Obamacare’s sinking safety net

As millions get covered, a POLITICO investigation finds that dozens of the insurers that the health care law depends on are losing money and even abandoning the system. Can it be fixed?

By Paul Demko
07/13/16 04:57 AM EDT

If you’re looking to find a smashing Obamacare success story—a place where the nation’s biggest and most controversial new law in a generation has truly lived up to its promise—you might stick a pin directly in North Carolina.

The central pledge of the Affordable Care Act was to make insurance available to people who didn’t have it, creating a new safety net for millions nationwide. And in North Carolina that’s exactly what happened. People flocked to the program: More than 600,000 people there signed up for Obamacare policies in 2016, and roughly 90 percent of those got financial help to pay their insurance bills, also through Obamacare. Thanks directly to the ACA, the number of people without health insurance in North Carolina has plummeted by 30 percent in the past three years. Far more people are covered, and far more of them can afford their health insurance.

But if you’re looking for a quintessential Obamacare failure story, you might also stick that pin directly in North Carolina. For the insurance companies doing business in the state–the ones issuing policies to those 600,000 people–Obamacare has turned into a financial sinkhole. UnitedHealth Group, the nation’s largest insurance company, is pulling out of the Obamacare business in North Carolina next year. Blue Cross Blue Shield of North Carolina, which dominated the individual market with more than a half-million customers, reported that losses on its Obamacare business in 2014 and 2015 topped $400 million. The insurer said that figure includes government payments designed to shield insurers from big losses during the early years of Obamacare. The only other current competitor, Aetna, wants to hike rates by nearly 25 percent next year.

What’s happening in North Carolina is repeating itself in state after state across the country and represents the most acute structural threat to the marquee achievement of President Barack Obama’s presidency. A POLITICO review of 2015 financial filings from nearly 100 health plans across a dozen geographically and politically diverse states found that less than a quarter of them hit the standard break-even point for insurers, at which payouts are kept to about 85 percent of premiums taken in. And 40 percent of them had medical costs that outright exceeded the premiums they brought in. Those numbers do not include government payments that compensate plans for particularly high-cost customers.

Even so, many of those insurers lost tens of millions of dollars on their Obamacare policies last year — and now they’re seeking big rate hikes.

The ACA’s strength and its weakness is that it was built atop America’s private insurance system: rather than creating new government health plans, it depends on competition among companies to offer affordable insurance to people who need it. In a nation dominated by private-sector health care players, this made it politically possible–but it also means the system works only if insurers find Obamacare to be a desirable business. What has happened instead in North Carolina and many other states is that insurers are finding the Obamacare business to be a swamp.

Nationwide, an analysis by McKinsey found that insurers lost $2.7 billion on individual customers in 2014, the only year since Obamacare coverage expansion for which full numbers are available–with 70 percent of carriers sustaining losses. Those losses are after government payments intended to help plans with high-cost customers. Preliminary data from 2015 suggest the rate of losses likely doubled, according to McKinsey.

The red ink has led to the collapse of two-thirds of 23 new nonprofit health plans that were established with federal loan dollars to increase competition in the state exchanges where customers shop for policies. And UnitedHealth Group is largely getting out of the Obamacare business because of anticipated losses of $650 million this year. “The individual market is a mess,” Brian Webb, health policy manager for the National Association of Insurance Commissioners, told a recent briefing on Capitol Hill.

As Obamacare approaches its fourth season of enrollment, and prepares to enter the post-Obama era, it’s hitting an inflection point—and, in states like North Carolina, that point could become a crisis. Millions are now being covered through the law, but they’re older, sicker and more expensive to insure than anyone anticipated. To compensate, health plans are raising premiums, in some cases by a lot—the largest insurer in Texas wants to jack up rates for individual plans by an eye-popping 60 percent next year.

Ivonne Jacomino, a registered nurse, checks the blood pressure of Maria Vila at the Jessie Trice Community Health Center in Hialeah, Florida in September, 2009. Vila, like many low-income Americans in the Hialeah, could not afford health insurance before the passage of the Affordable Care Act. | Getty

A close look at what’s really keeping the exchanges underwater suggests that some of the problems are self-inflicted wounds by Obama and his administration; others are the handiwork of Republican saboteurs, who undercut the safeguards intended to help companies weather the uncertainty of the new law. And overall, the system has been weighed down by one big miscalculation: Health insurance amounts to a guess about how much customers’ health care is going to cost in the long run, and in many states Obamacare health insurers guessed wrong.

