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Obamacare’s premiums are spiking. Does that mean the law is failing?

Obamacare has become something very different from what Democrats hoped for.

Three years ago, health economists believed Obamacare’s soon-to-launch marketplaces would grow to replace much of America’s fractured, complex employer-based health insurance system.

Predictions for the employer-sponsored insurance system’s collapse ran rampant. The question around companies shifting workers to the new public marketplaces was often framed as not if but when. University of Pennsylvania’s Zeke Emanuel pegged it at 2025. MIT’s Jonathan Gruber estimated 2050.

These days, you don’t hear those predictions anymore. Speculation, instead, focuses on whether the marketplaces will survive at all.

Major health insurers Aetna and UnitedHealth soured on the law over the summer, sharply reducing participation in the marketplaces. Obamacare’s insurance markets have, in turn, become increasingly less competitive and more expensive. The most recent data shows that premiums will increase, on average, by 22 percent in 2017 for a mid-level plan.

Enrollment, meanwhile, is only about half of what forecasters had thought it would be when Obamacare's insurance expansion started.

"Some people had thought this would be the first step toward ending employer-based coverage," says Caroline Pearson, a senior vice president at research firm Avalere Health. "That is not on the horizon at this point."

Obamacare was meant to be the beginning of America’s transition to a new health care system — it was common in those days to hear the law spoken of as a "platform" or "a first step." Instead, Obamacare is proving to be something much more familiar, and much more limited.

The marketplaces' rising premiums coupled with the failure to attract a robust group of health plans to some areas suggests that Obamacare’s insurance expansion is on the path to looking like other safety net programs we know, offering limited services to a predominantly low-income population.

"The exchange population — 85 percent of which qualifies for financial assistance — looks a lot like the Medicaid population," says Michael Adelberg, who previously served as the Obama administration’s acting director of the exchange policy. "And with it, we’re seeing the start of the ‘Medicaid-ization’ of exchange plans: narrow networks with no frills."

To be clear: Access to a "no-frills" plan is a huge improvement on what low-income people experienced prior to the marketplaces. Many were shut out of the coverage by prohibitively high prices or their own preexisting conditions. Obamacare is undoubtedly helping those people — and there are millions of them — and will likely continue to do so going forward.

But it's still a far cry from what health wonks envisioned just a few years ago when they saw the health care marketplaces reshaping the industry.

Obamacare is still succeeding at increasing the number of Americans who have health insurance

It's true that Obamacare’s marketplaces are in a period of tumult. It's also true that the uninsured rate in the United States has fallen to the lowest point in decades. That change is, without a doubt, the result of the Affordable Care Act’s insurance expansion.

The uninsured rate has consistently declined since the health law’s insurance expansion launched in 2014. In September, it fell below 9 percent for the first time ever.

Chart showing the continued decline of the uninsured rate for early 2016 Vox / Sarah Frostenson

This means having insurance coverage is now roughly as common as wearing seat belts.

"It's important to step back and think about what would be happening right now if there was no Affordable Care Act," says Nick Bagley, an assistant professor at the University of Michigan Law School whose work focuses on the Affordable Care Act. "Premiums would be much higher now than they are under any kind of reasonable estimate."

These people are generally happy with their coverage. The vast majority have used their plans to see the doctor, and most say they’re satisfied with their choice of doctors and hospitals.

And premiums have, generally, actually been lower than we would have expected had the law not passed. An analysis from the Brookings Institute shows that 2016 premiums were 20 percent lower than forecasters had expected.

cbo (Brookings Institute)

All available evidence suggests the law is helping these people gain access to medical services that were previously out of reach — and there isn’t much reason to think this will change. Even when there are large premium spikes, more than 80 percent of marketplace enrollees have subsidies that ensure their monthly fees remain affordable.

Obamacare is failing to deliver on the promise of bringing competition to the individual marketplace

Healthcare.gov

There was a clear policy vision for the health law’s marketplaces: If the United States’ individual insurance market were better organized and easier to navigate, consumers and health plans would flock to the new method of purchasing coverage. They would get cheaper premiums when insurers competed against one another for shopper's business.

President Obama promised when the marketplaces launched that Americans will find “[m]ore choices, more competition, and in many cases, lower prices." As the marketplaces launched, he predicted that consumers would shop for coverage the "same way you'd shop for a plane ticket on Kayak or a TV on Amazon."

In some places, the marketplace looks like this. California, for example, has had no trouble attracting a robust set of insurance plans that want to sell on its marketplaces.

Areas that have more competition also tend to see less of a premium spike this year. The cost of a mid-level health plan in Los Angeles, for example, will only rise 5 percent between 2016 and 2017.

Insurance plans blame the Obama administration for the marketplaces' low participation

Insurance markets are very local. Health plans gravitate toward higher-population areas where they can more easily enroll lots of customers and have a wide array of hospitals and doctors to contract with.

