The Affordable Care Act (ACA) completely changed the way individuals and small businesses get their health insurance. The success of the ACA depended on getting plenty of young and healthy people to sign up to help offset the expected glut of older and sicker people. While the older and sicker people were willing to wait online up to five hours just to get a plan when the original bug-filled website was launched, the younger and healthier people passed.
When an industry is forced to take in adverse clients without the ability to financially offset the potential for losses if not enough profitable clients sign up, then that is called adverse selection. The ACA attempted to combat adverse selection by putting in an individual mandate that penalized Americans who did not have an approved health insurance plan in their federal income tax returns, but the individual mandate is proving to be ineffective.
The Really Big Problem with Risk Pools
For the ACA to work, insurance companies must have a steady flow of young and healthy people signing up for insurance. But it is estimated that nearly 20 million people paid the individual mandate penalty in 2014 instead of getting insurance, while an estimated 17 million people chose to pay the tax in 2015. These numbers indicate that it is obvious that the individual mandate is not working and that adverse selection is happening.
The plans sold on the ACA follow federal guidelines for coverage and they must all offer the same coverage to be included on the marketplace. That means that insurers cannot do anything to counteract the off-balance ratio of healthy consumers versus those who need significant care immediately. Because the insurance companies cannot protect themselves with different types of plans, they are all forced to take significant losses when more sick than healthy people sign up for plans.
What are People Doing Instead of Buying Insurance?
President Obama extended the period of the so-called “Grandmother Clause” to 2017. This is the part of the ACA that allowed people to keep the plans they had when the ACA rolled out. These existing plans offer weak coverage and do not prevent the owner from getting an individual mandate penalty, but many people are choosing to keep their existing plans and pay the fine.
One of the target groups for the ACA is people ages 18 to 34, which includes a large amount of 27-year-olds who must purchase insurance on their own for the first time or pay the fine. Some observers think that the fact that the fines come out of people’s federal income taxes and are not extra payments that need to be made, many Millennials and others are just fine with not having insurance and letting the fine come out of their returns. These are younger people who are healthy and have no immediate fear of long-term health issues. These are also the exact kind of people the ACA needs to stay viable.
The Effects of Adverse Selection
To see how adverse selection damages the ACA, we can take a look at the story of Blue Cross – Blue Shield of North Carolina (BCBSNC). In 2015, BCBSNC reported its first operating loss ever of $50.6 million. The company said that the loss was a direct result of adverse selection on the ACA marketplace.
For 2016, BCBSNC asked to increase its ACA premiums by 34.6 percent, and it wasn’t the only health insurer looking to post double-digit rate increases on North Carolina’s exchange. Coventry Health Care of the Carolinas is the second largest insurer on North Carolina’s exchange and it asked for an 18 percent increase. These are the astronomical premium increases Republicans point to when they claim the ACA is not working, and the vast majority of these increases are due to adverse selection.
The Republican Plan
President-elect Donald Trump indicated that he felt the solution to adverse selection was simple; he will allow insurers to sell across state lines. According to Trump, competition across state lines will force insurance companies to clean up their acts, work on providing quality plans and reduce premiums as a result of competition.
People on both sides of the Trump argument agree that it is possible that opening up competition would help lower premiums, but the issue with health insurance is not caused by state lines. The ACA allows insurance companies to sell across state lines as long as the company’s home state and the state the company wants to sell into agree to the arrangement. To this day, not one company has asked to sell across state lines.
The issue is that it takes a strong network of providers and a good base of healthy consumers to start a health insurance plan in any state. A company based in Wyoming would have to expend a great deal of money to start a plan in Florida, and there is no guarantee the plan would be a success. The bottom line is that insurance companies won’t sell across state lines because it is too financially risky, and that throws the Trump plan out the window.
Is There an Answer?
The answer to overcoming the damage done by adverse selection could be something as simple as investing money and time into educating younger people on how to choose their own insurance, how to use the marketplace and the benefits of owning insurance. The government had put together a preliminary plan to start doing this type of marketing and the plan started slowly in 2016, but it stopped after the presidential election.
Donald Trump thinks he has the answer to adverse selection, but most experts are not so sure. What is obvious is that if younger and healthier people are not convinced that buying health insurance is better than paying income tax fines, then the future of health insurance in America could be shaky.
