The type of health care needed for sick Americans - and
who should pay for it - has been debated extensively in United States health
policy circles for decades.
The choice of young people to forgo health insurance combined with
the high cost of providing care for the sickest Americans are together
generating big losses for insurers participating in the Affordable Care
Act's state insurance marketplaces.
‘Some private health insurers, like Aetna, underpriced their policies on the Affordable Care Aact exchanges, suggested a policy paper in JAMA.’
Aetna, one of the nation's largest health insurance companies,
announced in August 2016 that it would no longer participate in exchanges,
citing a $200 million loss. Now, Aetna's premiums are expected to go up
by 25% in 2017, so the company can attempt to make up for the
loss. Other insurers are also withdrawing from the marketplaces and
raising rates, some up to 20%.
It turns out that some private health insurers, like Aetna,
underpriced their policies on the ACA exchanges, according to a policy
paper in the Journal of the American Medical Association
by Uwe Reinhardt, the James Madison Professor of Political Economy and
professor of economics and public affairs at Princeton'sWoodrow Wilson
School of Public and International Affairs.
This was done either to gain market share early on or because
insurance companies like Aetna did not anticipate the financial risks
they took on. These companies had little experience with the customers
drawn to the marketplace, Reinhardt said, especially the younger,
healthier individuals who decided to forgo health insurance and instead
pay low fines to remain uninsured.
When young, healthy people forgo health insurance, community-wide
premiums soar. This opens up insurance companies to expensive risk
pools, where they are paying out more money in benefits than they take
in from premiums.
Over time, this practice will drive up communitywide premiums,
causing even more young, healthy people to forgo health insurance
coverage. This opens up insurance companies to expensive risk pools,
where they are paying out more money in benefits than they take in from
"Young Americans would rather remain uninsured and pay the
relatively low penalties called for in Obamacare, knowing full well that
if they really get sick and their care exceeds their resources, their
relatives or the rest of society will somehow bail them out anyway,"
Prior to the ACA, insurers in many states could charge higher
premiums to people based on their medical history or use of health
services. Now, insurers cannot raise premiums on the ACA based on health
status, medical claims or gender. They can only consider a person's age
or tobacco use when setting rates, and only under certain limits. This
is formally known as a "community rating." The goal was to make
insurance more affordable for all in America.
But issuing community-rated premiums is "unnatural" for big
insurance companies, Reinhardt said, because it forces insurers to issue
policies to very ill people at premiums far below the expected costs of
providing care for the insured.
"The idea is that those who are ill and older should be subsidized
by the premiums paid by younger, healthier people," he said. "That
actually is done all over the world, and even in America's
employment-based health insurance system, like here at Princeton
University. Sicker employees in the United States do not usually make
larger contributions to their employment-based health insurance than
Reinhardt said the approach can only work if all individuals,
healthy or otherwise, are mandated to purchase coverage for a defined,
basic package of benefits. This is done in many countries, including
Switzerland, Germany and the Netherlands.
"In other countries, younger, healthier people understand they pay
more than their actual cost when young. But in return, they too, will be
subsidized when they get older or fall ill. For some reason, American
youngsters do not think that way," Reinhardt said.
If healthy, young people continue to opt out of the ACA, insurance
companies' risk pools on the marketplace exchanges will consist mainly
of sicker people. This could explain why premiums on the exchanges are
now soaring, even though total national health care spending growth is
projected to be only 5.8% per year between 2015 and 2025,
according to the latest estimates published by the Centers for Medicare
and Medicaid Services.
"Quite frankly, it's hard to see a way out of this dilemma,
especially given the current political climate in which partisan rancor
trumps patriotism and caring for the American people," Reinhardt said.
Reinhardt said many Americans probably do not know that nearly 20% of all health care spending comes from just 1% of
individuals, who often have multiple health issues requiring expensive
treatments. The sickest 10% account for 65% of total
health spending. The healthiest 50% account for only 3%.
In these figures lies the actual "nightmare" that is now besetting the
ACA on the exchanges, Reinhardt said.
"The type of health care needed for these sicker Americans - and
who should pay for it - has been debated extensively in U.S. health
policy circles for decades, especially since few people could afford to
purchase their own health care," Reinhardt said. "Remember that the U.S.
median disposable family income is only about $56,000, not even enough
to cover the annual cost of some effective specialty drugs."
The already high cost of U.S. health care adds to the dilemma. On
average, prices for most health care services or products in the United
States are twice as high or higher than prices for identical services
and products in other countries, Reinhardt explained. As a result, per
capita health spending in America tends to be twice as high as the
comparable number in other countries as well.
"Even a relatively modest medical procedure here can cost the
equivalent of a fully loaded Mercedes Benz," Reinhardt said. "If health
care costs in the United States were lower, most people would probably
agree that ill, low-income citizens should receive the needed health
care that is available to the better off. Americans are not an unkind
people. It is just so expensive to be kind. So the problem is that our
health system is in danger of pricing kindness out of our souls."
Heather Howard, lecturer in public affairs at the Wilson School and
director of two Robert Wood Johnson Foundation-funded programs
(Advancing Coverage in States and State Health and Value Strategies)
said Reinhardt's commentary is highly relevant, especially as many
consider the future of the evolving health care system in the United
"As implementation of the ACA has continued, many have expressed the
need for tweaks to the law in order to make it work better for more
Americans," Howard said. "Indeed, in a less divisive political climate,
such fixes would be routine. Unfortunately, that policy course
correction has proven difficult to achieve in this case, which makes
Uwe's trenchant insights that much more important."