(Bloomberg View) — In November, UnitedHealth (NYSE:UNH) abruptly reversed its previously sunny take on the Patient Protection and Affordable Care Act (PPACA) — Obamacare — and said that the company would have to pull out of the government-run exchanges if market conditions didn’t improve. The problem: People signing up during “special enrollment” (the majority of the year that falls outside of the annual open enrollment period) were much sicker, and paying premiums for much less time, than the rest of the exchange population.
The result: Those policies were losing a ton of money.
UnitedHealth’s bombshell raised the specter, once thought safely in the grave, of the “adverse selection death spiral,” the phenomenon where sick people are more likely to buy insurance, which raises the average expenditure, which means higher premiums, which makes insurance a worse deal for the healthiest members of your insurance pool, which means they drop out, which means your pool is even sicker and average expenditure goes up even more … and there goes the insurance market.
The mandate was supposed to prevent this, but the mandate has pretty skimpy penalties, meaning that it may be economically rational to forgo insurance, and buy it only if you get sick.
See also: What if you lie to a PPACA exchange?
This sort of strategic behavior was very risky before Obamacare, because insurers generally refused to cover pre-existing conditions that popped up while you were uninsured. With insurers forbidden to exclude such conditions, or price the insurance to cover their added costs, it suddenly became a viable tactic.
Pundits and wonks worried a lot about this when the law was being debated, but over time, a consensus developed that restricting signups to open enrollment would make the system too hard to game for this to be much of a problem. But then suddenly, UnitedHealth described a pattern in its insurance claims that sounded a lot like gaming, as I noted at the time.
But it was hard to know how seriously to take that threat. It’s just one company, said the law’s supporters, and not a major player on the exchanges. I found UnitedHealth’s warnings more worrying than the optimists did, but even I was skeptical that there was much gaming going on. Special enrollment is only for people who have had major life events like changing jobs, getting married or having a baby. So I assumed that the folks who had a qualifying life event, and actually signed up for insurance during special enrollment, were more likely to be sick people who really needed insurance, while healthier folks who had a qualifying event decided to wait until they got a new job, or until open enrollment rolled around again. That would certainly skew the pool, but probably not disastrously.
But yesterday, Politico published a long article giving more support to the “gaming” hypothesis. People who sign up during special enrollment, insurers say, “run up much higher medical bills and then jump ship, contributing to double-digit rate increases and financial losses.” Customers are also exploiting the three-month “grace period” when they can stop paying premiums and still get treatment from providers. And the article suggests that at least some Americans have realized that under current regulations, they need to be insured for only nine months of the year to avoid the mandate penalty.
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So you can sign up for insurance, cram all your spending into that shorter time frame, and then stop paying for the last three months.
This is not just UnitedHealth, either. Blue Cross Blue Shield, the mainstay of the marketplaces, appears to be seeing similar problems, as does Aetna (NYSE:AET). This is not just the experience of one outlier.
I don’t want to overstate the threat here. But I really can’t. Unless it’s gotten under control, this sort of behavior poses an existential threat to the exchange marketplaces. The more people game the system, the more people will have to game the system. People who game both incur more in costs than regular consumers do and pay less in premiums, which means everyone else has to pay more. As the insurance gets more expensive, those regular consumers will be increasingly tempted to convert to gamers themselves, and the marketplaces may well collapse.
Note, however, that I said “unless it’s gotten under control.” There are some steps that insurers and this administration, or a future one, can take to mitigate this. Most notably, they can require people to conclusively document that they have just had a qualifying life event. That won’t completely control the problem, because one of the qualifying life events is moving to another state. In a lot of major population centers you can do so without significantly uprooting your life, and you will if that’s the difference between you paying $100,000 worth of cancer treatment or Aetna doing so. But it would probably eliminate some phantom babies, layoffs and marriages. Will that be enough to eliminate gaming? I don’t know. It’s certainly a step.
That will not, however, be entirely painless. There you are, having agonizing back spasms, and some insurance executive wants you to find the marriage license you stuffed God knows where after your wedding two months ago. Stand by for outraged complaints about “putting paperwork before people.”
Some people will undoubtedly fail to meet the paperwork requirements, and lose their insurance, even though they actually qualify.
But if you want the exchanges to survive, you’re going to need to accept this as the price of keeping them going. Buying insurance can’t be a game — or at least, not one that anyone can play anytime.
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