None of the problems are insurmountable, but if they aren’t fixed, the law could find itself in a mounting crisis—what observers call a “death spiral”—in which competition vanishes, costs skyrocket, and a dwindling pool of insurers offer policies so expensive that health insurance is as out of reach as it ever was.

Politically, the repair job isn’t trivial: It requires a bipartisan decision to stabilize the Obamacare markets, a consensus that has been unattainable in the politically toxic atmosphere on Capitol Hill since the law was passed six years ago without a single Republican vote. With this year’s enrollment season set to open just one week before Election Day, the turbulence in the exchanges could be a wildcard in the presidential contest–and threaten Obama’s signature domestic achievement.

The gulf between Obamacare’s success covering citizens and its failures on the insurance front isn’t just an accidental side effect: It’s a direct result of the key selling point of the law, that coverage is now accessible to all Americans. Health care finance experts point to a handful of policy changes that could bolster the exchanges and ensure that people in states like North Carolina can still buy health insurance five and 10 years from now. That would require an honest reckoning with what’s gone wrong–and the legislative resolve to enact fixes. “There’s plenty to be worried about,” said Don Taylor, a health policy expert at Duke University who has tracked Obamacare in his home state of North Carolina and across the country. “The answer is more policy—not doing nothing.”

So just what is that new policy supposed to look like?

ANY LAW AS ambitious and complex as the ACA is going to be a work in progress. Almost from the moment Medicare passed in 1965, Congress has been revising it, and even now it undergoes changes every year. Most insurance companies say they remain committed to offering Obamacare plans, and as long as they stay in the business, the exchanges are unlikely to implode.

In some states, such as California and Washington, the system is working fine. More than 9 in 10 health plans made money selling Obamacare policies to individuals during the first year of enrollments, according to McKinsey’s analysis. But in states like North Carolina, it’s becoming increasingly clear that the assumptions the law was built on just haven’t held up. “The pool is far less healthy than we forecast,” said Brad Wilson, CEO of Blue Cross Blue Shield of North Carolina, in an interview with POLITICO. “We need more healthy people.”

North Carolina’s Obamacare story started out just as the administration hoped it would: More than 350,000 people signed up for insurance the first year it was offered. Just two insurance companies were offering polices through the state’s “insurance exchange”—the marketplace that lets individuals without workplace coverage buy their own coverage–but in 2015 they were joined by a third carrier, UnitedHealth Group. Sign-ups that year surged above 550,000. This year, the state saw another 10 percent bump, topping 600,000.

But as those customers demanded health care, costs started to mount. In 2014, medical claims in the individual market for both Blue Cross Blue Shield of North Carolina and Aetna exceeded 90 percent of premiums paid, according to financial filings. Last year, those costs soared above 100 percent of premiums for all three carriers competing in North Carolina. Altogether, medical claims hit $3.2 billion–nearly $100 million more than premiums the insurers collected. Throw in administrative costs on top of that, and it becomes clear that the insurers lost tens of millions of dollars on their individual market business, most of it coming through the exchange. This year, all three insurers stopped paying commissions to brokers for selling individual plans, hoping to suppress enrollments and limit their losses.

The companies are still analyzing how and why their initial estimates for setting their rates and writing policies were so off the mark. The largest insurer, the nonprofit Blue Cross Blue Shield of North Carolina, has repeatedly stated it can’t continue to sustain the losses it endured during the first two years of Obamacare enrollment, and it is currently weighing whether it will continue competing on the exchange at all for 2017. Though the insurer has submitted plans to do business again in every county in the state, it plans to hike rates nearly 20 percent on average. A final decision on 2017 participation won’t be made until August.

“All options are on the table,” Wilson said—even getting out of the Obamacare business.

