Uncertainty and plan offerings for 2018

Last Thursday, CNBC highlighted a study by the Urban Institute and Robert J Woods Foundation about insurers worrying about political and policy uncertainty for their 2018 plan offerings for the Exchanges. As I see it there are three major sources of uncertainty. Will the Cost Sharing Reduction (CSR) subsidies be paid? If not, the insurers are gone in 2017. Will the individual mandate be enforced and if not, what will that do to risk pool size and composition? What other policies are coming down the pipe?

CSR is easy. If it is yanked, the insurers are gone at the end of the month it is yanked. That is not confusing me.

But the other two parts have me scratching my head a bit:

If Republicans repeal the Obamacare individual mandate without a concrete replacement plan, we could see another year of big price increases and insurer withdrawals for open enrollment in 2018, according to a new report. “The greater the uncertainty, the higher the rates,” said Sabrina Corlette, a Georgetown University research professor and one of the authors of the new report, which was published by the Urban Institute and the Robert Wood Johnson Foundation. “At a certain point you can’t even price high enough to account for the uncertainty and it’s at that point that the carriers say, ‘we have to get out,'” said Corlette.”

Here is where I am getting confused. I understand the model well enough. The combination of no pool participation mechanism through the granting of unlimited hardship waivers and policy uncertainty will drive many healthy individuals out of the market in the models that the actuaries run. The only people who will stay in the market for guarantee issued, community rated, no lifetime cap insurance are the people who really need the insurance because they are sick as hell. This is the classic death spiral. And insurers will pull out before they are on the tab for billions in losses as they set their premiums too low. This is the Washington State in the 90s story; this is the pre-ACA New York individual market story. I get the fear.

The big difference in the ACA story is the subsidies are attached that lower the consumer facing costs. I have been giving the exchange mechanics significant thought in better times and I want to revive that post It is very hard for a single carrier to lose money in this market structure when it offers the right configuration of products.

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….
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.

What happens?

The Off-Exchange market gets really ugly as it death spirals. The On-Exchange market can remain stable if the carrier offers a risk attracting policy that is priced significantly higher than a boring narrow network policy that is aimed at healthy subsidized buyers. Silver gap strategies come to the rescue.

This analysis falls apart if there are still multiple carriers in a region or a state. It is a strategy that works best under either monopolistic or collusive conditions.

You can change the number around so the baseline 2018 premium is $1,800 per member per month and the least expensive Silver is $1,700. The actuaries can deliver basically any number with a straight face if the policy uncertainty is sufficient. At some point the GDP caps for subsidies will come into play for 2019 but carriers if they are sure that they are either the only current carrier or that they can force their competitors out of the market should still be able to make money from the On-Exchange population even if they have to double premiums. The subsidy structure is insulation.