It’s a new year, and with it comes new hope for the Affordable Care Act’s (ACA) exchanges. Wall Street analysts recently released research that shows improvements in insurers’ finances for 2016, predicting even better margins for future years. But just as the markets are starting to stabilize, the incoming Congress and Administration are threatening to undo them.
Last week, President-Elect Donald Trump tweeted that the ACA will “fall under its own weight;” Senate Majority Leader McConnell has said the same. And to be sure, the ACA’s marketplaces have been through some rocky times. This year, a number of insurers, including large national carriers such as United and Aetna, pulled out of marketplaces across the country, citing major losses. Along with CO-OP failures, these exits left millions of Americans with only one carrier to choose from for 2017. Many insurers that remain raised their premiums to account chronic underpricing in the first years of the marketplaces and a sicker-than-expected population of enrollees. But emerging evidence suggests these have been just temporary corrections.
A new analysis by Standard and Poor’s (S&P) Global Ratings finds that the markets are stabilizing. In a case study of 32 Blue Cross Blue Shield plans across the country, analysts found a lower average Medical Loss Ratio (MLR) in 2016 compared to the first two years of marketplace participation. The MLR measures the total cost of claims over the amount of paid premiums; thus, a lower MLR indicates better control over claims costs and a good financial outlook for insurance companies. The downward trend of MLRs in 2016 signals improvements for the health insurance industry.
Understanding this development requires looking back at the initial years of the exchanges. While the ACA was signed into law in 2010, the provision establishing the insurance marketplaces did not go into effect until 2014. That first year, many insurers priced aggressively to gain market share, resulting in lower-than-expected premiums. Additionally, companies set rates relying in part on the ACA’s risk corridor program, a market stabilization device that was gutted by a 2014 budget bill that left billions of dollars in receivables unpaid. Rate filings for 2015 were due before insurers had adequate time to assess their experience in 2014, and so this past year is when companies finally started to see improvements.
In 2016, insurers demonstrated that they are starting to break in their ACA shoes. The improved MLR is the result of more accurate pricing and network designs that cut costs, as well as federal efforts to stabilize the markets. The Obama Administration has initiated a number of actions to get the marketplaces on the right track, such as changes to the risk adjustment program, tightening SEP eligibility requirements, and improving regulation of short-term policies.
Steady improvements in the MLR are predicted to continue into 2017. Analysts expect that the 2017 premium hikes were a “one-time pricing correction.” A recent White House report notes that early data on 2017 marketplace enrollment suggest that the increases did not drive consumers away; enrollment is actually trending higher than last year. While insurers may need to request higher rates for 2018, this analysis predicts that the average increase would be “well below” the 25% uptick seen this year, and anticipates that insurers will reach their target profitability in 2019.
All of this, of course, relies on the ACA’s three-legged stool remaining in place: the individual mandate, the premium and cost-sharing subsidies, and the insurance reforms. Repealing all or key parts of the law, especially without a clear replacement, would destabilize the markets, potentially sending them into an insurance death spiral that causes insurers to flee. In this scenario, an estimated almost 30 million people could lose their coverage.
Despite setbacks, the ACA has led to an unprecedented expansion of coverage. It’s by no means perfect, and it needs changes to strengthen the markets and make coverage more affordable. But if the Wall Street analysts are correct, the ACA is not failing. Quite the opposite, in fact.
You can read the full S&P Global Ratings report here.