By Lambert Strether of Corrente.
Will Adverse Selection Force ObamaCare into a Death Spiral?
And we then went on to write:
[L]et’s define the term “adverse selection.” Adverse selection is a form of information asymmetry, where sellers and buyers don’t have the same information; for example, a health insurance buyer who knows they need health care, and a health insurance seller who does not know which buyers need health care and which do not. Economics professor Robert Frank explains how an unregulated health insurance market with such asymmetries would play out in the New York Times (2013):
The crux of the matter is what economists call the adverse-selection problem. Uninsured people with pre-existing conditions often face tens or even hundreds of thousands of dollars in out-of-pocket medical costs annually. If insurers charged everyone the same rate, buying coverage would be far more attractive financially for people with chronic illnesses than for healthy people. And as healthy policyholders began dropping out of the insured pool, it would become increasingly composed of sick people, forcing insurers to raise their rates. …. But higher rates make insurance even less attractive for healthy people, causing even more of them to drop out. Before long, coverage would become too expensive for almost everyone.
In other words, a death spiral. ObamaCare’s mandate was supposed to keep enough healthy people in the pool so that the adverse selection problem did not arise. (According to the articles cited in the notes to this Wikipedia article on adverse selection, the evidence for adverse selection in the health insurance market is mixed at best; ironically, therefore, ObamaCare might end up providing that evidence!)
So how’s that working out?
We then proceeded to show how ObamaCare wasn’t working out; the answer to our question was (already) yes.
In the last few days we’ve had strong additional evidence that ObamaCare’s death spiral is accelerating. WaPo:
[Health Insurance behemoth] Aetna said it will exit 11 of the 15 states where it offers coverage through the Affordable Care Act, widely known as Obamacare. That affects about 80 percent of its customers covered through insurance marketplaces.
If insurers continue to lose money, more are likely to withdraw from the marketplaces, a move that would reduce choices for consumers and could contribute to higher premiums. In one county, Aetna’s exit in 2017 could leave no insurers offering policies through its marketplace.
And Bloomberg confirms:
The [insurance company] dropouts also undermine a key promise of the law: multiple insurers would compete for consumers’ business each year, and the power of the market would control costs and raise quality. Instead, the opposite is happening. Rates may jump 24 percent next year, according to ACASignups.net, a website that tracks the law, and a quarter of U.S. counties could have just one insurer on the exchanges, according to Cynthia Cox, a researcher at the Kaiser Family Foundation.
(Just we we urged in “ObamaCare’s Neoliberal Intellectual Foundations Continue to Crumble.”) In this post, I’ll first show that ObamaCare’s death spiral is real. Next, I’ll answer the question “Why now?” by outlining the motives the health insurance companies have to intensify the death spiral in this election cycle. I’ll then take a brief interlude to glance at the death grip that neoliberalism still has on the policy discussion, as the “public option” slithers out from under its rock to become liberal conventional wisdom. Finally, I’ll point to signs that the neoliberal death grip is loosening, with the emergence of what I’ve called “The Overton Prism.” Yes, I know I could get away with a happy dance on having called, in my mild-mannered way, the death spiral correctly, but it’s interesting to see health care policy become dynamic again, in the midst of a Presidential campaign.
The ObamaCare Exchange Death Spiral Is Real
The death spiral is real because we are seeing its properties: A risk pool that’s sicker than expected, policies crapified to keep profits high, followed by the less sick leaving the pool, making it even sicker, rinse and repeat. Robert Laszewski:
The architects of the new health law built into it a three-year program to help cushion early insurance company losses as those previously unable to gain coverage were expected to flood into the program at the start. By year three, they assumed, the risk pool, and the prices the participating insurance companies charged, would begin to stabilize.
But that hasn’t happened. With each successive annual open enrollment the tendency of the sickest to buy coverage while the healthiest hung back has only repeated itself.
The fundamental problem with Obamacare is that the health insurance plans carriers are selling are so unattractive—with their still high premiums even after subsidies, ever larger deductibles and narrower provider networks—that only about 40 percent of the exchange eligible population has signed up. The longstanding insurance industry rule is that 75 percent of the eligible must sign-up to get the enough healthy people in the pool to pay for the sick.
Obamacare has been an utter disaster for the working and middle class that seem willing to buy the unattractive plans only if they are sick and can come out ahead on the deal.
(NC readers already know how crapified the ObamaCare plans are: 2013, 2013, 2014, 2015…) Note that Laszewski’s 40% figure is entirely consistent with NBER Working Paper No. 21565, which concludes, in short form, that for approximately half the “formerly uninsured,” ObamaCare is a losing proposition.
