New warning signs that Humana may be pulling out of the ACA insurance exchanges, coupled with UnitedHealthcare’s recent exits, has reignited the debate about the stability of the insurance marketplaces. Ironically, blame for undermining the exchanges may ultimately lie with one of the ACA’s most popular provisions: allowing young adults to join their parent’s insurance.
Without question, some critics have oversold the impending collapse of the ACA insurance marketplaces, but serious challenges do persist. Perhaps the most important hurdle for the overall health of the exchanges has been encouraging less costly individuals to sign up. Unsurprisingly, thus far the exchanges have attracted particularly expensive enrollees. According to a recent report from Blue Cross Blue Shield, exchange enrollees were 22 percent more expensive than those insured through their employers. In short, the marketplaces need more young, healthy individuals to sign up.
Attracting the healthier population is critical for the exchanges because they use a form of community rating — a system where insurers are restricted from charging different prices to healthy and sick customers. The modified version used in the ACA exchanges only allows for relatively minor adjustments based on age, geographic area, and tobacco use.
Since everyone pays roughly similar prices, the healthy often pay more in premiums than they recoup through claims, while the sick pay “too little.” In short, community rated insurance is often a bad deal for the healthy.
If the healthy choose to forego coverage, insurers must increase prices for the relatively expensive group that remains. Higher prices, in turn, could lead the healthiest remaining individuals to drop coverage, leading to still higher prices, and so on. This kind of “death spiral” can lead to the collapse of community-rated insurance markets.
Basic economics points to a fundamental policy takeaway: To be successful, community-rated markets must be paired with policies that encourage entry of the lower cost population. Inexplicably, the ACA does the exact the opposite.
One of the seemingly innocuous provisions of the ACA was to allow those between 18 and 26 to be considered dependents on their parents’ health insurance plan (prior to the ACA the limit was age 18). Rather than buying a policy on the exchange, those under 26 can simply join their parent’s plan instead.
This has proved to be a remarkably popular feature across the political spectrum. Based on a survey by the Kaiser Family Foundation, 76 percent of Americans viewed the provision favorably, including nearly 70 percent of Republican respondents. More importantly, a large number of 18-26 year olds have taken advantage of the policy. According to the Department of Health and Human Services, roughly 3 million young adults are on a parent’s plan as a result of the provision.
Popular or not, though, the under-26 provision directly undermines the community-rated exchanges. Rather than encouraging the young to participate, the architects of the ACA went out of their way to introduce a new policy that funnels young, healthy adults away from the exchanges. The provisions are not simply inconsistent — they are self-defeating.
The potential implication for the exchanges is large when we consider the relevant magnitudes. In 2016, the total initial enrollment of the exchanges was only 12.7 million, a number that will likely fall to 10 or 11 million by the end of the year. Adding 3 million young adults — or even a portion of that — to a market of that size could make a huge impact on the average health of enrollees. Doing so would protect the exchanges from the potential “spiraling” incentives.
Putting aside major overhauls to the health care system, there are relatively straightforward ways to resolve these inconsistent incentives. On one hand, the ACA exchanges could eliminate (or at least loosen) the limits on community rating. Allowing for larger differences in premiums effectively means the young will pay less, encouraging greater participation. Inevitably some will criticize this as inequitable toward older enrollees, since they will lose much of their current subsidy from the healthy and be forced to shoulder more of the burden of their health costs.
The other solution is to simply eliminate the under-26 provision. Given the goals of the ACA marketplace, it is not clear why a seemingly arbitrary 8-year age group would be exempted from the exchanges in the first place. To exempt the healthiest possible group is even more puzzling.
Ultimately, supporters of the health insurance exchanges must recognize that part of their instability is self-created. With the threat of a presidential veto blocking proposals from ACA opponents, remedying the issue falls squarely on their shoulders as well. The solutions may be unpopular, but failing to resolve the internal inconsistency of these provisions means the ACA will continue to quietly undermine its own centerpiece and fuel the fires of critics.