If Blue Cross Blue Shield does decide to abandon the North Carolina exchange— which most observers believe is unlikely this year—it would potentially leave just two companies, Aetna and Cigna, offering Obamacare policies in the state. And neither of those companies intend to compete statewide in 2017, instead offering policies in select counties. The worst-case scenario is that residents of some North Carolina counties would be left with just one–or even zero–insurers. Nobody knows precisely what that would mean for consumers at this point, but at the very least exchange shoppers would have fewer choices and higher prices.

“That would be very scary for lots of people,” said Ciara Zachary, health policy analyst at the North Carolina Justice Center, a liberal advocacy group.

The troubles in North Carolina’s exchanges are not unique. POLITICO’S analysis of financial filings for exchange carriers in a dozen states shows continued struggles in 2015. Health plans competing on the exchanges in Colorado and Oregon, for example, collectively paid out at least 20 percent more in medical costs on their individual customers than they received in premiums, leaving insurers tens of millions of dollars in the red.

In New York, most plans are losing money, including the much ballyhooed startup insurer Oscar, which has attracted hundreds of millions in venture capital funding by promising to shake up the insurance market with tech-savvy innovations. But Oscar sustained medical claims of $180 million on its roughly 50,000 New York customers last year. That’s nearly $1.50 paid out in medical claims for every $1 collected in premiums–a burn rate that is clearly unsustainable.

Not all exchange markets have proven to be financial quagmires. The exchange market in Florida, for example, appears to be on a path toward financial stability. Fewer than half of competing carriers operated in the black in 2014, according to McKinsey’s analysis. But of the nine competing plans for which 2015 data were available, just one–UnitedHealth–had medical claims that exceeded premiums on its individual market business. Among the remaining plans, medical claims accounted for 86 percent of premiums. That’s right where insurers need to be to at least break even.

There are no simple explanations for the huge difference in financial performance for Obamacare insurers competing in different states. Though it’s a national law, health insurance varies widely from state to state: the populations are different, the medical cultures are different, and each state has its own business landscape. The local political responses have been different, too, but that’s not always the main story: both Florida and North Carolina enrolled a lot of people despite having a state government that strongly opposed the health law.

One likely factor is the amount of competition among hospitals, doctors and other health care providers, which determines their ability to dictate reimbursement rates. In southeastern Minnesota, for example, where the Mayo Clinic is the dominant provider, the cheapest midlevel plan available to a 40-year-old through the state’s exchange this year was $329 per month. That’s roughly 20 percent higher than in the rest of the state.

“The more competition you have, the better the pricing,” said Mario Molina, CEO of Molina Healthcare, which is selling exchange plans in nine states. “In some markets where there’s very little competition it’s difficult to get the prices that health plans need.”

But looming over the whole conversation is the blunt question of just who signs up for Obamacare in each state, and how sick they are. In the dry language of insurance companies, customers are called their “risk pool”—and when it comes to Obamacare, the pool is way riskier than they wanted.

SO WHAT WENT wrong? Like all insurance, Obamacare is built on the idea of shared risk: A small number of customers with big medical bills needs to be offset by a much wider group who pay monthly premiums but rarely access care. Theoretically, they balance out, and insurers collect their profits off the top.

The biggest problem plaguing the exchanges is that for many states, the balance has turned out to be way off. Fewer individuals signed up for coverage than projected, and they’ve proven sicker and more expensive than insurers had expected.

Before the ACA, there were a handful of ways insurers could balance their risk pool. One big tactic was just to avoid covering sick people, filtering out individual customers who appear likely to need lots of expensive medical care. But Obamacare made that type of discrimination illegal: One big selling point of the law was that everyone would be eligible to sign up.

In the new insurance landscape, where carriers must take all comers, no matter how sick and costly, the simplest way to ensure a viable risk pool is to make it as large and diverse as possible.

For Obamacare, that has turned out to be a bigger problem than anyone anticipated. Three years ago, the Congressional Budget Office projected that 24 million Americans would be enrolled in exchange plans in 2016. The reality: barely half that number signed up this year–and that number is certain to erode as people stop paying their insurance bills or find jobs that include coverage. The Obama administration’s stated goal is now just 10 million enrollments by the end of 2016.

Why so low? In part, it’s because fewer people got kicked off their work plans than expected. Initially, the architects of the plan thought many employers would stop offering insurance and let people buy their own on the Obamacare market. That didn’t happen. “Employers have not ‘dumped’ employees to the extent that some people feared and predicted,” said Ceci Connolly, CEO of the Alliance of Community Health Plans. It was good news for those workers, but not so good for the exchanges’ actuarial health.