There are areas of the country that had competitive individual markets prior to Obamacare, largely places that are urban with affluent populations. Those places tend to continue to see multiple plans offer coverage at more affordable rates. But in the areas that have long struggled to attract competition — places with smaller, low-income populations — the situation has not hugely improved.

There are five states — Alaska, Alabama, South Carolina, Oklahoma, and Wyoming — that only have one insurance plan signed up to sell in 2017.

These places tend to have the biggest premium increases, too. Oklahoma's premium for a mid-level plan is set to rise 69 percent next year; in Alabama it will go up 59 percent.

Chart showing states with fewer insurers experience severe spikes in monthly premiums

There are lots of explanations for why insurers have shied away from the marketplaces. The health plans themselves will gripe that the administration set regulations that were constantly changing and impossible to succeed under. Certain policies that were meant to stabilize the market in its nascent years didn’t work as planned.

One of those programs, risk insurance, ends in 2017 — and is a key reason why premiums are going up so significantly this year.

"You had health plans that were underpricing their products and receiving reinsurance," Avalere's Pearson says. "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."

Many of those I spoke with in the insurance industry were especially frustrated with the individual mandate, which they found to be too weak and poorly enforced, leading to lower-than-expected enrollment among healthy, young adults. The White House hoped that young adults would make up 38 percent of enrollees; right now they’re about 28 percent of the marketplace population.

"We’re concerned that some of the rules today allow people to jump in and out of the pool," says Justine Handelman, vice president for policy at the Blue Cross Blue Shield Association. "It’s critical that more changes are made."

Critics of the insurance industry will fire back that the marketplace experience shows it's impossible to expand coverage in partnership with a private industry. The United States made its insurance expansion dependent on cooperation from private insurance plans, which are more beholden to shareholders than consumers. It was a plan, they’ll lament, that was doomed to fail.

The Swiss built universal coverage with private plans. Why can’t we?

ambulance

The argument I found most convincing came from Uwe Reinhardt, a health economist at Princeton University who studies international systems. He points out that it’s not the case that partnerships with private insurers can’t work to expand coverage. There are other countries like Germany and Switzerland that have, for decades now, achieved universal coverage working with private plans.

But those countries did something quite different from the United States. When they set out to create universal coverage systems, they regulated their health care system much more tightly. They mandated the benefits each insurer covers and how much each medical service costs. They also set up much stronger laws to force consumers to buy coverage.

Take Switzerland, for example. Anyone who moves there must purchase coverage within three months of arrival. Few people try to evade coverage, but those who do can end up facing steep fines or even jail time.

"If you don’t obey, and the Swiss find out — which they often do when you get to the hospital — they will go after you and garnish your wages," Reinhardt says. "They’re very tough. And we’ve never gotten close to creating a system like that."

He’s right. Obamacare does create more regulation around the insurance marketplaces than existed prior to the law, like requiring health plans to cover certain "essential benefits" and to be clearer about what percentage of an average member's costs they cover.

But the American system hasn’t gone nearly as far as Switzerland in how it manages private plans. Obamacare includes a much weaker requirement to purchase health insurance. Lawmakers skittishly added in a fine ($695 this year). For most people though, it's much cheaper to pay the fine rather than buy coverage.

Legislators made a policy choice with Obamacare: They wanted to preserve more freedom for insurers and consumers than universal health systems typically offer. We’re seeing the consequences of that now, as insurers and customers use their freedom to decide not to participate in the new system.

The marketplaces aren't on the verge of collapse. But they're also not what drafters envisioned.

Medicaid Expansion Patient

Obamacare’s future might not look like the brand new, competitive market that health plans envisioned. Instead, it might look a lot like a program we’ve known for decades: Medicaid.

Medicaid has, since the 1960s, served low-income populations that lack health insurance, largely women with children and the disabled. The program usually pays low reimbursement rates to hospitals and providers, so it doesn’t get big brand-name facilities into its networks. In 2011, one-third of doctors nationwide said they didn’t accept Medicaid patients.

At the same time, surveys generally find that Medicaid enrollees tend to be especially happy with their coverage. One recent Gallup poll found that Medicaid enrollees are just as satisfied with their plans as people who receive health insurance at work.

The population that has flocked to the marketplaces looks pretty similar to the Medicaid population. The average income of the Obamacare population is 165 percent of the poverty line (just under $20,000 for an individual or about $40,000 for a family of four).

This was not what legislators expected. They thought the marketplace would attract many more middle-income enrollees. The Congressional Budget Office projected in 2009 that 43 percent of enrollees would buy coverage without a subsidy. Now, that figure hovers around 17 percent.

The people buying coverage through the Obamacare marketplaces are types of people who likely couldn’t afford to buy coverage on the individual market before Obamacare began providing financial help. "Prior to the ACA, the individual market — because the products were expensive and there was no subsidy — was built for a population that resembled the white-collar employer market," Adelberg, the former administration official, says.

But now these people are getting heavily subsidized coverage. They will likely stay in the marketplace, even as premiums rise, because the subsidies insulate them from the sticker price.

