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Mandate Repeal May Not Unravel ACA

When President Donald Trump signed into law a sweeping tax reform bill that included repeal of the Affordable Care Act’s individual mandate penalty, many thought it marked the beginning of the end of the ACA.

After all, without the penalty for not having health insurance, wouldn’t Americans decide to shed their policies? And with enough young and healthy Americans choosing to go without coverage, wouldn’t insurers be forced to hike premiums or even get out of the marketplace?

Not so fast, cautioned analysts from A.M. Best.

Best released a report in early January describing its outlook on the U.S. health insurance industry overall as stable. That’s an improvement over its 2017 outlook, when it termed the health insurance industry as negative.

In upgrading its outlook, Best said that insurers overall have been able to adapt to the pressures from the ACA, and improve their earnings and risk-adjusted capitalization levels.

In theory, the end of the individual mandate penalty should give consumers less incentive to buy health coverage. This would lead to a risk pool made up of greater numbers of older and sicker consumers, which would lead to higher premiums, which would lead to carriers exiting the marketplace.

But the reality is different, said Doniella Pliss, A.M. Best associate director.

“When we talked to the companies that we rate and that are active in this market, they are telling us that prices now are so high that they don’t believe the penalty plays a role in people’s decisions to buy coverage,” she said.

Penalty Relevant to Only a Few

The penalty is relevant to only a small percentage of the ACA marketplace’s consumers, Pliss said.

“About 80 percent of those who buy coverage through the marketplace are eligible for a subsidy,” she explained. “And if policy premiums go up and your income stays the same, then you get more of a subsidy. So at that point, the penalty becomes irrelevant to this group.”

For the 20 percent of consumers in the individual marketplace who are not subsidy-eligible, some may find it’s more cost-effective to pay the penalty and go without coverage they have trouble paying for, Pliss said.

The penalty repeal takes effect in 2019, which gives carriers time to adjust their pricing, she noted.

Fewer carriers in the ACA market means less consumer choice, but from an insurer’s point of view, Pliss said, “they know who their customers are by now, who has a chronic condition, who is getting a subsidy.”

In the earlier years of the ACA, when more carriers were in the marketplace, the risk pool was more split, Pliss said. “The reality now is that if you’re the only carrier in your area, you know who you’re getting as clients,” she noted.

Insurers Showing Profitability

Insurers who serve the ACA marketplace are showing “no sign of a market collapse,” according to Kaiser Family Foundation.

The Kaiser report, issued in January, looked at the first three quarters of 2017, and showed insurers that serve that marketplace are regaining profitability as the market stabilizes. This is a shift from 2014 and 2015, as insurer financial performance worsened with the opening of the health insurance exchanges. But the market showed signs of improvement in 2016 and a return to profitability in 2017, Kaiser said.

One question that remains is whether the Trump administration’s ending of cost-sharing reduction payments to health insurers will hurt carriers’ fourth-quarter 2017 profits. “Nonetheless, insurers are likely to see better financial results in 2017 than they did in earlier years of the ACA marketplaces,” Kaiser researchers wrote.

Kaiser cited improving medical loss ratios in 2017 as one factor driving profitability in the ACA market. In the third quarter of 2015, insurers on average reported medical loss ratios of 97 percent — meaning they were spending 97 cents for every $1 of premium they collected to cover customers’ health costs. That dropped to 91 percent in the third quarter of 2016, and dropped to 81 percent in the third quarter of 2017.

Premium hikes in 2017 also are driving the improved financial performance among insurers, Kaiser said. While premiums rose by an average of 17 percent per enrollee last year, per person medical claims grew by just 4 percent.

However, those higher premiums do not appear to have driven significant numbers of healthy customers from the ACA marketplace, Kaiser reported.

Despite this optimistic report, Kaiser researchers cautioned that what happens in Washington could upend the marketplace.

“Policy uncertainty has the potential to destabilize the individual market generally,” the report said. 

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Follow her on Twitter @INNsusan. Contact her at [email protected].