And in part the small size of the Obamacare pool is because of a self-inflicted wound by Obama himself. For years, in selling the ACA, Obama had been repeating a talking point: “If you like your health care plan, you can keep it.” But in late 2013, as the first open-enrollment season loomed, millions of Americans received notices that their plans were being canceled because they didn’t meet the coverage requirements of the health care law. Republicans relentlessly mocked the president’s failure to keep his pledge. PolitiFact called it the 2013 “Lie of the Year.”

In response to the blowback, the administration decided that those old plans didn’t have to be canceled after all–people could keep them through 2017, even if they didn’t comply with the new rules. That move may have quelled the political uproar, but it also cut off a potential flow of millions of customers who may otherwise have signed up for new plans in the fledgling Obamacare exchange markets.

Not all states extended those plans, and some insurers phased them out on their own. But McKinsey estimates that heading into the 2016 enrollment season, 3.7 million Americans were still in those old individual plans. And it’s likely that an awful lot of them are quite healthy, given that they were able to obtain coverage even when health plans were free to discriminate against people with pre-existing conditions.

A viable risk pool also needs healthy customers. The most desirable customers are young, from 18 to 34—the so-called young invincibles—who might not want to sign up at all, because they don’t think they’ll need health care.

To encourage all Americans to sign up, Obamacare includes a cudgel: You have to pay a tax penalty if you aren’t covered in a qualified health plan. In reality, there are numerous exemptions–and the penalty has proven too low to induce younger Americans to buy insurance. The fine maxed out this year at $695, or 2.5 percent of income, whichever is higher. Healthy, younger people (some of whom may be eligible for subsidies but not realize it) often figure it’s cheaper to pay the fine than shell out money on health insurance that they don’t think they’ll need. That may or may not make financial sense for them as individuals, but it’s hurting the broader system. For markets to be sustainable financially, experts estimate that 35 percent of customers should be between the ages of 18 and 34. In reality, right now, just 28 percent of customers fall in that group.

Many Americans waited until the final day of the Obamacare enrollment period to purchase health insurance. Pictured above is a kiosk setup at the Mall of Americas on January 15, 2014, the final day for those that want insurance to start on February 1.

Obamacare also includes a restriction on timing: Exchange customers are supposed to sign up only during the annual open-enrollment period. That’s designed to prevent people from gaming the system and getting insurance only when they need medical care. But there are exceptions to the timing rule–you can sign up for Obamacare when you’ve switched jobs and lose your work coverage, for instance. And insurers complain that these exceptions are far too numerous and easy to game. Most troubling to insurers, there’s been no rigorous verification process to corroborate that Obamacare customers are truly eligible for special enrollment periods—that they really did change jobs, that they weren’t just claiming to have done so because they had just gotten a scary diagnosis or banged up their knee and now wanted health care. Many health plans have found that customers who come in through special enrollments run up bigger medical bills than other people. Pennsylvania’s Independence Blue Cross, for example, says people who enroll outside the standard window have 30 percent more medical expenses.

Alan Murray, CEO of CareConnect, a New York plan affiliated with a hospital system, said that when Obamacare launched, insurers expected that two trends would gradually improve the risk pool. More young people would enroll in coverage as the tax penalty ramped up, and pent-up demand for health care services would dissipate as Americans who had previously been uninsured got the care they needed. In New York, neither of those has so far materialized. Young people aren’t enrolling, demand for medical care has been unabated and costs far outpace premiums. As a result, CareConnect is seeking nearly 30 percent increases for individual plans for next year.

“We have two years of data and everybody who’s in the individual market on average is not as healthy as we were led to believe,” Murray said.

It was inevitable that expectations would be off base. The Obamacare exchanges were entirely new markets, and prognosticators were flying in the dark. The end result: Insurers ended up setting their premiums way too low for Obamacare to be a sustainable business. But there were more than bad estimates at play. Politics played a role as well.

OBAMACARE WASN’T JUST a new law aimed at insuring American citizens: It was written with the well-being of insurance companies in mind. Insurers knew they were facing a new and unpredictable landscape, and to address their worries, the ACA included a trio of backstops–basically, an insurance program for the insurers, designed to protect them from big losses in the early years.

