Exchanges in 2018

Last week was a blur. I had a whirlwind tour of the health policy universe. I received a job offer that I have declined. I then met with a team that is charged to produce awesome work in health policy and I am looking forward to see where things could go from here. I was on the phone explaining Silver Gap and Silver Spam pricing strategies to a lot of very smart people. All of this had my wife chuckling at me.

I also had a chance to talk to a very smart and wonky friend of the blog who asked a very good question — what are the odds that there are no carriers in a state in 2018 on Exchange?

I do not think this is likely. I think it is highly likely that there are a number of states where there is a single carrier and even more states which may have multiple carriers but with a clear division so that most counties in those states only have a single carrier. However I am having a hard time seeing the mechanics of carriers completely dropping out and abandoning states en masse. Could it happen in a single state? Yes, I think it is unlikely but possible. Would it happen in four or five states? No.

The basis of my response is that the federal subsidy structure makes it very hard for a carrier to continually lose money in a state if it is the only carrier. Let’s look at a few scenarios below the fold.

2017 Single Carrier States

In the states with only a single carrier for the 2017 plan year, the only reason for the incumbent to leave the on-exchange market in 2018 is if they lose massive amounts of money in 2017 AND they can not get the rates hiked in 2018. If a carrier is losing a lot of money in a state, that state or region is unlikely to be attractive to other carriers to enter. We see in 2016 that states are willing to approve very large rate increases from carriers if they can demonstrate that this is the only way to cover the expected claims. If the incumbent carrier in a single carrier state is seeing large medical losses, they will get the rates. This normally would trigger concerns about a death spiral where higher rates drive out healthier individuals. Off Exchange could see a death spiral. However the on-Exchange subsidized population is protected from most of the rate increases by the subsidy formula. The individual market in a high cost, single carrier state could turn into an extremely sick Off-Exchange population plus a reasonably healthy subsidized population.

2017 multi-carrier states

There are two scenarios to consider here. The first scenario is what happens if or when a carrier is shut down and liquidated mid-year. I do not think this is too likely in 2017 as most of the weakly capitalized carriers in the form of the co-ops are out. Furthermore, one of the major sources of capital impairment, the underpayment of the risk corridor receivables will go away. Either CMS will settle claims or the courts will order the carriers to be made whole through the Judgement Fund. This will lead to significant capital and cash position improvement.

The second scenario is if there are multiple carriers in a market that is losing money. We need to split this into two groups. The first group are carriers that have adapted a Silver Spam strategy to choose a narrow and fairly unhealthy risk pool while exploiting risk adjustment. Under that scenario, the narrow network carrier should be making money in 2017 or at least not doing too badly for itself. The other carriers will exit. After an exit, the Silver Spamming carrier will face a challenge as I have strong doubts that a Silver Spam strategy is viable for a super narrow carrier without some ability to offload high cost and high complexity medical risk to someone else. We should expect significant rate increases in 2018 from the sole Medicaid like carrier to cover their shipping out of network costs for their new members with highly complex and highly expensive care needs.

The other scenario is if there is not a single Medicaid like carrier in the market. If both carriers are losing money, we get an interesting staring contest as both carriers will often think that if they are the sole surviving carrier in the market, they can suck at the federal money hose. In that scenario we see a lot of sound and fury signaling very little. Both carriers will make noise about how tough the Exchange market is. Carrier A will say that they need to raise rates by 33% and Carrier B will say they need to raise rates by 37%. A is waiting for B to drop and B is waiting for A to drop. Both carriers will file plans and networks in 2017 for 2018 and then they will withdraw some and accuse the insurance regulator of acting in bad faith. As the summer comes along, the board of A might tell them to pull the plug and concede the market to B or vice versa.

At that point the surviving carrier has an effective monopoly on the subsidized Exchange market. Very large rate increases could be pushed through where the Federal government eats most of the cost. If the surviving carrier is smart, they’ll Silver Gap in 2018 as much as they can to get a far larger check from the Feds while driving the risk pool to be broad and healthy as the post-subsidy premiums will drop. The Off-Exchange market will be in trouble if the surviving carrier is the sole carrier but so far we have seen national carriers stick around off-Exchange far more willingly than they have been on-Exchange.

I would not be shocked if a single state has to get crazily creative to keep a single carrier on-Exchange in the entire state. But I do not expect mass withdrawal of carriers because the interaction of the subsidy attachment point and the ability of a monopolist insurer to effectively print money from the Feds will keep the last carrier involved.