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The Not-So-Affordable Care Act: Professor Gaynor Explains Rising Premiums

Prior to this year’s open enrollment season, analysts predicted that Affordable Care Act insurance premiums were likely to increase, in some states sharply. That prediction proved valid in October when it was revealed that across the country, premiums for health insurance policies offered on federal and state exchanges were set to rise an average of 22 percent.

Heinz College professor Martin Gaynor said that the reasons for the increases are complex.

In talking with Professor Gaynor, he lays out several contributing factors:

Citing losses, some large insurance firms left the ACA Marketplace

“This is a new market, and in any market there’s always some churn,” said Gaynor. Among the firms that exited are prominent names like Aetna.  “One thing to bear in mind is that just because some firms are exiting doesn’t mean they won’t come back.”

Gaynor points to a marketwide phenomenon that many insurance companies underestimated what their expenses would be and weren’t covering costs, at least not to the extent desired. In some cases companies intentionally underpriced plans to attract enrollees, and that strategy didn’t work out as well as they wanted.

Such actuarial errors put some companies in the position where they needed to either leave the market, or raise premiums.

"They made a mistake,” said Gaynor.

Not enough young, healthy people in the risk pool

“Customers who signed up [for ACA health care] were, in the aggregate, older and sicker patients who require more costly care,” said Gaynor. “Younger, healthier people who were less likely to need health care services were less likely to sign up.”

A feature of the ACA that has been very popular—and pre-dates the exchanges—is that people under the age of 26 can remain on their parents’ plan. Many young people have been either exercising that option, or choosing to not buy health insurance and instead incur a tax penalty. (Not inconsequential is the fact that the penalty is less expensive than most health insurance policies.)

Medicaid expansion was thwarted in many states

Under the ACA, it was intended that states would expand their Medicaid programs, which would have the effect of providing a greater number of low-income families with state-administered health insurance. That didn’t happen.

While the law originally required the expansion, the Supreme Court ruled that the requirement was unconstitutional, and as a result many states chose not to expand Medicaid.

Gaynor said there are some people who would have been covered by a Medicaid expansion, but who instead entered the ACA exchanges. That had an unforeseen impact on the ACA risk pool as well.

Medical costs drive premiums

Something that is important to note in all of this, Gaynor says, is that insurance premiums are almost entirely driven by medical expenses, which have also been increasing since the ACA passed. (He remarks that it is unclear whether or not those increases have anything to do with the ACA.)

The rising price of drugs and hospital services can cause insurers to get hit hard, but that this is a part of the equation that Gaynor suggests is largely being ignored.

Patented medications—especially those with highly positive or even curative outcomes—can be extremely expensive; meanwhile some “legacy” drugs that are not under patent and yet face little to no competition in the market have been priced more aggressively in recent years.

“On the hospital side, we’ve had a tremendous amount of consolidation in hospitals,” said Gaynor. “That’s nothing new…but there was a tick up with 457 additional hospital mergers from 2010-2014.”

He adds that many cities are dominated by a single large health system, and so it’s not surprising to see prices rise in the wake of those mergers.

“If you dominate a market, you can raise your prices and you will. That happens in hospital markets just like it does with gas stations or milk or anything else,” said Gaynor.

He adds that these activities and their impact are not specific to the ACA, but that they nonetheless have an impact on costs, and therefore affect pricing and premiums.

Policy fixes can help both consumers and insurers

Subsidies have increased along with premiums, which will offset some of the direct cost borne by the consumer buying insurance with those subsidies.

“But that doesn’t make the cost go away,” said Gaynor. “The money has to come from somewhere, and that’s being borne by taxpayers.”

Gaynor also remarks that the ACA originally featured “risk corridors” that would insulate companies against heavy losses, which are especially possible early in the market. Those were phased out, but he says they could be re-implemented.

“The risk corridors served a beneficial purpose in helping out companies that got an unexpectedly expensive draw from the risk pool,” said Gaynor. He adds that risk corridors could help to keep new companies entering the market from getting under water right away, but that they are not long-term solutions because they can be expensive to the system. Also, if not used appropriately they can cause companies to take more risk than they otherwise would when setting prices.

Another possibility for improvement, Gaynor says, is to put more work into the ACA’s risk adjustment. “[The risk adjustment could be] more developed, more granular, and also timely, so if an insurer gets a more expensive risk pool than average, then the exchange is on top of that and they compensate [the insurer] so they aren’t carrying those losses,” he said.

The future of the ACA in a Trump presidency

Gaynor notes that the troubles with the ACA are not shocking, that with any new program there are imperfections at the outset that get smoothed out over time.

Analysts and politicians point to different root causes and solutions, but being that the ACA is the signature legislative accomplishment of the Obama administration, it is a highly politicized topic in which the discussion is usually distorted by ideology.

The election of Donald J. Trump—who campaigned in part on a promise to repeal “Obamacare”—casts even greater uncertainty, up to and including the possibility that he and the Republican-controlled Congress will seek to rapidly dismantle or defund the ACA, thus rendering all of these financial stresses moot, at least for the time being.

Gaynor said the next administration will ultimately have to deal with the ACA. What remains to be seen is whether a Trump administration will make changes that address flaws in the current statute and improve upon it, or whether they will follow through on the promise to repeal and replace the ACA entirely.

“The latter is far more disruptive than the former.”

Learn more about Martin Gaynor