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A Recipe for a Spiraling Obamacare Exchange

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If you live in Iowa, and you buy insurance on the Obamacare exchange for individual plans, you might want to make sure you’re near an emergency room when you check the rates for 2018. Because you might well have a stroke.

Iowa is scheduled for the largest premium increases in the land next year, a whopping 69% according to health care consultancy Avalere. The average premium on the benchmark “silver” plans will rise to $1,000 a month.

What is going on in the state of Iowa? A rash of tragic combine accidents? Are Iowans getting lung diseases from all that corn pollen blowing about on the wind?

(Related: Colorado’s 2018 Individual Health Rates Will Be Weird: Wakely)

Not quite. What’s happening in Iowa is sick people. Lots and lots of sick people cramming into an individual market that doesn’t have enough healthy patients to offset their costs.

In particular, some have suggested, one sick person: a hemophiliac whose treatment is costing $1 million a month. Iowa is a small state, and its exchange only covers about 50,000 people a year. This leaves it more vulnerable than larger states to bad outcomes, because it doesn’t take too many rare cases to push an insurer into the red. The potential for catastrophe is higher for each insurer, because of course, they cover only a fraction of the total pool.

“Everyone is trying to avoid the $12 million man,” Duke University research associate David Anderson told Politifact. “Because whoever catches him basically can’t make money.”

(Related: Blue Cross Carrier to End Iowa Individual Sales in 2018)

Apparently that one patient reads the news, and is aghast at the implication that he is, all by himself, destroying Iowa’s market for health insurance. Jonathan Cohn of the Huffington Post interviewed his family — and reassured him that it’s not true. Iowa, Cohn says, is imploding because of a combination of bad decisions by Republican lawmakers, and structural problems inherent in rural markets.

I was intrigued by the issue, so I spent some time looking at the numbers. Is Cohn right, or the folks faulting the $12 million man? The answer I came up with was: both of them, sort of. (Image: CMS)

(Image: CMS)

Let’s start with the cost of that patient. I was unable to find data on the number of individual policies sold in Iowa, so let’s assume a generous case for the prosecution of our beleaguered hemophiliac: Those 50,000 people are all in families of four, which would mean that 12,500 policies were sold. If that’s the case, it works out to roughly $950 a year per policyholder, which is a great deal of money. But Avalere predicts an average premium of $12,000 a year.

That’s a theoretical maximum for what he is costing his fellow policyholders. And it’s not nearly enough to account for all of Iowa’s cost problem. On the other hand if we use more reasonable assumptions, the number falls. If all 50,000 policies are individual policies, then he’s costing folks about $250 a year, or $20 a month. That’s not nothing, of course, but it is a small part of the overall issue.

So what is causing the problems? The same thing that made Alaska premiums spiral north of $1,000 a month, and caused similar, though less severe, issues in other states: too little competition among providers. In dense cities, insurers can play hospitals against each other, refusing to cover those that don’t offer discounts. But if there’s only one hospital that people in a farm town can plausibly go to, insurers are going to have to cover that hospital.

Then why didn’t prices spiral out of control before Obamacare? Presumably because hospitals were restrained by the fact that insurers couldn’t sell outrageously priced insurance. When the government stepped in and legally required people to buy insurance, while subsidizing a large number of the people who did, that calculation changed.

The problem was made worse by state-level officials, who decided to keep Obama’s promise that “if you like your insurance, you can keep your insurance.” It allowed companies who had been selling before 2014 to keep offering those “grandmothered” plans. Since those people were probably healthier than the pool of the uninsured, that left Iowa’s small insurance pool even smaller, and sicker, than it otherwise would have been.

So no, this poor boy is not, singlehandedly, destroying the Obamacare market. But he may be shaping how it evolved.

Consider the problem that an insurer faces on a competitive market where they know such a patient exists: Do you set your prices to cover that patient, or not?

If you set your prices to cover that patient, your product may be uncompetitive, meaning you will get too few customers to justify all the trouble you took putting together a network of doctors and hospitals. But if you don’t price to cover that patient, and you get that patient, you will lose money.

It’s an ugly conundrum, and it means that in this particular circumstance — a small market with one very expensive patient — David Anderson may be exactly right: Whichever insurer gets that patient is going to lose money. When there were four insurers, each of them had a one-in-four chance every year of taking a bath. That’s not the kind of gamble companies are willing to take without raising their prices to compensate them for the risk.

But when health insurers raise prices, we tend to see adverse selection. Which is to say, healthy customers look at their rising premiums, and think “Oh, heck, I never go to the doctor anyway. I’ll just go without insurance.” This phenomenon is somewhat mitigated by Obamacare’s premium subsidies — but not entirely, because not everyone is eligible for subsidies. And the higher the premiums go, the more likely those relatively affluent folks are going to be to drop their insurance, which not only skews the pool sicker, but leaves fewer people available to help share the cost of that one, very expensive patient.

Because of these pricing problems, the equilibrium number of insurers in Iowa is no greater than one. It may be zero, because of the other issues. But with one insurer, at least the expensive and destructive game of “hot potato” will stop.

That’s where Iowa now is: There is one insurer, Medica. That may mean that things get more stable for Iowans next year. But it’s not exactly great news if things “stabilize” at $1,000 a month for a policy that covers only 70% of your expected health care costs. Iowans buying on the exchanges are not going to like their E.R. bills.

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