And for the insurance companies, the risk pool is getting sicker and sicker:
[Aetna] criticized the ACA’s “inadequate” risk-adjustment mechanism, which is meant to limit insurers’ losses as they start covering sicker individuals. …Of Aetna’s exchange membership this year, more than half is new, with those needing expensive care making up ‘an even larger share’ in the second quarter, the company said. Coupled with the risk pool, this makes premiums costlier and “creates significant sustainability concerns,” the company said.
(Of course, in the topsy-turvey world of neoliberalism and for-profit health care, sick people getting care is a problem, but we’ll get to that later.)
The effects of health insurance company pullouts will be to leave people ininsured. Insurance Business Magazine:
A recent report from the Kaiser Family Foundation shows that as many as two states and 650 counties are on track to have just one insurer on the Affordable Care Act exchanges next year. The entire states of Alaska and Alabama will be faced with just one choice in 2017, as well as large swaths of Kentucky, Tennessee, Mississippi, Arizona and Oklahoma.
That’s up significantly from 225 counties with just one marketplace competitor in 2016.
Insurer withdrawals are largely affecting rural areas, Cynthia Cox of the Kaiser Family Foundation said. In fact, 70% of the counties facing a lack of options next year are mostly rural.
(Mostly rural, eh?) And:
Those exits by three of the country’s biggest health insurers mean that more than 2 million people may have to pick new plans for 2017, according to a Credit Suisse Group AG estimate.
That’s unfortunate, because it turns out that making health care available to people actually makes them healthier. However, as we pointed out in the series “ObamaCare’s Relentless Creation of Second Class Citizens” (parts two, three, four, five, and six) ObamaCare’s benefits are randomly distributed, and one such random factor is jurisdiction (county). In this case, the second class citizens are in
Pima Pinal County, as one consumer citizen realizes (Arizona 3TV):
The move has patients who get insurance from the public exchange wondering where they’ll turn.
“One of them, I talked to him on the phone today, he’s like, ‘Does this mean I have to move? I have to go to a different county?” said Maria Villalobos, an employee at Sun Life Family Health Center in Casa Grande who is licensed to help people navigate the health insurance marketplace.
So, if you’re in Pima County, you go to Pain City. If you’re not, you go to HappyVille. Yay!
Insurance Companies Triggered the Death Spiral to Muscle the Administration
ObamaCare defenders argue, with some justice, that health insurance companies are ginormously profitable, and should just take — or be forced to take — losses on the ObamaCare exchanges. But why should they? And why intensity the death spiral now? Reporting from HuffPo gives the answer:
[Aetna’s exit] also was directly related to a Department of Justice decision to block the insurer’s potentially lucrative merger with Humana, according to a letter from Aetna’s CEO obtained by The Huffington Post.
But just last month, in a letter to the Department of Justice, Aetna CEO Mark Bertolini said the two issues were closely linked. In fact, he made a clear threat: If President Barack Obama’s administration refused to allow the merger to proceed, he wrote, Aetna would be in worse financial position and would have to withdraw from most of its Obamacare markets, and quite likely all of them.
Bertolini penned the letter, which The Huffington Post obtained through a Freedom of Information Act request, on July 5 ― 16 days before the Justice Department announced it would fight the Humana deal. The department had asked Aetna how, if at all, a decision on the proposed merger would affect Aetna’s willingness to offer insurance through the exchanges.
Bertolini responded bluntly. Aetna supported the law’s goal to expand coverage and planned to increase its exchange offerings next year, in the hopes that the exchanges would stabilize as enrollment grew, he wrote.
But if the Justice Department were to block the merger, Bertolini warned, Aetna could no longer sustain the losses from its exchange business, forcing it to sharply change direction
Wolf Street summarizes:
Now that the big health insurers can’t have their tighter oligopoly without a fight from the Justice Department, they’re stabbing competition in the back the other way they can: by exiting the health care exchanges and causing the Obama administration a nasty and very public headache – in the hope of softening it up and getting it to sit down at the merger settlement table.
Those poor insurance companies! Who will help them?
Interlude: The Death Grip of Neoliberalism
In doing the research for this post, I came across some amusing quotes that I thought I would share with you here. They show the death grip that the simple rules of neoliberalism (#1: “Because markets.”; #2: “Go die!”) have on the policy discussion in our political class. First, from the Times article on the health benefits that access to health care can bring:
A new study, published Monday in JAMA Internal Medicine, offers another way of looking at the issue. Low-income people in Arkansas and Kentucky, which expanded Medicaid insurance to everyone below a certain income threshold, appear to be healthier than their peers in Texas, which did not expand.
The study took advantage of what Dr. Benjamin Sommers, an author of the paper and an assistant professor of health policy and economics at Harvard, called
In its 2012 ruling, the Supreme Court made the health law’s Medicaid expansion optional for states. The resulting variation in choices makes it much easier to compare what happened in different states and draw conclusions about what effects health insurance coverage might have for the finances and health of Americans.
