News about Obamacare has not been good this week. On Monday, the health insurance giant Aetna announced it would stop selling coverage in 11 state marketplaces. This follows UnitedHealth’s exit from Obamacare, as well as the exit of dozens of smaller health insurance plans.
Ezra Klein and Sarah Kliff have been writing about Obamacare ever since Congress started debating it. So they took an hour on Tuesday to talk about the Aetna news, what it means for Obamacare, and whether it’s time to get seriously worried about the future of the marketplaces. What follows is a lightly edited transcript of the discussion we had over Slack. And if you’re looking for even more Obamacare answers, check out this Facebook Q&A Sarah recently conducted on Aetna’s exit and the law’s future.
Why did Aetna quit Obamacare — and how much of it had to do with its denied merger?
Sarah Kliff: It has, obviously, been a tumultuous week (and tumultuous few months) for Obamacare. This summer you've seen two major insurers basically pull out of the marketplaces — first UnitedHealth, then Aetna — and many smaller plans also decide Obamacare wasn't a good business opportunity for them.
All of these decisions, in aggregate, are really going to limit choices on the marketplaces. We now know there are four states where only one insurance plan will sell coverage — and at least one county, in Arizona, where zero insurers are signed up. The health law basically depends on insurers volunteering to sell on the marketplaces, and right now you have fewer raising their hands.
Right now I feel like we're seeing the start of a conversation of whether there is something going very wrong with the marketplaces — whether we'll keep seeing withdrawals to the point where the markets don't function.
Ezra Klein: Right, so I think there are two issues here. There is the specific story around Aetna pulling out of the marketplaces, and that's become a whole lot more complicated over the last 24 hours. But then there's the broader story of instability in the marketplaces.
Regarding Aetna, two things seem simultaneously true: They were losing money in Obamacare, but they would have happily stayed in the program if the Obama administration had greenlit their merger with Humana (and big ups to the Huffington Post's Jon Cohn and Jeff Young for uncovering the smoking gun document here).
I think this shows a few things. One is that basing your system around managed competition between private insurers means you are in bed with private insurers — dependent on their cooperation, and so incentivized to help them succeed. It's interesting, in this context, that the Obama administration actually didn't buckle on the Humana merger.
But the other is that it is proving very difficult for these blue-chip insurers, like Aetna and United Health, to turn a profit in the marketplaces. And that's the real danger to Obamacare here.
Sarah Kliff: Aetna complicates the narrative a bit because you have this whole other narrative around their merger negotiations. And even what happened there isn't clear, like we don't have evidence that Aetna retaliated against the administration. Their framing is that they expected economic benefits from the merger, and without those, they can't sustain the losses on the marketplace.
Ezra: Can I push on that, though?
Ezra: I think that letter is carefully crafted, but I don't think there's any doubt what it was saying. That was a quid pro quo. Everyone involved is a professional, so they make arguments around economic necessity rather than simply demanding their ransom, but even with their Obamacare losses in 2015, they turned a big profit in 2015. They could have stayed in the marketplaces, raised prices, and tried to make it work — and that's actually what they said they would do at the time.
The bigger problem for the Obama administration comes when you look at it the opposite way: Assuming what was keeping Aetna in the marketplaces was the hopes of getting their merger, and assuming the Obama administration doesn't want to cut those kinds of deals, then how do they keep other struggling insurers in their program?
Sarah: So I'm not sure how easy it would have been for them to stay in the marketplaces, like you say. Because you see similar companies (exhibit A: UnitedHealth) pulling out of the market, because they're losing millions of dollars. And they're not involved in any sort of merger negotiations. Right now companies are three years in, they have shareholders, and it becomes harder and harder to justify staying in the market when you're not making any money.
Ezra: Yeah, I agree with that. I think we might be saying the same thing. To put it differently, there are two scenarios possible here. One is Aetna would have liked to stay in but needed to make good on their threat. The other is they wanted to leave but could have been kept in by the lure of the merger. This is clearly the latter case, and that's much worse for Obamacare.
Insurers hold incredible sway over Obamacare’s fate
Sarah: Right, so I think you raise a good point here — the administration has incredibly little leverage to keep insurers in the marketplace. This is a question I get a lot — what can the White House do to get insurers to sell? And it really depends on insurance plans deciding it’s a good business opportunity.
Even if you get to a situation where there are places with zero health plans, the administration only has the power to ask insurance plans really, really nicely to come onto the market.
Ezra: This is a place where the absence of a public option is really hurting Obamacare. They have no fallback in areas where the number of participating insurers falls to one, or even to zero.
Sarah: So here is a question I have been thinking about a lot lately that I wanted to get into our conversation: What went wrong? What has happened in the past few years that has changed dozens of insurance plans from thinking Obamacare was a good investment to a bad one?
I think some went in with the expectation that the first year or two would be shaky and then things would clear up. And it seems clear that expectation wasn't met.
But I'm trying to think through are there certain places where we had blind spots, certain things that didn't work like we (and insurance plans) expected?
Totally true re: public option. I think this is why you have President Obama, in his last six months in office, writing an article in JAMA advocating for the public option as one of the policies he thinks is needed to secure the law's future.
Ezra: So it looks to me like a couple of things are going wrong, or maybe not going wrong. The big one is that insurers were not able to effectively predict the health costs of enrollees. They underpriced their plans relative to the needs of the market. This is, to some degree, surprising: Insurers have traditionally been pretty good at this kind of thing.
But I don't think it's totally shocking that the big insurers pulling out — Aetna and UnitedHealth — are really concentrated in the employer-based market. I don't think they had quite the skill with pricing out individual enrollees that some smaller insurers who focused on the weirder, harder, less lucrative individual market did.
