Rate hikes expose shaky foundation of Obamacare

In recent weeks, large insurers selling coverage through Obamacare have proposed massive rate increases for 2016 – even exceeding 40 percent – because they haven’t been able to sign up enough young and healthy customers.

This is an ominous sign for the future of Obamacare, because two federal programs that were supposed to act as training wheels for insurers in the early years of Obamacare by absorbing excess risk are set to expire after 2016. If insurers don’t do a better job of attracting a healthier risk pool, 2017 promises to be a rocky year for insurance markets, regardless of which party is in control of the White House.

In the first two years of the implementation of Obamacare’s insurance exchanges (2014 and 2015), insurers set rates with the expectation that the government would absorb a certain degree of risk and they made assumptions about the medical costs of their enrollees.

Now that insurers have had more time to look at the claims coming in from those enrolling from Obamacare, they’re finding that the pool of customers is older and sicker than originally projected, driving up medical costs. Meanwhile, federal help isn’t what they anticipated.

CareFirst BlueCross BlueShield, the largest health insurer in Maryland, proposed an average increase of 30.4 percent for 2016 (with a range of 19.3 percent to 45.7 percent).

A similar story is playing out among insurers who have filed rate proposals throughout the country. BlueCross BlueShield of Tennessee asked for an average increase of 36.3 percent. In South Dakota, Wellmark proposed a 42.9 percent average increase.

In Oregon, Moda Health, which serves roughly half of the state’s individual market, is aiming to raise rates by an average of 25.6 percent. As Jed Graham of Investor’s Business Daily noted, Moda’s costs for 2014 – the first year of Obamacare’s exchanges — exceeded its premiums by 61.5 percent.

Clare Krusing, press secretary for America’s Health Insurance Plans, the industry lobbying group wrote to the Washington Examiner in an email that, “Premiums are going to vary across the country, particularly because of the market dynamics, like provider consolidation, that impact rates at a local level. This year, health plans have a full year of claims data to understand the health needs of the Exchange population, and these enrollees are generally older and often managing multiple chronic conditions. Premiums reflect the rising cost of providing care to these individuals and families, and the explosion in prescription and specialty drug prices is a significant factor in overall premium costs this year.”

Surveying the national landscape, industry consultant Robert Laszewski told the Examiner that, “What we are seeing is a mixed bag in terms of how carriers are responding to their 2016 rates. There seems to be a trend growing where carriers with the largest market share are coming out with the eye-popping increases. Carriers with the least share are still coming in with the smaller increases.”

Part of this might be that in the first two years of Obamacare, when they were expecting more federal help, larger insurers were able to offer “teaser rates” to rapidly build up their market share, but now that they have access to more data, they’re increasing their rates. Larger insurers, he noted, have access to more data.

“The key to getting a insurance risk pool that eventually supports lower rates is to attract as many people into it as possible,” Laszewski said. “Lower rates will attract more people and provide a better chance of getting more sustainable rates.”

But, he said, “even with the lower rates the Obamacare reinsurance program enabled, only about 40 percent of those eligible eventually signed up after two full open-enrollments. Carriers need more like 75 percent of an eligible pool to get the most efficient pool. Things just haven’t worked out.”

According to the administration, as of the second open-enrollment period ending this February, just 28 percent of those who signed up for insurance came from the crucial age 18 to 34 demographic. Prior to the launch of the program, administration officials had indicated that 40 percent needed to be from the age group for the exchanges to be viable. Furthermore, in 2016, according to the Congressional Budget Office, Obamacare is supposed to make a quantum leap to covering 21 million people – but just 11.7 million people signed up for privately-administered insurance through Obamacare through February. Those who already signed up for coverage may be the low-hanging fruit — those who are older, sicker, and most in need of insurance — meaning the law still hasn’t penetrated the market deeply enough.

In a regulatory filing justifying its proposed premium hike, CareFirst cited “actual claims experience” that showed a “significantly” riskier pool of customers than expected.

CareFirst also identified, “lower anticipated payments from the Federal reinsurance program.” The reinsurance program was one of three programs, known as the “three Rs” that were meant to give some extra cushion to insurers who, under Obamacare, are forced to cover everybody who applies for insurance, including those with pre-existing conditions. The idea is to prevent a scenario in which certain insurers tailor policies to cherry pick the healthiest individuals, saddling other insurers with a disproportionate share of the sickest and most expensive beneficiaries.

The reinsurance program slaps fees on insurance policies and uses the revenue to funnel payments to insurers to compensate them for taking on individuals with a high-risk profile. Total payments available for the program have gone from $10 billion in 2014, to $6 billion in 2015, and $4 billion in 2016. The program is scheduled to expire after 2016.

Another program insurers were counting on is known as the “risk corridors.” In theory, the program was supposed to collect money from insurers who had lower than expected medical losses and use it to compensate insurers who had higher than expected losses.

In a scenario in which there are massive industry-wide losses (and thus there isn’t enough money being raised by the program to make it self-sustaining), Republicans argued that the program would take on the characteristics of an open-ended taxpayer bailout.

At first, the administration said the program would be budget neutral – meaning it would only make payments to insurers up to the amount that was collected from other insurers. But that led to a furious backlash from insurers last spring, as lobbyists and company executives warned of serious rate hikes for policies starting in 2015 unless they were given added reassurance that the federal money would continue to flow.

In an email to senior White House adviser Valerie Jarrett sent last April (and later brought to light by the House Oversight and Government Reform Committee), CareFirst CEO Chet Burrell warned that “if this transitional protection is not there, carriers will have to increase rates substantially (i.e. 20 percent or more beyond what they might otherwise file) to make sure that premiums adequately reflect expected costs – because there would be little protection if they do not.”

Eventually, the Obama administration backed down to industry lobbyists. In May, the Department of Health and Human Services said that the secretary “recognizes that the Affordable Care Act requires the secretary to make full payments to issuers” and that HHS would “use other sources of funding for the risk corridors payments.”

But in December, as part of the massive appropriations bill, Republicans fought for language that would cap payments to the amount that was raised by the program – meaning if it runs a deficit, insurers won’t get the full amount of payments they once expected. Without as firm of a government safety net, insurers are more vulnerable.

“The change to the federal risk corridors program after the Affordable Care Act was implemented is among the reasons our proposed average premium rate in the District reflects an increase; however, it is not the only factor” Scott Graham, spokesman for CareFirst, wrote in an email to the Examiner. “It’s more accurate to say the average rate increase reflects the cost of providing care to those individuals who purchased policies from CareFirst.”

Laszewski said that “My conversations with carriers does indicate that the lack of clarity about how the risk corridor payments will be funded is absolutely playing into the rate actions causing big rate increases a year earlier than many of us expected.” There are a number of factors driving up rates, he emphasized, “the uncertainty about the risk corridors is clearly playing into this.”

Proposed rate increases are just that – proposals. They are the start of the back and forth between insurers and regulators, and eventual rates could be vary significantly from the initial proposals.

But the overall picture – a weaker than expected risk pool, the expiration of programs that have been propping up the insurance market – doesn’t bode well for the future of Obamacare.