"The risk is that premium increases beget more premium increases if some healthy people decide to drop coverage in response to the increases," says Larry Levitt, vice president for special projects at the Kaiser Family Foundation. "In the marketplaces, that is not likely to happen because the vast majority are receiving subsidies and are cushioned."

The insurers that have succeeded on the marketplace are those that have a background running Medicaid programs for states. This includes companies like Centene. It came into Obamacare knowing how to target those people, as St. Louis Post-Dispatch reporter Samantha Liss detailed in a recent piece:

Instead of offering a broad range of plans, the company is narrowly focusing on low-income individuals who have lost their Medicaid eligibility and need to find a private health insurance plan.

By selling insurance to consumers the company already knows, Centene plays to its strength.

These are the success stories of the Affordable Care Act: Plans that know how to serve low-income populations are building new businesses on the marketplaces.

To run a successful Medicaid program, more competition can be nice — but isn't necessary. You just need one insurer willing to sell.

If the health care law can maintain that bare bones level of insurer participation, then the marketplaces will likely continue to operate just as they have for the past three years, regardless of the 2017 rate hikes.

The end of speculating about the end of employer-sponsored coverage

It was easy, five years ago, to explain why big companies would dump their workers onto the public marketplaces.

Insurance costs kept rising. The average employer-sponsored plan for a family of four cost $17,545 last year. Why would companies keep paying for coverage when they could pay a relatively small penalty ($2,000) to shift workers to the public marketplace? Congressional Republicans estimated in 2012 that American companies could save a collective $422 billion moving their workers to the marketplaces.

But we have scant evidence of that storyline becoming reality. Employer-sponsored coverage has held pretty steady. And while there are individual stories about certain companies ending health insurance coverage, most studies fail to show any larger trend in the economy. There are just as many people getting coverage at work as when Obamacare took effect.

Prior to Obamacare, there was no mandate that companies offer health insurance. But employers did so anyway to stay competitive and woo employers, particularly in tight labor markets.

The public market hasn’t changed this calculus. The botched Healthcare.gov launch in 2014 left some employers skittish, not wanting to shift their workers into a situation where shopping for coverage would be difficult or impossible. The type of insurance offered on the marketplaces has, as discussed earlier, been relatively skimpy compared with what companies typically give workers.

Employers have, so far, been quite willing to pay for expensive benefit packages. And that puts a real limit on the overall growth of the marketplaces.

If companies were sending workers into the marketplaces en masse, the large market would likely convince more insurance plans to stick around and sell to a larger consumer base.

But the marketplace is now much smaller than expected. There were 10.4 million enrollees this year — 11.6 million less than the Congressional Budget Office projected in 2014. A smaller marketplace with unpredictable premiums is a less compelling place for insurers to invest in — and that, in turn, makes it a place that companies are less likely to send their workers.

Markets promise choice. Medicaid promises coverage.

doctor patient

Obamacare’s drafters didn’t envision the marketplaces looking so much like a Medicaid program. But is it a bad thing if that's how the exchanges ultimately shake out?

The answer likely depends on what you think is most important in creating universal coverage — and what metrics we use to judge whether the Affordable Care Act is working.

Obamacare’s marketplaces aimed to prioritize choice and a shopping experience as an important good to deliver to consumers. Legislators saw inherent value in letting consumers pick the plan that was right for them.

Consumers seemed to value the shopping experience too: Between 2015 and 2016, only one-third of marketplace enrollees kept the same plan. People who bought Obamacare coverage really did seem to shop for coverage that fit their needs.

If the marketplaces become more like Medicaid, that’s the type of experience that gets lost. The promise Medicaid makes isn’t one about choice. Medicaid enrollees get little say in what hospitals they can visit or which doctors will take them. It's much more of a one-size-fits-all program.

Medicaid doesn’t guarantee options, but it does promise coverage. It doesn’t provide access to all doctors, but it provides access to a doctor who, without the program, might be out of reach. When I’ve talked to people who have enrolled on both, some prefer the latter.

Earlier this year I spoke with Kaylynn Maxfield, who recently moved from Utah to Pennsylvania with her husband and young son. Maxfield generally found signing up for Medicaid a better experience than enrolling in the marketplace.

"With the marketplace, you have so many options that it's overwhelming, like which one do I choose, and how do I make sure I choose the right one," she says. "With Medicaid there are three options, and you know they’re all offering the same level of coverage. It was so much simpler."

For Maxfield, choice didn’t really matter that much. What she wanted was the ease of mind that comes with health coverage — and for her, Medicaid offered a better experience by that metric.

There are millions of shoppers who buy coverage who have different priorities when it comes to what they want from the marketplaces. There are those, like Maxfield, who just want a guarantee of coverage and find shopping a hassle. But there are many others who did shop, and took advantage of the choices the marketplaces offered. These are the losers of a Medicaid-style marketplace, as the law shifts from what drafters envisioned to what health insurers are actually willing to build.