Obamacare’s insurance exchanges

Columbia Management, Investment Team | December 9, 2013

  • Enrollment is low
  • There is still confusion around plans
  • Where do we go from here?

Healthcare.gov’s performance has improved since its re-launch last week, but capacity and communications problems will persist. Through October, the reported number of enrollees in federal and state-run health insurance exchanges remains meaningfully below initial targets. The federal government is running the insurance exchanges for many Republican-led states that have declined to build their own exchanges; there are 17 state exchanges. Not surprisingly, initial enrollment on all public exchanges has skewed heavily toward Medicaid and the less healthy. Underrepresented are young, healthy individuals needed to fill risk pools forecast by government actuaries. A number of states are rolling beneficiaries of their existing free or heavily subsidized insurance programs into Medicaid. Questions remain as to whether Obamacare (ACA) will reach the uninsured and whether health insurance exchange enrollment will continue to skew toward older people. Neither is good: the former means ACA is not substantially reducing the number of uninsured, but simply absorbing existing individual insurance market customers (or people who can afford insurance but can’t get it due to preexisting conditions); the latter means the pool will be older and sicker than expected, implying that premiums haven’t been set high enough. One cannot help wondering whether ACA would have been better devised only as Medicaid expansion.

Questions remain around data security and whether front-end website issues are masking deeper flaws in subsidy determination, plan selection, pricing and enrollment. Health insurers are eager for enrollment issues to be nearly resolved by December 15 to enable them to process new applications accurately before coverage begins January 1. Legislation, or regulation, that waives penalties for non-compliance with the mandatory coverage requirement or extends the open enrollment period poses significant risks to insurers and would signal the material ACA shortcomings. Despite the huge publicity around ACA’s launch, the bigger earnings pressure points for health insurance stocks remain Medicare Advantage (MA) cuts and the impact of the Medicaid industry fee (premium tax).

“If you like your coverage, you can keep it.” Policy cancellations (actual or pending) resulting from ACA may affect half or more of the nearly 15 million people who currently purchase individual (non-group) insurance coverage. The cancellations have included policies that do not qualify as comprehensive coverage under the reform law. It is unclear how many within this population will purchase replacement coverage on the exchanges or choose replacement coverage offered directly by their insurers, though at higher prices to reflect new coverage standards. State-by-state decisions to allow insurers to extend cancelled plans will, of course, affect the size and quality of initial ACA enrollment. Retaining existing plans could placate ACA critics, but could also undermine the law’s promise of enrolling people in health plans with broader coverage. Hospitals have aggressively sought to enroll patients in insurance exchanges, reasoning that many of those they enroll will no longer be low- or non-pay.

Other factors affecting public insurance exchange enrollment include:

Whether open enrollment is extended beyond March 31, 2014, whether these additional enrollees are younger, and whether adding enrollees of all ages to the risk pool reduces risks of adverse selection.

  • Fluctuation in enrolment as previously unemployed find jobs with employer-sponsored coverage and vice versa.
  • Churn between Medicaid and exchanges due to income fluctuations.
  • Availability of doctors and hospitals on exchange plan provider networks.
  • Public awareness and risk of public disaffection, the latter exemplified by a new poll among 18 to 29 year-olds from Harvard’s Institute of Politics showing 56% oppose ACA, mirroring the results of an ABC News/Washington Post poll among all adults.
  • Fewer than 30% of the young plan to enroll in exchange-based insurance if and when they are eligible, which would undermine the law’s foundation on young, healthy enrollees. CNN reported last week that Senate Majority Leader Reid, one of ACA’s staunchest supporters, is the only top congressional leader to exempt some of his staff from having to buy insurance through the law’s new exchanges.
  • Insurers and some states seeking to bypass healthcare insurance exchanges

Less discussed around the difficulties in establishing public health insurance exchanges is the promise of private healthcare exchanges, that is, the transition of employees from traditional (institutionally) self-funded or stop-loss insurance plans to insurance exchanges sponsored by institutions – employers, insurance brokers, insurance companies – rather than federal and state governments. The unknown, but promising, size and rate of this migration has elevated shares of insurance brokers and managed care companies and pressured others’, such as pharmacy benefit managers (PBMs), which face profit margin risk despite offering more restrictive pharmacy benefits such as narrow retail networks, restrictive drug formularies, mandatory mail-order and more restrictive clinical programs. So what is a private insurance exchange and what are some implications?

Like public exchanges, private exchanges are online marketplaces at which customers select among a range of insurance plans, enroll and pay premiums. Private exchanges, run by the private sector, have been around for years. They are largely exempt from ACA except as to certain coverage requirements. An employer may choose a private healthcare exchange in order to switch from a defined benefit (DB) to a defined contribution (DC) means of offering health benefits, not unlike the 401-k DC retirement savings plans; to offer employees a wider selection of insurance products and prices; or because some exchanges may negotiate lower prices from insurers.

Most employers are likely to retain traditional plans, at least for now. Despite their independence, private exchanges have been tarnished in some peoples’ eyes by Healthcare.gov’s stumbles. Though early, private exchanges now have fewer than 1 million enrollees (fewer than 1% of employer-sponsored coverage). The chief reason why an employer may choose to retain self-funding its health benefits is that moving to a full-risk private exchange could cost the employer 10% or more and remove the flexibility and transparency of self-funding or stop-loss insurance. For self-funded health benefits (called administrative services only, or ASO), penetration has risen from about 30% to 60% of commercial enrollment over the past 25 years. Cost savings are derived from tax benefits, regulatory exemptions, avoiding new premium taxes, the benefits of offering wellness or disease management programs, and the avoidance of “paying” for managed care insurers’ profits. Nonetheless, even with these ASO advantages, employers may simply decide simply no longer to manage health benefits.

Healthcare exchanges hold great promise for the companies who offer and manage them. Nonetheless, competition among exchange providers will be stiff. Those companies that already have strong relationships with employers, such as large insurance brokers, are likely winners, as are the health insurers that can operate exchanges successfully and take on more profitable risk enrollees. Contemplated Tax Code changes may allow employers to offer a DC health plan outside of an exchange. Lastly, competition won’t be limited to the private sector; when Health-care.gov’s problems are solved, some employers may terminate private exchanges and shift employees to public exchanges. These dynamic shifts in the health insurance exchange markets are likely to persist for years, suggesting elevated risk and reward among the sectors and companies involved.