Some of the nation’s largest health insurers have announced they may drop out of the healthcare exchanges for 2017 due to mounting costs in that portion of their business. Other large insurers have also suggested that they are re-evaluating their involvement, due to increasing costs that are outpacing premiums. In addition, more than half of the non-profit insurance cooperatives formed to provide exchange plans have also left the market.
Insurance traditionally works by calculating the probability of a costly event. Looking at statistics, insurers are able to estimate the likelihood of such events and spread that potential cost across all their customers. Customers who are more likely to fall victim to a costly event contribute more and customers who are less likely to suffer a loss contribute less.
According to obamacarefacts.com, “Insurers broker deals with healthcare providers to lock down prices, then they compare what plans will pay on average, then they create plans with costs that ensure the plan pays for itself and turns a profit.” Unfortunately, that doesn’t seem to be the case for a growing number of insurers.
Under health care reform, health insurers must charge everyone the same rate, regardless of where they might fall in the risk pool. This means that people who may need large amounts of costly medical care over the course of a year will pay the same as someone who may not need to see a doctor at all. While it is good that those who were previously unable to get health coverage at all—or who would have had to pay astronomically unaffordable rates—can now obtain insurance, it also created a situation where the premiums for healthy people needing little or no medical care have become so expensive that many have opted not to purchase insurance at all, choosing instead to risk the tax penalties, which are currently much less expensive than the cost of insurance they do not anticipate using.
This creates an additional problem where many people choose to have no health insurance coverage until they get sick. And then the health insurance company is required to sell a sick person insurance at the very same rate as everyone else. While the law states that insurance can only be purchased during open enrollment, it is often possible to find and qualify for one of the many exemptions to this requirement.
This would be similar to allowing people to avoid purchasing homeowner’s insurance until their home catches fire or is damaged by a storm, or allowing drivers to avoid buying car insurance until they’ve been in an accident, paying the premiums until repairs are made and then dropping the coverage. You can see that neither of these scenarios make economic sense for an insurer, yet this is not unheard of with health insurance. Health insurance—like other coverages—works best when there is a large group of people paying into the system, making funds available for the lesser number who may incur large claims.
As a result insurance companies are reacting to the economics of business. Faced with the reality of increasing losses, their options are to apply for additional rate increases (which may or may not be approved), continue to lose money (and eventually go out of business completely) or to quit the unprofitable portions of their business. How this affects the health insurance market remains to be seen. As more and more carriers drop out of the market, lack of competition in the marketplace may drive rates higher unless rates are closely reviewed by government agencies.
The answer to this problem is not to completely repeal the PPACA—that just isn’t a realistic proposition at this point. But it does illustrate the need for reasoned discussion and additional change and refinement of this health care reform program.