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“The mandate penalties are not working”: an expert explains what is broken with Obamacare

Deadline Approaches To Signup For Health Insurance Under Affordable Care Act Photo by Joe Raedle/Getty Images

For as long as I’ve covered Obamacare, I’ve always found Caroline Pearson to be an exceptionally smart and honest observer of the law. Pearson is a senior vice president at the research firm Avalere Health, and I called her up Tuesday morning to talk about Obamacare’s spiking premiums.

Pearson doesn’t think double-digit rate hikes are Obamacare’s new normal — but she does see other challenges on the horizon that will make it difficult for the marketplaces to grow.

“The dramatic premium increase should be a one-time correction, Pearson says. “Plans have been underpriced. Hopefully they’re now priced more appropriately and we don’t see those same increases in future years. But there are other challenges that aren’t going to be fixed with higher rates that may continue to cause problems in the future.”

Pearson and I spoke about what those challenges were, why the marketplace has had lower enrollment than expected, and what steps the government could take to fix that — if Congress wanted to. What follows is a transcript of our conversation, lightly edited for clarity and length.

Sarah Kliff

Let’s start with the basics. What is happening with Obamacare premiums, and why are they spiking so much in 2017?

Caroline Pearson

There are a few challenges. Enrollment continues to fall short of expectations, which is contributing to instability. We’ve got all of the sickest people, who are highest need, and they enrolled in 2014. Each year, the marketplaces have continued to not pick up enough healthy people to create a stable risk pool. That’s one big issue.

The second issue is that you’ve got the end of reinsurance, which is a program that basically offsets insurers’ losses for the very high-cost enrollees. Given that health plans were pricing without any information about what enrollees would look like in the first few years, this was a way to backstop some of the financial risk. It was one of a couple of mechanisms meant to keep premiums low as the market was getting up and running.

You had health plans that were underpricing their products and receiving reinsurance. This is a year of reckoning where they needed to raise their rates, and some exited the market because they were continuing to sustain losses. And enrollment ties into this: [The Congressional Budget Office] had projected there would be 22 million exchange enrollees by now, and that the market would be stable enough to end reinsurance. In reality, we’ve got 10.4 million enrollees and a much less stable market.

Sarah Kliff

When you look at the big rate increase happening this year, do you see it as a one-time course correction or the new normal for the health care law?

Caroline Pearson

The dramatic premium increase should be a one-time correction. Plans have been underpriced. Hopefully they’re now priced more appropriately and we don’t see those same increases in future years. But there are other challenges that aren’t going to be fixed with higher rates that may continue to cause problems in the future.

Sarah Kliff

Tell me a bit more about those other challenges.

Caroline Pearson

One challenge is the small enrollment, which makes the Obamacare marketplaces less attractive for health plans. It’s harder for any plan in a specific region to have a big enough population to stabilize their risk.

The other one we haven’t talked about is that the law still has a risk adjustment mechanism [another program to transfer money to health plans with especially sick enrollees]. Risk adjustment right now is very unpredictable and in some cases inaccurate. So even if the market as a whole had enough premiums to cover the cost of all enrollees, there are still plans that could be financially penalized as a result of the risk adjustment.

Risk adjustment is fixable, but it needs to be refined and based on better data. The federal government has proposed some changes that should make it more accurate in 2018, so that is good. I think there is still this issue that it is a zero-sum game. It is fundamentally unpredictable. Plans that have information about their own enrollees but not the rest of the market have a hard time knowing whether they’ll receive or lose money.

Sarah Kliff

How do you think the premium increases will affect Obamacare enrollment this year?

Caroline Pearson

For the 85 percent of people who receive premium subsidies, I think the rate increases don’t matter very much. Those people aren’t paying the market rate, and the subsidies will increase along with the premium increases. They’re really insulated from that pressure.

As for the unsubsidized people in the market, I do think there is risk some of those people could drop out. But the question is: Who is it that is buying exchange coverage without a subsidy? It’s probably people who have chronic health conditions and are high need. They won’t be happy about a 15 to 20 percent increase, but that’s still going to be much better than going without coverage.

Sarah Kliff

The Obama administration projected last week that enrollment on the marketplaces will grow by about a million people next year. Does that seem realistic to you?

Caroline Pearson

I think those projections are a little optimistic. I would probably project relatively flat enrollment from 2016 to 2017. Over a million is the growth we saw from 2015 to 2016. I would expect a smaller incremental increase in 2017.

Sarah Kliff

So how would you fix that? As you mentioned earlier, enrollment on the marketplaces has consistently come in lower than projected. If there was legislative will to fix the marketplaces, what would the best fixes look like?

Caroline Pearson

You have to think about how to get more people into the market. I do not believe enrollment is low because people aren’t aware that there is coverage. I think it’s low because middle-income people do not believe the coverage is affordable if they don’t have high health care costs already.

I think what you have to do is rethink the subsidy structure and benefit design structure to make coverage more appealing for people between 200 and 300 percent of the poverty line.

If you look at the report that [the Department of Health and Human Services] put out on Monday, the average income of the marketplace population is 165 percent of the poverty level. It is a very low-income population.

The mandate penalties are not working to compel people into the market, but the subsidies are in. Absent higher mandate penalties, which even in a Democratic Congress is hard, you might see getting rid of the subsidies for people between 300 and 400 percent of the poverty line and doubling down on the people between 200 and 300 percent. If you could get better enrollment among that group, it might stabilize the market.

Then there are all sorts of benefit design things you could do to attract healthy people. You want to think about how to make the things that healthy people use, like maybe prescriptions or certain doctor visits. You could see rolling in vision coverage to attract healthy people. Benefits design research suggests those things make insurance seem like a better deal, when you have routine care that is being paid for.

Sarah Kliff

There were a lot of insurance plans that left the Obamacare marketplaces last year. Do you think there is any shot at getting them to come back next year? What would that look like?

Caroline Pearson

I do not anticipate new entrants in 2017 at all. If you did have legislative and regulatory fixes, then they might come back. But I think in 2018 the government will mostly be focused on keeping insurance plans in. This is now a market that is completely dominated by Blue Cross Blue Shield. In 89 percent of the counties where there is only one insurer, it is a Blues plan, which is what the individual market looked like before the ACA.

Sarah Kliff

When the ACA was being debated, there was a lot of talk of the marketplaces being the start of a new, competitive insurance landscape — that it was the first step toward dismantling employer-sponsored coverage. Do you see a path toward that world anymore, where companies move their workers onto the marketplace?

Caroline Pearson

Not in the near term. I think employer coverage has proven far more stable than everyone expected. There is not an indication. Some people thought this would be the first step toward ending employer-based coverage; as more people were happy with their individual insurance you’d see this migration. That is not on the horizon at this point.