Turmoil in Individual Private Health Insurance Markets: Welcome to Real Competition
Almost daily reports question the viability of the Affordable Care Act’s (ACA) private marketplaces for individual health insurance. The key problems: apparent financial losses and large proposed price increases on the part of some participating private insurers. The departures of the UnitedHealth Group (UHG) and Humana from ACA marketplaces have greatly heightened concerns, though UHG itself was a relatively small player in individual insurance markets.
To interpret these developments, we need to keep a few things in mind. First, private markets for individual insurance were unstable and deteriorating long before the ACA established its marketplaces in 2014. Fewer and fewer Americans were able to obtain meaningful individual coverage, the adequacy of coverage was declining, and premiums were increasing by 10 percent to 12 percent annually in the three years prior to the law’s passage.1
Though regarded by some critics as anti–free market, the ACA actually sought to ensure that a viable and competitive individual insurance market continued to exist in the United States. The law requires people to have health insurance, subsidizes premiums for low- and moderate-income Americans, and bans insurers from setting premiums according to the health status of customers, or refusing to insure the sick altogether. All of these provisions enable and encourage individuals—the healthy and the unhealthy—to purchase private health insurance. In a new Commonwealth Fund brief, Mark Hall and Michael McCue found that in 2014, insurers’ aggregate premium revenues from the individual insurance market jumped by 97 percent.2 In addition, tying subsidies to the second-lowest-cost silver plan injected intense price competition in the ACA marketplaces as carriers fought for market share.3
Also supporting sustainable and competitive individual health insurance markets have been the ACA’s premium stabilization programs: the three R’s of reinsurance, risk corridors, and risk adjustment. These programs were designed to help carriers offer new insurance products to the market by protecting them from unexpectedly high claims and pricing errors and supporting fair price competition. By partially insulating insurers from uncertainty in the new markets, the reinsurance program reduced premiums by as much as 14 percent in its three years of operation.4
To date, the new ACA marketplaces have been up and running in all 50 states through three open-enrollment periods. Short-term viability, of course, does not guarantee long-term success. But if the ACA reforms do not make competitive private individual insurance markets workable in the United States, returning to the status quo ante is not an option. The individual insurance market in the U.S. seemed incapable of repairing itself before the ACA was enacted, and there is no reason to suppose it could do so now.
A second thing to keep in mind is the nature of competitive markets generally. We should expect to see markets vary from place to place. In some areas they will function well. This has been notably true in state-based marketplaces, such as those in California and Kentucky. Rural areas may have more problems because they lack the population to sustain multiple competing insurers, but these challenges predated the ACA and in most places were worse before the ACA marketplaces existed.
Also, we should expect to see winners and losers among insurers. As the Hall and McCue analysis shows, some companies will make money, some won’t. Some will grow, while others will shrink, get acquired, or exit the business. This is totally predictable, and indeed, a virtue of the competitive dynamic inherent in private markets. Only the fittest survive. Thus when an insurance company exits ACA marketplaces, this could be evidence that the competitive dynamic is alive and well.
Finally, we should expect private markets to experiment with new approaches to old problems. Narrow networks are one such experiment. Insurers have increasingly turned to narrow networks as a way to compete on cost rather than on selecting healthier customers. Trying to find cheaper suppliers is an absolutely core strategy in virtually every other industry but has been used sparingly in the market for individual health insurance. While limiting patients to low-cost providers may create dislocations and even hardship for some, we should recognize the strategy for what it is: a natural response to the creation—for the first time—of truly competitive markets for individual private insurance.
As reports of turmoil among private insurers in ACA marketplaces arise, we should keep in mind these characteristics of private health insurance markets, and competitive markets generally. The ultimate questions are whether a critical mass of Americans who were uninsured previously or who had poor coverage through pre-ACA markets can continue to obtain affordable, quality private insurance under provisions of the Affordable Care Act and whether markets are working well enough to sustain that accomplishment. In the process we should expect suppliers of insurance to enter and leave markets, to fail and to thrive. We should expect some local markets to work efficiently and others to struggle. Neither government nor private markets alone can provide perfect solutions to complex social problems such as ensuring the provision of good private health insurance to millions of individual Americans, including the sick and the poor. Strong partnerships between government and private industry will continue to be essential to meeting this challenge.
1 J. Gruber, Growth and Variability in Health Plan Premiums in the Individual Insurance Market Before the Affordable Care Act (The Commonwealth Fund, June 2014); S. R. Collins, M. M. Doty, R. Robertson, and T. Garber, Help on the Horizon: How the Recession Has Left Millions of Workers Without Health Insurance, and How Health Reform Will Bring Relief—Findings from The Commonwealth Fund Biennial Health Insurance Survey of 2010 (The Commonwealth Fund, March 2011).
2 M. A. Hall and M. J. McCue, How Has the Affordable Care Act Affected Health Insurers Financial Performance? (The Commonwealth Fund, July 2016).
3 J. Holahan, L. J. Blumberg, and E. Wengle, What Does the Failure of Some CO-OPs and the Possible Pullout of UnitedHealthcare Mean for the Affordable Care Act? (Urban Institute, Jan. 2016).
4 American Academy of Actuaries, Drivers of 2016 Health Insurance Premium Changes (AAA, Aug. 2015).