Insiders call these the “three R’s.” The first “R”—“reinsurance”—subsidizes insurers that attract individual customers who rack up particularly high medical bills. The second—“risk adjustment”—requires insurers with low-cost patients to make payments to plans that share the benefits with those who insured higher-cost ones. And the third, called “risk corridors,” is a program to subsidize health plans whose total medical expenses for all their Obamacare customers overshoot a target amount.

The reinsurance program has worked exactly as expected, funneling more than $15 billion to insurers during the first two years of exchange operations. Risk adjustment proved more controversial. Many small insurers complain that it’s too unpredictable— and stacked in favor of their bigger, wealthier competitors. The Obama administration has largely defended the program, but is weighing changes starting in 2017.

The risk corridor program, however, has been an unmitigated debacle. In December 2014, the Republican Congress voted to prohibit the Obama administration from spending any money on the program, decrying it as a bailout for the insurance companies. Sen. Marco Rubio, then thought to be a leading GOP presidential contender for 2016, was particularly vocal in pillorying the program.

Unlike all those symbolic “repeal Obamacare” votes, Congress actually succeeded in blocking those risk corridor payments, and it hit Obamacare hard. Insurers filed claims seeking $2.9 billion, but under the limits imposed by the GOP there was less than $400 million available to make good on those payments. The end result: insurers initially received only 12.6 cents for each dollar they had counted on. Many of the new Obamacare co-op plans that went out of business blamed their collapse in part on the fact that they’d been counting on the full payments to keep them solvent.

The end result is that insurers are raising premiums sharply for 2017 in many states. In Arizona, Oklahoma and Tennessee, proposed average rate hikes exceed 50 percent. Across 36 states analyzed by the Council for Affordable Health Coverage, the average requested increase is 19.2 percent. It’s making for plenty of bad Obamacare headlines in an election year when Republicans are again running on a pledge to repeal it.

The good news for Obamacare’s supporters is that while insurers are clearly unhappy about their losses–and jacking up rates to reverse that red ink—few are threatening to abandon the exchange markets. Despite the uproar over UnitedHealth’s exodus from most of the 34 states it had been in, the health insurance giant appears to be an outlier. And even United is staying in a few key states where it has a significant share of the market.

Most other plans are sticking with Obamacare despite the turbulence. Anthem, which had nearly 1 million exchange customers at the end of March, plans to continue competing in the 14 states where it sells Blue Cross Blue Shield-branded products.

“We do believe we’re well-positioned for continued growth in the exchange marketplace if the market stabilizes to a more sustainable level,” Joseph Swedish, Anthem’s CEO, told investors on a recent call. “Clearly, the performance of the exchange marketplace has lagged expectations throughout the industry.”

Connolly said her member plans remain committed; most are nonprofits and consider it part of their mission to write policies even in challenging business environments. That doesn’t mean they aren’t exasperated. In April, the member plan CEOs gathered in California to share experiences and brainstorm solutions. “Nobody in Washington,” Connolly said, “is doing anything to make it any easier for our members.”

But many plans also have a non-altruistic (and largely unspoken) motivation for sticking with the exchanges: their other government business, specifically Medicare and Medicaid, has seen huge growth in recent years. Insurers now receive $200 billion annually to provide coverage to Medicare beneficiaries. Many plans are willing to take a hit in the individual market if they can keep securing much larger windfalls from other government programs.

Another sensitive consideration: four of the five largest publicly traded insurers, including Anthem, are currently seeking approval from the Obama administration for controversial blockbuster mergers that would reshape the industry. The last thing those companies want to do is antagonize federal regulators by abandoning the president’s signature domestic achievement.

Few experts predict the markets will implode, despite the political rhetoric. To the contrary, most insurers expect that technical problems will be fixed, just as the technical problems that plagued the rollout of the exchange websites were eventually surmounted. The question is how.

THE OBAMA ADMINISTRATION has already taken several steps to improve the stability and financial viability of the Obamacare marketplaces, most notably tightening those special enrollment rules so people can’t sign up only after they get sick. It is also redoubling outreach to young adults, including more proactively contacting people who paid the tax penalty to tell them more about their coverage options for 2017–and potential subsidies that might make it way more affordable.

