States Have Some Bad Ideas for Keeping Insurers

(Bloomberg View) -- Insurers have been pulling out of Obamacare, and that's a problem.

How big a problem depends on where you live. In some counties, no insurers may be willing to offer coverage. In others, such as the metro New York City area, competition remains robust. But when you look at the maps of coverage, the pattern is clear: Every year, the areas with deep markets shrink, and those with monopolies, near-monopolies, or no coverage at all grow. And even in relatively healthy exchanges with a fair number of choices, exits mean disruption for customers who may lose access to their current doctors.

States are finding creative ways to keep insurers on the exchanges. So far, two strategies seem to be bearing fruit. The first is to have the state pick up the excess cost for the sickest patients, allowing insurers to keep premiums lower, and perhaps prevent the dreaded “death spiral” where rising costs raise premiums and drive healthy patients out of the market, until all you have left is very sick people and very expensive insurance. Alaska has taken this approach, and it seems to have kept premiums in check, though they're still very high.

But this approach costs money, and a lot of states are already having budget trouble. So an alternative is to leverage existing spending -- for example, by giving preference on Medicaid contracts to insurers that are offering exchange policies. This approach garnered a lot of excitement when Nevada announced it, and New York followed suit. A solution that shored up the exchanges without costing states a penny! What's not to love?

This week's news suggests one reason. Aetna announced that it is pulling out of the last Obamacare market where it was considering offering insurance in 2018 -- Nevada, where yes, they were applying for a Medicaid managed care contract. When that contract was terminated (apparently for unrelated reasons), so was Aetna's possibility of selling insurance on that exchange. Nevada has had a challenging time finding insurers to sell in its large rural areas, and this announcement doesn't help.

Aetna's decision also suggests the problem with this seemingly easy fix. The individual market is a small portion of the overall health insurance business, and it may indeed be possible to force insurers to stay on the exchanges in order to keep those other, profitable lines of business. But that doesn't do anything to fix the cost problems that have made the exchanges so unstable. If losses on the exchanges are large, that money is going to have to be made up somewhere -- or else insurers will exit those other contracts, leaving states in worse trouble.

Tying exchange insurance to some other contract may make Obamacare look more stable, at least temporarily. But it makes other programs less stable, because it ties their fortunes to a system that has substantial underlying issues. A policy that started as a way to help states exercise leverage over insurers could easily end up in the reverse situation, where insurers can get better deals on big contracts by saying “Nice exchange you've got there. It would be a shame if anything happened to it.” I don't think that's what happened in Nevada; Aetna has pulled out of all of its other Obamacare markets, simply because they don't think these are profitable lines of business. But the potential is there if other states follow Nevada's lead.

That leaves pouring more money into the system. This approach might actually keep premiums low enough to prevent an exodus of healthy customers. The only problem is, where to get that money? Minnesota is looking to spend almost $600 million over the next two years, much of which will be taken out of other health insurance subsidies for low-income households. And unless a federal waiver is approved, the state will have to get the rest by raiding its rainy day fund. And Minnesota is relatively fiscally healthy, compared with many other states. It's hard to see where Illinois, for example, could find the money to backstop its insurance exchanges.

States may need to find that money somewhere, or figure out some other way to keep insurers on the exchanges. If 2018 continues the pattern we've seen, then insurance-less counties are about to become a major headache for regulators -- and an even worse problem for the people who live in those places. The more markets left without insurance, the harder this problem gets to fix. This may not be the death knell that Republicans have been listening for, but it's the kind of symptom you need to treat right away.  

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of “The Up Side of Down: Why Failing Well Is the Key to Success.”

To contact the author of this story: Megan McArdle at mmcardle3@bloomberg.net.

To contact the editor responsible for this story: James Gibney at jgibney5@bloomberg.net.

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