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Is Obamacare in Trouble?

Since the passage of the Affordable Care Act, about 20 million people have gained health insurance coverage and the uninsured rate in the U.S. has plunged. But over the last several months, the major insurance companies United Healthcare, Humana, and Aetna have pulled out of the healthcare exchanges, prompting concerns about the exchanges’ long-term sustainability. Yale Insights talked with Yale’s Fiona Scott Morton and Howard Forman about the state of Obamacare and what it needs to thrive. 

Q: The departure of Aetna and other big insurers from the healthcare exchanges has received a lot of attention. Is Obamacare in trouble? 

Forman: I think there are a lot of challenges that we still face, particularly in the exchanges. But Obamacare is not just about enrollment on the exchanges, and I think the other pieces are operating very, very well. We have an enormous number of young adults 26 and under who are now enrolled who otherwise weren’t. We have almost 10 million people in the Medicaid program that weren’t otherwise. The uninsured rate is dramatically lower than it was prior to the implementation of the ACA, or Obamacare. 

About 80 to 85% of the people in the exchanges receive subsidies, so even when the rates on the exchanges go up, that’s not the real rate that consumers are paying. In many cases, the cost will be passed on to the federal government. It may mean that some of the costs are going up faster than we thought, although the overall budget for the ACA has come in lower than originally expected. 

There are issues around adverse selection on the exchanges that we worried about at the beginning and that are becoming clearer. I don’t think that we’re in any imminent danger of complete implosion, but there are very real challenges that we face at this time.

What we just witnessed with Aetna pulling out of exchanges is a more specific case of the political challenge. Just a few months before pulling out, Aetna said that they looked at this as the investment period—they were willing to have some losses because that’s what it costs in order to look at a new book of business. Then, suddenly, when the federal government decided not to approve the merger that they were looking for, they decided to pull out of the exchanges. One wonders whether some of that move was really a political response rather than just an economic and business response.

Scott Morton: It doesn’t make sense to me for that to be the case, because the antitrust division of the Department of Justice doesn’t run the Affordable Care Act, first of all. Secondly, if the insurers were to decide that they didn’t like the Affordable Care Act as it is currently structured and were to pull out, I think the next most popular solution would be the so-called public option, to expand Medicare to everybody. If Medicare is expanded, then insurers don’t have anything to do. So, if the insurers want Obamacare to stay in the current form of a privatized benefit run by private sector insurers—and that’s business for them—then they have to work with the government to find a way to make it function, not pull out.

Now, I think part of the issue is that the people enrolling through the exchanges are more similar to Medicaid beneficiaries than the commercially insured population. They’re lower income and they’re quite sick. We’ve had adverse selection into the exchanges, so more sick people are signing up than healthy people. The insurance companies are coming to terms with that. They need to budget for that kind of sickness level. They need to design networks and benefits for that group. 

We thought the penalties would make people sign up. But the penalties are not high enough yet to make everybody sign up. So we still have some folks who are uninsured on purpose, and that’s making the pool a little sicker than it would otherwise be.

Forman: By the time of the second sign-up period, nobody had even experienced the penalties yet. In many cases, even people who should have had penalties assigned to them weren’t paying them. So there is a lag. It takes a while before you get people to think, “I just filed my taxes and now I have a mandate tax that I have to pay, so next year I have to go ahead and sign up.” Having said that, the mandate tax is too small. Everybody knew it was too small at the beginning, and we also know from a reasonably large literature over time that mandates are never 100% effective. 

If you look at mandates to wear helmets, if you look at mandates to have car insurance, they’re woefully inadequate unless you have really severe penalties assigned to them. So I think one of the big tasks for the next Congress is to decide whether they want to make this work. If they want to make this work, they can. They can raise the penalties. If they want to see this fail, then they’re doing a good job, because what they’re doing is basically, through obstruction, preventing it from succeeding.

Scott Morton: Congress is really freezing the original legislation in place, and that original legislation wasn’t perfect. For example, the subsidies for sick people are not, I think, high enough. We need to find a way to make insurers happy to participate in a marketplace, no matter how sick the people are, and that’s currently not true, so you need to tweak the legislation to make that true. But that would require Congress to act. As Howie said, Congress would have to want this to succeed rather than want it to fail. 

