Column: What ails the Obamacare insurance exchanges? (It’s not what you think.)

The big health insurer Aetna rattled supporters of the Affordable Care Act this week by threatening to leave some states where it offers Obamacare plans and canceling plans to expand to more states next year.

The announcement was a big turnaround for an insurer that had been relatively optimistic about the future of the individual insurance exchanges established by the ACA starting in 2014. News headlines treated it as “the latest blow” to the ACA (in Bloomberg’s words), and as a sign that the exchange system isn’t working.

Aetna’s statement was juxtaposed with pessimism from other insurers, notably UnitedHealth Group, a major insurer though a minor player in the ACA. It has said it will be ending its ACA business in most states where it has been operating.

The health insurance marketplace is complicated, and grousing by big commercial insurers isn’t always what it seems. But it’s proper to ask whether these complaints point to something fundamentally awry with the ACA, and if so, how to fix it.

Nicholas Bagley of the University of Michigan Law School and Mike Adelberg, a former Medicare and Medicaid official, provide the most comprehensive look at these issues with a new article at Health Affairs. Their goal is to examine the risk-management programs that were written into the ACA to help insurers through the transition to a regulated insurance pool aimed at covering almost all the uninsured.

These programs, they acknowledge, have “not performed as expected,” leaving insurance companies on the hook for greater expenses than they anticipated. “Even as the press vilifies insurers,” they wrote, “the ACA’s supporters can’t afford to be indifferent to their struggles.”

That’s because insurer discontent shows up on the ground. The ACA insurance exchanges in 2017, Adelberg and Bagley observed, “will have fewer options, larger premium increases, and less generous benefits than any year since the ACA marketplaces came on line in 2014.” This isn’t entirely the product of ACA design; Congress deserves part of the blame for interfering with the system’s smooth operation, as we’ll see, and failing to address problems as they’ve cropped up. That has “damaged the ACA markets — hurting both insurers that sell health plans and the consumers who purchase them.”

No one expected the transition to ACA-mandated insurance to be simple, or perfect. The nation changed from a system in which individuals could be denied insurance because of preexisting conditions, or charged stratospheric rates. Those stunts were rendered illegal, as were a host of other consumer-unfriendly practices, while minimal benefits such as pregnancy coverage were mandated.

The insurance industry had no experience assessing the cost of the millions of new customers they would acquire as a result, so a period of trial and error in premium and plan design was expected. But the ACA also incorporated several provisions to ease the transition.

Let’s start with three risk-management programs, which Adelberg and Bagley describe thusly:

1. Reinsurance, a transitional three-year program that collects contributions from all health insurers and pays out to those serving “exceptionally high-cost enrollees.” Because collections have come in under projections, the authors report, the Department of Health and Human Services recently announced that it would pay only 55% of what insurers with high-cost patients were owed for 2015.

2. Risk adjustment, a permanent program that pays out to insurers with a high-risk pool of enrollees, using money collected from those with a low-risk client profile. The goal is to “eliminate insurers’ financial incentive to ‘cherry pick’ healthy enrollees or ‘lemon drop’ sick members,” the authors said. But payouts have been higher than expected for some smaller insurers, leading to complaints that the program is too easily gamed.

3. Risk corridors, another three-year transitional program that also was to redistribute money from insurers with low risks to those with high-risk, costly patients. This program was seriously undermined by congressional Republicans, who prohibited the Department of Health and Human Services from dipping into the U.S. Treasury to cover any shortfall in available funds. As a result, the department could only pay out 12.6 cents on the dollar for risk-corridor claims for 2014, a development that forced some small insurers out of business.

Sen. Marco Rubio (R-Fla.) claimed credit for this pointless rule, even though it meant higher premiums for his constituents and insurance customers as a whole. As Adelberg and Bagley observed, the Rubio stunt actually won’t save any money — it’s still owed to the insurers, but merely forces them to sue for the payments. Six lawsuits already have been filed in the Court of Federal Claims.

The uncertainties surrounding the “3Rs” and the necessity of litigating over payments have muddied projections of how the exchanges will work and what their costs will be, serving as “a stark reminder that ACA implementation remains much harder than supporters anticipated,” Adelberg and Bagley wrote.