The biggest idea—recently resurrected after a few years in obscurity—is the so-called public option–a government-run health plan that would compete against other insurers in the exchange. Democrats dropped it during the Obamacare debate, but right now both Hillary Clinton and the president want it to get a second look.

But insurers hate the idea of government-run competition, and Republicans are already saying it’s the first dangerous step toward socialized medicine.

Still, the health plans do want some kind of aggressive action to get the exchanges on firmer ground. There are some potentially easy fixes–but they’re likely to appeal more to actuaries than to politicians who have to face real voters. And most would require Congress to amend the actual wording of the law. The administration can’t just tweak a few regulations.

One surefire way to get more young adults into the exchange markets: stop allowing them to stay on their parents’ plans until age 26. Adding a huge new population of very young adults between, say, ages 22 and 26 would do wonders for the system’s health. But that’s proven to be one of Obamacare’s most popular provisions; even House Republicans’ recent “repeal and replace” white paper preserves that young adult coverage, which so many of their constituents have come to count on. For millions of people who are covered at work—not in the exchanges—that under-26 provision is one of the few easy-to-understand and widely accessed benefits of Obamacare.

Another fix: increasing the financial penalty for Americans who don’t get coverage. But not even Democrats are proposing that, which is hardly surprising given that the individual mandate registers in polls as the least popular piece of the law. Across the political spectrum, nobody particularly likes government mandates and IRS penalties.

Allowing exchange insurers to charge more to older customers could also help. Right now, the law limits how much premiums can vary by age: Insurers can charge their older customers three times more than younger ones. That ratio is far lower than was typical before the ACA. But again, jacking up health costs for older Americans, who typically vote in significantly higher numbers than their younger counterparts, is politically problematic.

Similarly, insurers would like to see increased flexibility for what type of plans they can sell on the exchanges. Right now, the rules require the plans to cover at least 60 percent of medical costs for the vast majority of Obamacare customers, to protect people from junk plans that don’t really insure them. But less robust coverage with cheaper monthly premiums could prove enticing to young adults who don’t expect to need a whole lot of medical care—keeping them out of the risk pools where they’re needed.

Perhaps the easiest and most effective fix would be to make good on the original promise of risk corridor payments; $2.5 billion would go a long way toward wiping out most of the insurers’ losses. But the Republicans who voted against it decry that as a bailout for health insurers; it’s not going to happen, not right now.

For six years, getting Congress to act on any of these Obamacare remedies has been a political impossibility: The Republican mantra has been “repeal and replace.” Legislators simply wouldn’t engage on any debate that involves actually fixing the system. They faced the potential wrath of conservative activists if they were seen as doing anything to legitimize Obamacare. John Boehner’s fate as House speaker may have been sealed right after President Obama’s 2012 reelection when he commented that Obamacare was “the law of the land”—infuriating newly elected House conservatives who didn’t see it that way.

The legislative impasse could change in 2017, as Obamacare moves ahead, without Obama. But that depends on the voters. If Republicans continue to control at least one chamber of Congress, as most political observers expect, there’s no guarantee they’d engage any more constructively with the shortcomings of the law.

More crucial to Obamacare’s future is who wins the presidency. The turbulent insurance marketplaces could hand a President Donald Trump, in coordination with congressional Republicans, a chance to make good on his promise to repeal the health care law, or at least dislodge big and crucial parts of it.

But if Hillary Clinton wins the White House, that could buy backers of the health law a second chance at working out the kinks. The presumptive Democratic nominee–no stranger to the mud pit of health care politics—has already produced a litany of policy changes she’d like to see enacted, many centered on consumer affordability.

Republicans would face a dilemma under a President Clinton: Do they continue their quixotic quest to abolish the law? Or do they shelve their repeal vow once Obama is gone from

Obamacare? With 20 million Americans now covered under the law, many observers now see Obamacare as toothpaste that just can’t be put back in the tube. As with Medicare and other divisive entitlements that both sides came to accept, it means that Congress, at some point, will need to strike fix-it compromises with the new administration—even if that means making an uncomfortable peace with “Hillarycare.”