“Natural experiment.” Really? What’s “natural” about an artifically created market with bizarre and immoral jurisdictional barriers to care?
Regarding Aetna’s exit, the Times editorial board strokes its chin:
, however, that Congress should strengthen the marketplaces to ensure sufficient competition…. Any law as complex and comprehensive as the Affordable Care Act is bound to have some hiccups. The to those problems is to improve the law.
“It is clear.” Really? The state of Colorado is holding a referendum on single payer this election year (which Sanders should campaign for. Bernie, are you reading this?) Why isn’t the simple, rugged, and proven single payer system a “sensible response”?
Finally, from WaPo, again after the Aetna exit:
“You have here a situation which have to worry about,” said Zeke Emanuel, who served as a top White House health policy adviser during Obama’s first term and is now vice provost for global initiatives at the University of Pennsylvania. “There is a problem with the risk pool. There is a problem with the numbers of people signing up.”
“All of us who care about the exchanges” [pause] [hysterical laughter]. Stop it, Zeke! You’re killing me!
Liberals Deploy the So-Called Public Option
One “solution” to health insurance oliogoplies muscling the administration would be to allow them to merge. A second “solution” is to tinker with the ObamaCare exchanges to make them more profitable. (Of course, once you give in to a blackmailer they muscle you again, but at least this will kick the can down the road.) Modern Health Care outlines the state of play:
With the November elections, approaching, ACA supporters feel a growing sense of urgency to make the exchange markets more financially viable for insurers and affordable for consumers. That’s because many Americans are becoming alarmed about premium hikes insurers are requesting in the individual market and about health plans exiting the exchanges.
Premium hikes being a consequence of the deteriorating risk pool, hence an aspect of the death spiral:
“In the Senate and House races, Republicans will say the ACA isn’t going well, premiums are going up, companies are leaving, and we really need a substitute,” said Robert Blendon, an expert in healthcare politics at Harvard University. “It gets people very nervous.”
And what would that “substitute” be? Why, the “public option,” of course:
ACA supporters say Aetna’s announcement Monday that it will withdraw from 11 of the 15 states where it currently offers exchange plans will give a boost to proposals by President Barack Obama and Democratic presidential candidate Hillary Clinton to establish public option plans. Obama recently proposed creating public plans in areas where competition is limited, while Clinton has laid out a broader proposal to launch government-run plans to compete against private insurers and to encourage states to seek waivers to create such plans. “This should give momentum to the public option,” said Sabrina Corlette, a health policy expert at Georgetown University who co-authored a new report on strategies to stabilize the exchange markets. “If carriers don’t want to play, why should they object to having a fallback public plan?”
The “public option” is always deployed when liberals need to forestall single payer and never in good faith (see here and here); at some point I hope to demolish it once again, but for now let me just say that the career “progressive” public option advocates remind me of Ptolemaic astronomers, desperately adding more complicated and rickety epicyles to an obsolete system, all to “save the phenomena,” and keep alive the idea that the sun revolves round the earth. Because markets.
An Emergent Tripolar Political Structure
Clearly, Aetna’s withdraw, which intensified the ObamaCare death spiral, and spurred liberals to reheat the public option leftovers they stored in their policy fridge, has created a dynamic political situation. The Wall Street Journal summarizes it:
Even [?] on the left, [Aetna’s] move created problems. Sen. Bernie Sanders … promised to introduce legislation creating “Medicare for all” again next year. Mrs. Clinton and Mr. Obama have both backed a public option. Mr. Trump has said he would replace the ACA with a suite of longtime GOP ideas such as allowing health care to be bought across state lines, a proposal that would let insurers avoid the cost of regulations passed by particular states. The downside is that consumers wouldn’t get the benefits of those rules.
So, here we have the emergence of what I’ve been calling “The Overton Prism” (as opposed to the linear Overton Window). Sanders represents the left, Clinton represents the liberals, and Trump represents the conservatives. Both liberals and conservatives are neoliberals, although of different flavors, because markets. The left is not.
The health care policy debate in campaign 2016, has just become very interesting, thanks to Aetna’s withdrawal; it will be interesting to see what Sanders has to say on this topic in his “Our Revolution” rollout later this month. Hopefully, we are seeing a death spiral of neoliberalism itself, instead of merely a death spiral of the ObamaCare marketplace.
 Note the credential; ObamaCare, among other things, is a make work program for the Democratic base in the 10%, or those aspiring to it.
 The other option is to further crapify the policies, of course.
 Oddly, or not, Sommers does mention perhaps the largest of these “natural experiments”: Canadian single payer vs. the American neoliberal approach.
 Literally. Rule #2 of Neoliberalism.
 Note well that the conservative Wall Street Journal is intellectually honest enough to mention single payer. You will find that more liberal coverage is not.