King v. Burwell: What a Subsidy Shutdown Could Mean for Insurers
Virtually all commentators on King v. Burwell agree that a Supreme Court ruling against the government would be disruptive. But most skip over the potential real-world impact of the loss of health insurance subsides for millions of people, preferring instead to speculate on how Congress, the Obama administration, or the states might stave off insurance market failures. This is the second in a series of four posts examining the serious consequences of a decision that would terminate subsidies for residents of the 34 states that have federally run health insurance marketplaces. Today we look at how insurers would fare under the “Subsidy Shutdown” scenario.
Under the Affordable Care Act, health insurers have been big winners, enrolling record-high numbers and earning strong profits. Consumers, meanwhile, are benefiting from increased competition in the marketplaces—with 25 percent more insurers participating in 2015 than 2014, with no increase in average nationwide premiums.
A Subsidy Shutdown would reverse these dynamics. More than 7 million people in states with federally run marketplaces could lose their subsidies. Most of these people are likely to drop their insurance, because individuals are exempt from the coverage mandate if insurance is unaffordable. Those remaining in the marketplaces would be primarily the approximately 15 percent who buy health plans without a subsidy, and previously subsidized individuals with serious medical needs, who are better off paying high premiums than having no coverage at all.
Should a Subsidy Shutdown happen this summer, insurers would suddenly have a risk pool filled with high-need, high-cost people, after having priced their 2015 premiums based on a balanced pool containing both healthy and sick people. Claims would quickly outpace premium revenue as insurers lose most of their low-cost, healthy customers but retain customers whose medical costs exceed their premiums.
Some insurers would try to exit the marketplace midyear, as they may be permitted to do under their contract with the federal government if there is a Subsidy Shutdown. The first carriers to consider leaving would be new market entrants who had been lured by the opportunity to build membership. These include Medicaid managed care organizations seeking to expand their footprint, regional health systems seeking to integrate health care delivery with insurance, and nonprofit cooperatives given federal start-up loans. Many of these new competitors would be unable to withstand negative cash flow, even for a few months.
Larger insurers, especially Blue Cross and Blue Shield plans and national for-profit insurers, may choose to brave the remainder of 2015, though their balance sheets would take another hit when they absorb disproportionately high-risk customers from any exiting insurers—as they’re required to do. One reason to stay is that, under federal law, an insurer that leaves a state’s individual health insurance market is prohibited from offering coverage in that market for five years. The federal government could relax this prohibition, but the states have similar bans and may choose to favor those insurers willing to remain in their market.
Regardless of how the 2015 disruption is managed, the challenges would be even bigger in 2016. By the time of the Subsidy Shutdown, insurance rates for 2016 would already have been set, but those rates will be too low for the risk pool. This would set the stage for a “premium death spiral,” triggered by healthier individuals exiting the market; in fact, the RAND Corporation estimates that rates could eventually rise 47 percent in the absence of subsidies. Because rates must be linked inside and outside the marketplace, rate increases would apply across the entire individual insurance market.
Insurance regulators have not determined whether they will allow insurers to change their rates in the event of a Subsidy Shutdown, but insurers would have the option of exiting the market on the eve of the 2016 open enrollment period. For this reason, insurers are already discussing with regulators about proposing two sets of rates at an earlier stage of the review process, perhaps this spring. Raising rates would help maintain insurer participation, but it certainly is no panacea: higher rates would drive more customers out of the market, further accelerating the death spiral of escalating rates and shrinking enrollment. Federal law has risk stabilization provisions to combat adverse selection, including a temporary risk corridor program, in which the federal government subsidizes marketplace insurers that incur unexpectedly large losses, but these programs are not designed to overcome the loss of subsidies and, without statutory changes that make these programs much more generous than they currently are, are unlikely to prevent death spirals.
Even if a Subsidy Shutdown were short-lived, the results could prove long-lasting. We likely would see a return to state insurance markets dominated by one or two large insurers. With prices for 2016 locked in at much higher levels, individual market enrollment could decline 70 percent overall, leading to 9.6 million people losing their coverage.