I don’t think it’s failing, actually. I think it’s going to trundle along, but it’s not going to enroll more people and be as efficient as possible without some improvements. 

Forman: It is without historic precedent, as far as I can tell, for a piece of legislation of this size not to have substantial follow-on legislation. It is a very unfortunate political situation that we’re in right now. I agree that the ACA is not failing. I want to make it clear I agree with you on that. But, boy, it could thrive. This could be something that could be refined and be something that would be a real source of pride for both parties.

Q: The ACA had a number of goals: expanding coverage, bending the cost curve down, changing the model from fee-for-service to value-based. Where have we seen progress and where have we seen less progress among those goals?

Scott Morton: I don’t actually think that one of the goals of the Affordable Care Act was to bend the cost curve. The Affordable Care Act is about providing insurance and then the financing of health insurance. The big goal was to bring down the number of uninsured people. By the way, the hospitals were treating uninsured patients anyway, so the hospitals then had a lot of unpaid bills, and they applied to the government to cover those unpaid bills. So all of us, through our taxes, were paying for the uninsured already.

The idea now is we pay taxes to provide subsidies to everybody to purchase health insurance, so when they show up at the hospital, everybody has health insurance and the hospital balances its books that way. So it’s not about bending the cost curve, it’s about the financing of healthcare and, ideally, making everything more rational because people can plan ahead, they can have a primary care physician, they can engage in preventative care, they don’t have to have their health insurance attached to their job.

Forman: If you go back and look at what the motivations were, cost was a huge issue. If you look at the final bill, instead of healthcare reform, it was mostly health insurance reform. However, having said that, due to some combination of factors, whether it was the recession, the Medicare reforms that were built into the ACA, or some other factors that may be as yet poorly understood—for instance, maybe just the increase in deductibles and more consumer sensitivity that has existed over the last decade—we’ve seen a flattening of the cost curve over the last seven or eight years. 

I think some of that is tied to Medicare payment reform. For example, Medicare started to give penalties just two years ago for excessive readmissions. We’ve known for decades that about 20% of all Medicare beneficiaries will be readmitted within 30 days after discharge from the hospital, and most people look at that and say, “That’s just a ridiculous number.” But it persisted for a long time, and hospital people thought it was an immutable number. As soon as Medicare changed the incentives, we saw a 10% reduction in that number from about 20% down to 18%. 

So we know that economic incentives matter, and that can start to have an effect. Similarly, Medicare started to have significant penalties for hospital-acquired conditions: catheter-associated infections, decubitus ulcers, what we call iatrogenic pneumothoraces, in other words, causing a patient to have a pneumothorax from a procedure. We saw dramatic reductions in those once Medicare started putting in penalties. 

Scott Morton: I agree with everything Howie said, and I think a hard-to-analyze piece of this was essentially the national conversation that we had around passing the Affordable Care Act. I think at that point, everybody in the country, including every doctor in the country and every hospital administrator, realized that the path had changed—they could not just keep raising prices. I think it sunk in that we have to try new things and we have to reduce costs.

Forman: As a physician, I can tell you that it’s a very different conversation from 20 years ago. You have physicians and hospital executives and other care providers literally sitting around the table thinking about how to deliver care better. I’m much more optimistic now than I was 20 years ago.

Scott Morton: The Affordable Care Act put in place a bunch of experiments; for instance it allowed for the creation of Accountable Care Organizations and other kinds of clinical integration. I think the idea was not to make one big change to the nation’s healthcare that would save us lots of money, but rather to pilot a number of different innovations and see if any of those improve care at lower costs. 

Q: Would it take more legislation to make those pilots universal?

Forman: Interestingly, no. The secretary of health and human services has the authority to have rapid implementation of successful pilots. Early on, I think everybody in the White House and in Congress wanted to pass regulations about how we were going to reduce costs. Then they went around and talked to health economists and experts, who said, “Well, this might work but there’s no solid evidence.” 

So, instead, they funded a lot of these pilot projects, much of which is embodied in what we call the Center for Medicare and Medicaid Innovation. And there’s a line in the ACA that is a specific instruction that the secretary can accelerate the implementation of successful pilots without Congress.