Some big insurers have found that their initial estimates of customer costs were unduly optimistic. They set premiums lower than they should have, sometimes to buy market share, and incurred losses as a result. Rate-increase requests in the double-digit range for 2017 are the harvest, although most such requests tend to be pared down by state regulators. In any case, a recent study by the Brookings Institution shows that premiums have been lower than they would have been without the ACA.

Big insurers, moreover, base their approach to the ACA market on more than simple profit-and-loss calculations. They’re judging the prospects that the market will stabilize eventually, and on whether Congress or government officials will be more amenable in the future to making changes in the program they ask for. That’s a political judgment, and in these uncertain times, no one is very comfortable making it.

That brings us back to Aetna. Its reversal on the exchange business is, to say the least, curious. That’s because it’s a dramatic change from only three months ago, when the company said it was hoping to break even on ACA business this year. In April, Bertolini called the exchange market “rational and probably more rational than it has ever been,” and made clear that Aetna regarded its participation in the business during these first growing-pain years to be an investment in the future.

The company had 1.2 million customers in individual ACA exchange and ACA-compliant plans. “If we were to go out and buy those members, it would cost us somewhere around $1.2 billion to acquire them,” he said. “If we were to build out 15 markets, it would cost us somewhere between $600 million to $750 million to enter those markets and build out the capabilities necessary to grow that membership.” Those figures were a lot higher than the losses Aetna expected to incur in the first years of the program. “So we see this as a good investment.”

Yet now, Bertolini is complaining that “the poor performance of these products” warrants “a complete evaluation of our current exchange footprint” and cancellation of its 2017 expansion plans.

The only possible conclusions are, 1. Aetna’s risk-forecasting team must be remarkably incompetent to suffer such a reversal of expectations in the course of a single quarter, or 2. Something else must have happened.

What could that something else be? Well, for one thing, the Department of Justice announced on July 21 that it would sue to block Aetna’s proposed $37-billion acquisition of Humana, a deal that the companies said would help them compete in the healthcare marketplace. (The government also sued to block Anthem’s proposed acquisition of Cigna, another deal it said that would diminish competition in health insurance.)

Bertolini said Tuesday that its dealings with the Justice Department on the Humana deal are “a separate conversation” from its evaluation of the exchange business. Is that entirely plausible? Its claim that it needs Humana to preserve its competitive health in the insurance market would only be undermined by enthusiasm for the ACA exchange business. In any case, the chances that Aetna would tie the two issues together for the record are nil, so you be the judge.

The last piece of the ACA puzzle is the one most often overlooked. but it may be the easiest to gauge: How has the program worked for the average enrollee?

The fact remains that Obamacare has brought health insurance to 20 million Americans who couldn’t get it before. Is it important to them? Consider poor residents of Louisiana, who were denied coverage under Medicaid because former Republican Gov. Bobby Jindal refused to expand the program under the ACA, even though the government would pay almost the entire cost.

His policy was overturned by his Democratic successor, John Bel Edwards, and as my colleague Noam Levey has reported, enrollments began in June.

“Dr. Sarah Candler, who worked as a primary-care physician at another safety-net clinic in [New Orleans], said she cried with one of her patients who recently learned she would get the new Medicaid coverage,” Levey wrote. ”’It was like I got to tell her I cured cancer,’ said Candler, who said the woman had routinely postponed recommended screenings and put off filling her prescriptions because she couldn’t afford them. ‘It was so powerful to be able to say that I could fix at least one of the things that was making her sick.’”

The higher costs faced by insurers in the ACA market demonstrate how much medical care was being foregone by Americans who couldn’t get insurance in the past. A cancer patient who was uninsurable in the past is now eligible for care.

In the words of Charles Gaba, whose tracking of ACA enrollments is an indispensable resource, “Without the ACA, they’d be utterly screwed and would very likely go bankrupt trying to pay the full price for treatment, or die without it … Now multiply that person by several million others with similar horrible ailments, and the question is no longer purely about ‘how much will it cost’ but also ‘how many lives can we save’ and ‘how much pain/agony can we relieve?’”

Tell these people that Obamacare isn’t working.

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