Sarah: Or another theory of that is that they underpriced to bring consumers into their plans in year one, and then it was really hard to do big premium spikes.
They also had the downward pressure of regulators, who wanted (partially for political reasons) to keep premiums low.
The Obama administration likes to see consumers shop for coverage. Insurers hate it.
Ezra: Right. A lot of the insurers have complained about churn, which backs up that theory. They thought they could raise prices in year two or three, but when they did, consumers actually did prove price-sensitive and fled to other plans.
Sarah: Which is totally what the administration wanted! They wanted people to shop, and they did. But insurers were really unprepared for a market like that.
Ezra: In traditional economics, a competitive market drives profits down to near zero. So when you say, "I'm going to make insurance markets more competitive," you are saying, "I will drive down profits for insurers." I don't think anyone expected the insurance markets would prove this competitive, but now that they are, it's a complicated, distracting, and not very lucrative line of business. So if you have better alternatives, and Aetna and UnitedHealth do, why stay in?
On the other hand, the question is whether we're seeing insurers designed for this more competitive market rise up. That, to me, is the big issue. It's okay for some insurers to fall out of this market. There will be losers. But there needs to be winners, too — insurers who take to this project, develop competencies at it, and then want to expand to pick up the market share dropped by their rivals who aren't designed for this kind of operation.
Sarah: So there are some winners! Mostly plans that have helped states run Medicaid contracts and are used to serving a low-income population. So you have companies like Centene and Molina, for example, who are expanding their marketplace business. These aren't household names if you get insurance at work, but they're really big players.
I think the question is whether there are enough winners to sustain the markets. And if there are new startup insurers who can see what works and think the marketplaces are a good enough business opportunity to dive into them.
What works for Obamacare in California might not work in Alaska
Ezra: One difficult part with this conversation is that there are so many markets. There's no problem in California's Obamacare markets. There is a problem in Alaska's. I don't know how to talk clearly about this program in which some parts are thriving and some parts are failing simultaneously.
Sarah: Yes, totally. When you look at the states lacking competition, they're generally rural states that have always struggled to attract insurers. The states that are down to one insurer are places like Alaska and Wyoming.
So there was this theory in Obamacare that insurers would want to go to these places because it was easier — an “if you build it, they will come” theory. But the marketplaces got built. And insurers (perhaps unsurprisingly) did not flock to Alaska.
Ezra: One issue I keep waiting to hear more on is the individual mandate. In theory, that was a dial that could get turned up if younger, healthier enrollees were hanging back from the markets. Obviously that dial isn't going to get turned up. But is that the problem — that the penalty is too low? Or is something else leading to the mispricing?
Sarah: That’s a good question — maybe another story to be reporting, haha. Because it’s not like the mandate changed from when prices were set. Insurers knew what the penalties would be.
As to what led to the mispricing, one reason insurance plans were priced low is that there were a handful of programs that were meant to stabilize premiums in the first year, basically make sure nobody suffered crazy losses.
These are pretty complex issues and don’t get much attention. If you are a health wonk, you'll know these as the 3R’s: risk adjustment, reinsurance, and risk corridors. And those programs, to put it briefly, have not paid out at the expected rates.
Right now you have a number of lawsuits where insurers are suing the Obama administration, saying they were supposed to get way more financial support and that the administration didn't do the work it was supposed to to stabilize the market.
A public option? A collapse? What’s next in store for Obamacare.
Ezra Klein: So I think the question here is what comes next? If the Republicans had nominated a competent candidate, this would be a major election-year issue. As it is, the news has been overshadowed by Donald Trump's campaign shake-up, just as Trump manages to overshadow all news that might help his campaign and harm Hillary Clinton. But if Clinton does win the election, Obamacare becomes her problem to fix. So what can she do?
I see a few possible things coming.
One is that the public option is going to return to the discussion in a real way. It probably won't go anywhere, because Democrats don't control Congress, but if they manage to wrest it back from Republicans atop an anti-Trump wave, I think that will be their fix. The public option basically solves the problem of insurers pulling out and leaving markets completely empty. I could also imagine a public option that only triggered in markets with three or fewer choices being a compromise proposal.
The second option might be to let insurers offer much cheaper, and more diverse, insurance options in the markets. They can already go pretty high in terms of deductibles, copays, and so forth, but perhaps to make these markets work, the administration is going to have to embrace a much leaner definition of the term "coverage." Right now only young adults can buy into catastrophic plans, but maybe everyone should be able to.
Finally, I think this gives a lot of energy to the single-payer folks, who are watching their worst nightmares of what happens when governments gets into bed with private insurers confirmed.
Sarah: Yeah, I think those options sound right. As to which one we end up with, I think it depends on how dire the situation gets. If you end up with places in the country where literally no one wants to sell, then you really need an intervention — and the public option seems like the cleanest one.
But if we end up in a world where the administration can cajole at least one carrier into each market, then we might end up in your second scenario, where the marketplace is where you buy narrow-network plans that have high deductibles and copays. And this would be something of a departure from what architects envisioned for the choice the markets would offer. It would mean that the people who get coverage through their jobs have significantly better health insurance than those who buy on the marketplaces.
One thing that makes this situation seem especially precarious to me is how much of it rests on one health insurer (or, if we're being technical, one association of health plans): Blue Cross Blue Shield. You have lots of places in the country where the Blue plan is the only carrier. And that partly reflects the association's commitment to the idea of Obamacare, even though the plans have been quite clear they're hemorrhaging money. So if the Blues turn on Obamacare in the way Aetna and United have, that could leave the law in really, really rough shape.