Scott Morton: It’s a big deal to change the way you practice medicine around clinical integration and patient outcomes. That’s never been the focus of American medicine. Of course doctors are trying to save patients, but the team approach with the electronic health record and keeping people out of the hospital and so on hasn’t been the way that groups have been organized. It’s a big operation and you’re trying to move it, and so it’s not going to be quick. It’s going to be a slow, steady change. I think that’s potentially why we’re seeing these cost reductions now: groups are looking to the horizon and realizing that the payment models will change. To turn the ship in time, they have to start working on it today.

Q: Have there been any surprises in the effect of the ACA?

Forman: I would say it’s surprising that the uninsured rate has come down as much as it has. Even though it is clearly not a complete success, the fact that we have about 20 million fewer uninsured people right now, and the fact that healthcare costs on a national level have not gone up in any way excessively, are two things that are surprising.

Scott Morton: I agree with that. One surprise for economists was the popularity of narrow-network plans on the exchanges. Insurers initially put plans on the exchanges that were similar to the ones that they sell in the private sector to employers. These are broad plans: you can go anywhere or nearly anywhere with more generous cost-sharing. In a narrow-network plan, the proportion of doctors and the proportion of hospitals that are in the plan is restricted, and those providers agree to lower rates in exchange for having all the plan members come to them.

What we saw on the exchanges is that when consumers are shopping with their own money, the narrow-network plans are popular because they’re cheaper. This was a little bit of news to the insurance community. Normally an individual employee is not shopping. It’s the benefits consultant, who reports to the CEO and is using pre-tax dollars that the employee never even sees because it’s not part of her wage. That all really attenuates what we would call the elasticity of demand. The CEO doesn’t want complaints about the narrow network, and so the employer chooses a broad network. But, of course, an individual person can look at a narrow network and see that the pediatrician she really cares about is in that narrow network and say, “Overall, it satisfies me and it costs 15% less, so I’m going to buy it.”

Forman: I’ll tell you one other thing that I think is a little surprising. A lot of us, including me, believed that employers, and particularly smaller employers, would start dropping coverage and pushing people onto the exchanges. That has not happened in any meaningful way. On the margins, some number of employers have moved people into part-time status. But, many of us, even those of us that were very supportive of the idea of the ACA, fully expected that the employer-based insurance system in our country would start to devolve and more people would move on to the exchanges, and that hasn’t happened.

Scott Morton: Keep in mind that employers get to use pre-tax dollars to buy insurance, so it’s a big discount to buy health insurance through the employer.

Q: Some states have expanded Medicaid and some haven’t. What’s been the impact of that? 

Scott Morton: The states that refused Medicaid expansion have hurt their own population and refused free money from the federal government. In those states, low-income people who don’t qualify for Medicaid but would qualify under the Affordable Care Act, are going to emergency rooms or seeking care anyway, and the state is paying for it. My tax dollars here in Connecticut, instead of being shared with those states to help them pay for their medical care, which was what the Affordable Care Act was designed to do, instead are not. It’s a perverse outcome.

Forman: Over the last two or three years, slowly, states have flipped to having a Medicaid expansion, or getting a waiver where they’re allowed to come up with a modification that basically allows them to take the money and save face. 

The irony for the states that refuse the expansion, just to amplify what Fiona said, is that they are also seeing a reduction in payments from Medicare because the ACA assumed that you would no longer have to have this extra payment called a DSH payment that was intended to cover you for uninsured patients. You were no longer supposed to have as many uninsured patients.

So every hospital, whether you have Medicaid expansion or not, is seeing a reduction in DSH payments. Those hospitals in states that have not expanded aren’t seeing a reduction in the uninsured, and those hospitals are suffering. I believe strongly that whatever the outcome of this election, almost all the other states will figure out a way to flip.

Q: Were the exchanges intended to provide increased competition, and is that happening?

Scott Morton: Yes, the exchanges were intended to increase competition by making it easier to search across different health insurance options. In the old world, you would maybe hear about one option from a broker and you would have to find information about others in other places, and they weren’t easily comparable because they were selling different things. Now we have one website. You can say, “I want a silver plan in Connecticut,” and then you will see who operates in your region and sells a silver plan, and you’ll see the premiums and the deductible, and so on. So it makes it a lower-cost experience to go out shopping for health insurance, and it lets you really compare the things you care about, such as the network.

