Can Health Insurance Exchanges be Stabilized?
Studies indicate that health insurance exchanges can be stabilized and even turn profits for insurers, begging the question: why the instability now? The key to a stable exchange requires a number of factors: a large, healthy population of offset costs for the sick, cost-sharing subsidies from the government, and reinsurance in case of natural disaster. The chief issue throwing the exchange into chaos is centered around cost-sharing subsidies. Will the government pay insurers or not? No one knows just yet and it is scaring off insurers who would otherwise participate. However, this cost-sharing isn’t the only piece to the puzzle.
The health insurance market thrives when it has a large population to pull from and in particular, a large population of healthy subscribers. One of the key challenges facing insurers is offsetting the cost of individuals with higher health care costs and setting the right premium rates. One way to absorb that cost is by pulling from a large base population. There are two methods to pull in and keep a large healthy subscriber population: incentive and enforcement. Enforcement by tax penalty has been in the news, but what is lesser known, and maybe even more effective, are the incentives offered to lure in the healthy population - tax credits. Medicare has had success with growing the population base and reversing market pull-out by using incentives, indicating that the current exchange would reap the same rewards if Congress commits to expanding tax credits and cost-sharing reductions long-term.
Another method for stabilizing the market is by reinsurance, accomplished by pooling taxed individual and employer health plans. Put simply, reinsurance is insurance for the insurers in case there is an epidemic, and health care costs skyrocket. Even insurance companies need to plan for the unexpected to avoid catastrophic losses. Having a safety net allows insurers take on more long-term strategies that will weather the smaller, normal fluctuations that come with any market.
Of course, cost-sharing reductions from the government have been crucial in keeping premiums lower and insurers in the state exchanges. With the federal government footing a portion of the bill, more people are able to afford health insurance and insurers don’t take on the full volatility of the market. As subscribers know all too well, they are subject to the whims of the market as well as premium prices projected to spike for 2018 plans. Yet, with the federal government subsidizing a portion of the cost, the impact of a fluctuating market is dampened, meaning no skyrocketing premiums and a greater plan selection to the benefit of the public and health of the market itself.
It is clear that the stability of the exchange relies heavily upon government policy. As it is now, cost-sharing reductions (CSR) are doled out on a month-to-month basis at the President’s discretion. The uncertainty is extended further by current litigation over the legality of federal funding through the Oval Office and not through Congress. For an insurer looking to accurately assess risk, not knowing if a portion of the bill is going to be covered month to month or even next year, prompts a more modest approach.
Consequently, in earnest of keeping the business afloat, some insurers are pulling out of exchanges in the interest of self-preservation. In some cases, it has been estimated that up to 40% of insurers will be pulling out of the exchange for 2018. The result of this means people will lose insurance, premiums will rise, and the market will suffer. Associations like the American Heart Association and the advocacy group, America’s Health Insurance Plans, have argued extensively that the uncertainty around federal funding is destabilizing the market and will impact the economy of communities.
To note, in California, where the exchange sees a robust competition between insurers, the market is not only more stable but to the advantage of the consumer. Diversity in the market conjoined with a large participating population is to the benefit of the exchange. By contrast, Maryland has a smaller selection of insurers with CareFirst BlueCross BlueShield dominating the market. When they want to increase premiums upwards of 50%, it isn’t a ripple in a lake, it’s a splash in a puddle. Maryland serves as an example of the dramatic effects of an exchange with little to no competition, and a warning to legislators that without support, the exchange will flounder.
Yet, there is hope. The exchanges can absolutely be stabilized as long as the political policy is consistent and long-term, geared towards helping insurers face the extremes of the market. Insurers need help with maintaining a large pool of healthy members, a financial buffer in cases of natural disaster, and cost-sharing reductions paid by the government to draw in the healthy population. Until the legality of cost-sharing reductions is determined by the courts and Congress decides what will be done with health care, the exchange will continue to unstable in the face of uncertainty.
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