8 possible fates for the ACA exchanges

(Bloomberg View) — A lot’s been happening in the Afforable Care Act health care markets. Covered California announced that premiums would rise by an average of 13.2 percent on its exchanges, after years of being one of the standouts for low premium growth. Meanwhile, Anthem, a large insurer, said it would expand its presence in the ACA exchanges — the Obamacare exchanges — but only if its merger with Cigna is allowed to go through.

Aetna is only the most recent insurer to struggle to make money on these policies; after expressing optimism in April, the company now expects to take large losses in these markets and is cutting back on its offerings for 2017. The market, says one quoted analyst, is still “very volatile.”

Related: 3 ways Aetna just shook the ACA’s foundations

I’m not sure “volatile” is quite the right word, because volatility implies both large potential losses and large potential gains. So far in these markets, few people seem to be seeing the gains; most of the success stories I’ve heard have come from Medicaid managed-care companies that have successfully migrated their plans to the exchanges — presumably by providing Medicaid-like narrow plans to the population that floats between Medicaid and the exchanges. For people who want better-than-Medicaid service, the plans are a lot more pricey — and because those people use a lot of care, the plans keep getting more expensive.

This comes on top of news last month that the prices of the lowest-cost silver plans — which tend to be the most popular options on the exchanges — would be going up by a lot more this year than they did last year. If the insurance companies keep getting more bearish on these markets, then we can expect big hikes next year as well.

Where are these markets going? We can sketch out a few possible futures.

(Image: Thinkstock)

1. Rates will settle down because insurers are just finding their footing.

For the first few years, supporters of the law had a mantra: “Look how great Obamacare is; rates are lower than expected.” They had to stop chanting that in 2015, when insurers started asking for — and getting — great big price hikes. The new mantra became: “It’s a new market and insurers needed time to figure out how to price, but rates will settle down.”

Which also works for a limited time only. Obamacare sharply limits the ability of insurers to charge different rates to different people, or take significant profits, which means pricing should be pretty simple: the average expected claim, plus a modest profit margin. Sure, they could have mispriced for a year or two. But one or two years of price hikes ought to clear that up, especially because enrollment growth seems to have leveled off. If prices don’t stabilize soon, at some point — maybe 2018 — we have to concede that what we’re seeing is not an initial mispricing, but a market where consumer behavior is evolving in tandem with pricing, so that the latter can’t catch up to the former. That’s a very different problem, and one that could end in something like a death spiral in the unsubsidized portion of the market.

2. Rates will settle down because the exchanges will turn into Medicaid-with-premiums.

From what we’ve seen over the last year, the plans with the biggest problems seem to be plans that cost more and allow you lots of choice: choice of doctors, choice of hospitals, choice of treatments. Plans, in other words, that are a lot like employer-provided health insurance.

Who are those plans attractive to? Upper-middle-class people, for one. But also, people who are sick, who want to be sure they can go to the best oncologist, not just whatever random oncologist the plan has available. Those plans may simply not be viable at prices anyone wants to pay.

So the entire market may end up moving in the Medicaid-managed-care direction, with a very limited number of doctors and hospitals available.

Related: Managed Medicaid plans whip commercial plans

There are some issues with that, however. For one thing, such plans are pretty viable in urban areas, but in a rural area where there’s only one hospital, insurers can’t gain negotiating leverage by threatening to leave that hospital out of their network. Those insurers may end up leaving the exchanges altogether. It seems telling that Humana’s pullback will radically reduce the number of counties it covers, but involve much less radical surgery on the number of states it expects to serve.

Also, while these ultra-narrow-network plans may be economically viable, it’s not clear that they’re politically viable. We tried narrow networks before, and had great success at controlling health care costs for a few years. The organizations that made this work were called HMOs, and everyone hated them. A combination of political and market pressure gutted their ability to control costs, and that was that.

Medicaid patients have long accepted not-very-good insurance because it was free and because the Medicaid population doesn’t have much access to employer coverage. Its low quality was politically sustainable because poor people tend to vote at lower rates than other Americans. But pushing Medicaid-style coverage upward onto middle-class people who do pay premiums and vote … well, you’re back to that combination of market and political pressure.

3. Rates will settle down at a much higher level, and unsubsidized people will stop buying insurance.

With so much subsidy money sloshing around the system, a true “insurance death spiral,” which just keeps going until the market collapses and no one at all has coverage, seems unlikely.

On the other hand, it’s certainly possible to see a sort of modified death spiral, where the only folks who buy insurance are people whose monthly premiums are capped at a few dollars. That insurance would be very expensive, but because the government would be picking up almost all of the tab, those consumers wouldn’t care much.