I think, yes, it has increased competition. Importantly, it has also made it easier to enter. If I am a no-name insurance provider, I’m not Aetna or Humana but I have a fine network and a fine set of characteristics of my plan, there I am in front of everybody. I don’t have to have a fancy brand name to be able to access the shoppers. 

Forman: Overall, though, we don’t have enough competition. This is why there is so much concern about mergers in the industry. It is very heartening to see that a company like Oscar has risen up and has entered several markets. It would be nice to see more of that. The employer-based market is about 160 million people; the exchanges are around 12 million. If you think about that, 12 million people across 50 states is not a tremendous opportunity; 160 million is. 

Q: President Obama has suggested that a future solution could be to introduce a public option only in exchanges where there isn’t enough competition. Whether that’s politically feasible or not, do you think that would help? 

Scott Morton: I think the first best answer is to get the marketplace working so that everybody wants to enter, and that means getting subsidies to the point where insurers want sick people, getting enough people onto the exchange so there are economies of scale, and getting the regulations crafted so that it’s a good place to make money if you’re an able insurer. I would rather take that route.

Forman: I agree. I think the public option is a very, very challenging thing to implement. There are all sorts of problems with adverse selection. You could easily imagine that the public option becomes where every private insurer dumps the patients they don’t want, and so you have only the sickest beneficiaries in the public option. It also becomes very difficult for the government even to know how to set prices appropriately. If you had enough legislators wanting this to succeed to pass legislation, we could very much encourage more competition.

Q: Is there anything else that we’ve learned over the last three years about the public as consumers of healthcare? 

Scott Morton: Healthcare is actually a very hard product to buy. When you need it, for one thing, you’re sick and anxious and possibly in a hurry. Secondly, you’re not an expert about it. I usually, for my students, compare healthcare to a loaf of bread. The consumer buys a loaf of bread. It costs $5, she eats it, she’s quite capable of deciding whether she liked it or not. If she goes back the next day, it’s $5, and a second loaf is another $5, and a third loaf is another $5. Insurance has a premium and a deductible and cost-sharing—sometimes it’s co-insurance, sometimes it’s a co-payment. There’s a network, there’s out-of-network charges. I might get sick, I might not.

It’s actually quite a difficult problem, both in terms of the arithmetic and in terms of forecasting. What will I need in the coming year? So I think we have to do a better job making the choices understandable if we want to enable people to shop on their own for health insurance. 

Forman: I would just add that we’re on the cusp of providing good information to consumers to know the quality of the provider they’re going to, or the quality of the hospital that they’re going to. In the past, it was all about brand name. I think that if we can get good information about quality and start to have better price transparency, that part of the market will also become more competitive and you’ll have a more efficient equilibrium come out of it. 

Q: Is there anything that we haven’t talked about that you’ve seen from politicians or in the news where you’ve said, “That’s just totally wrong. People don’t understand.”

Scott Morton: That happens every single day when I open the newspaper.

Probably the macro-level issue is that we have a faction in this country that characterizes the ACA as terrible, and that’s really not fact-based. If you ask consumers, do they like having no pre-existing conditions when they buy insurance, do they like a lifetime annual cap, do they like having kids on their policies up to 26? They like all those things. All those things are in the Affordable Care Act, but people say, “I don’t like the Affordable Care Act but I like all those things.” So that’s a complicated political situation.

Forman: People still talk about death panels. I think they still believe that the government has some role in deciding whether we’re going to pay for a service if you’re old or disabled. That is explicitly excluded from the bill. There are an awful lot of people that somehow think the government has changed how healthcare is delivered in some meaningful way, and it really hasn’t gone that way.

Scott Morton: I think we have a lot of that with the ACA, that people imagine there’s some government official who’s going to come examine them in the doctor’s waiting room. Whereas, in fact, it’s the same hospitals and doctors and providers that we’ve had all along.  We’re just paying for it a little differently.

Forman: This particular election, let’s face it, has appealed to a constituency that is angry over a lot of things, many of which are very real things that have happened to them, and they see government as consistently the problem. That doesn’t help the efforts to improve the ACA.

Theodore Nierenberg Professor of Economics

Professor of Diagnostic Radiology, Economics, and Public Health; Director of the M.D./M.B.A. Program; Director of Healthcare Curriculum, M.B.A. for Executives Program; Lecturer in Ethics, Politics, and Economics