rate of increase in premiums this year does start to sound like death-spiral territory. And there are other signs. For starters, the risk pool pretty much stabilized in 2016, with very few new enrollees. And unlike 2014, when insurers had no idea what the markets would look like, or 2015, when they had to start setting rates with only a partial year’s worth of claims data, 2016 rates were set with a full year’s experience of health costs. A simple mispricing correction should have shown up in the 2016 rates.

There’s also the fact that insurers are vocally complaining about customers gaming the system, and threatening to leave (or for that matter, actually leaving). Of course, as I’ve written before, these public statements always have a certain theatrical element -- they’re aimed as much at legislators and regulators from whom they are trying to secure favorable rules as they are at the public to which they are ostensibly addressed. It seems pretty clear, for example, that insurers have been dangling exchange participation as a sweetener to try to get their mergers allowed.

That said, insurers have good reason to want Obamacare to work. And the fact that they are starting to pull out would seem to signal that they don’t think this is a simple pricing error; they think there’s a good chance that they will lose money in these markets no matter what price they charge.

When we see the 2018 rates, we will probably find out. If we’re looking at another wave of 25 percent premium spikes, then at that point, we have to acknowledge the very real possibility of a death spiral. That death spiral would, it’s true, probably be mitigated by the subsidies. But taxpayers would end up paying astronomical rates for those subsidies, and millions of folks who don’t get subsidies would be forced out of the market.

On the other hand, if next year brings us premium increases closer to those in the employer-based market, then the case for a one-time pricing error gets a lot stronger.

The only way to find out is to wait and see.

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:
    Christopher Flavelle at cflavelle@bloomberg.net

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