Will new short-term health plans undermine Obamacare?

In February, the Trump administration announced that it was going to allow insurers to sell short-term, limited-duration health insurance plans to individuals. Reaction to this plan was, let us say, quite mixed.

“If consumers think Obamacare premiums are high today, wait until people flood into these short-term and association health plans,” industry consultant Robert Laszewski told Kaiser Health News. “The Trump administration will bring rates down substantially for healthy people, but woe unto those who get a condition and have to go back into Obamacare.”

Meanwhile, the headline at Investor’s Business Daily cried “Trump Throws A Lifeline To Millions Of ObamaCare Victims.”

Who was right? Well, the Kaiser Family Foundation has released a new report on these plans that might help shed some light on the matter. Ultimately what it tells us, however, is a lot less than we’d like to know.

Start with the plans themselves: What will they look like? According to Kaiser, here are the key features:

• Unlike other policies (even before Obamacare), they aren’t guaranteed to be renewable. If you want to renew, you have to go through the whole process of buying a policy again. Which matters because:
• These policies are medically underwritten. Yes, this means the return of the dreaded “preexisting conditions,” for which insurers can charge you more or simply refuse to sell you a policy. They include not just prior illness but also age and sex.
• They don’t have to cover “essential health benefits” — maternity, mental health, prescription drugs.
• They can have lifetime caps on how much they pay out for your condition.
• They can have monster deductibles and otherwise increase your out-of-pocket expenses over the Obamacare caps.
• They’re not subject to a bunch of regulations on insurers that limit insurer discretion on how much they charge and how much they spend on care.

You might think these policies are a pretty bad deal for consumers. But consider how much money insurers are saving by limiting the risk that they’ll actually have to pay claims. And then consider that insurers can pass on those savings to you, the consumer. If you’re a young, healthy person who makes too much to qualify for substantial subsidies on an exchange policy — and whose main risk is something like a catastrophic car accident — these policies are actually probably a great deal.

In fact, they’re an even better deal than they used to be, thanks to Obamacare. Because while your main risk as a young adult is probably a traumatic accident, you also face some risk of getting cancer or another very expensive disease. Before Obamacare, that made it somewhat risky to buy a short-term policy, because at the end of its term, you’d get kicked off your plan, and no other insurer would touch you.

But now the worst thing that happens is that you wait for open enrollment to roll around and buy an Obamacare policy. This is a great deal for you young folks. Unfortunately, it could be a very bad deal for the rest of us.

Health insurance, like all insurance, works by pooling risk. Everyone pays premiums, then some people get sick, and some people don’t. The health insurer then takes the pooled premiums and pays the claims of the people who got sick, with hopefully a little left over for profit.

But insurance pools work only if no one has a very good idea of what their “experience” will be — which is to say, if no one can accurately forecast his or her need to collect claims. If you can accurately forecast that need or make a pretty reasonable guess, then the people who expect to have high claims will buy insurance, and the folks who expect to make low claims — or no claims — will just pay for those out of pocket.

Unfortunately, there are people who can fairly accurately forecast their health-care claims: people who already have an expensive diagnosis. Young adults, meanwhile, can be fairly sure they won’t use this much health care this year. So it may be rational for them to skimp on insurance, or go without, while the sick people rush to sign up.

But that will raise the insurer’s average cost for each policy, so they’ll have to raise premiums. At which point, some of the healthiest folks say, “To heck with this; it’s cheaper to just pay out of pocket.” Rinse and repeat enough times, and you have what is known as “the health insurance death spiral,” which eventually ends in, well, the death of the individual market for health insurance.

You can thus understand why many people are very anxious about the administration’s decision: It will entice the healthiest people to leave the insurance pool, raising premiums for everyone else and potentially worsening the already considerable problems with the Obamacare exchanges. It’s not clear, however, how big this risk actually is.

The thing is, by broad logic, Obamacare exchanges already ought to be death-spiraling, because premiums keep going up every year. And indeed, the number of people buying insurance has shrunk somewhat. But not really all that much.

You might think that this resilience is due to the individual mandate, but that probably has little to do with it; law or no, millions of people who were expected to buy exchange policies have declined to do so. It turns out that main factor in whether people buy insurance isn’t the mandate; the main factor is whether they get a substantial subsidy.

The exchanges hoovered up a lot of people who made less than 250 percent of the federal poverty line, which meant that they qualified not only for premium subsidies but also for special “cost-sharing reduction” (CSR) subsidies that limited their out-of-pocket costs. But the exchanges have struggled to expand the market beyond that heavily subsidized group. The overwhelming majority of the people buying exchange policies — 83 percent — qualify for premium subsidies. Almost 60 percent also get CSR subsidies.

And of the remainder, it’s not clear how many are the young, healthy customers who would be most naturally attracted to short-term policies. Only 27 percent of the folks buying on the exchanges are in the prime, cheap-to-cover 18-to-34 age group. (That’s why premiums keep going up; the Obama administration had originally forecast that it needed this figure to be 40 percent to keep premiums stable). However, it’s reasonable to expect that the young people who have bought exchange policies are disproportionately either quite sick (and therefore in great need of health insurance) or heavily subsidized. For young people who fall into those categories, short-term policies will not present an attractive alternative.

So it’s not really clear that short-term policies are going to poach many existing exchange customers. But there is yet another twist in our winding attempt to forecast the impact of this rule: people who purchase individual insurance policies off the exchanges.

There are actually two groups of those people: those in grandfathered non-Affordable-Care-Act-compliant plans, who do not really concern us, because they presumably like their insurance; and people who buy ACA-compliant plans. That second market is less well-studied than the exchange customers, though data suggests that there are about half as many of them as there are exchange buyers, and many of them aren’t necessarily thrilled about their insurance policies. Though they may be in a minority, they’re an important minority, because of a quirk in the Patient Protection and Affordable Care Act.

Under the law that established Obamacare, insurers have to treat their on-exchange and off-exchange policies as part of a single actuarial pool for calculating premiums. This rule is arguably needed to prevent insurers from cherry-picking healthy patients (which they have many ways to do, even if they are technically forbidden from using preexisting conditions to deny coverage). But it means that premiums in these two markets are somewhat linked.

And because of another quirk in the law, that could eventually bring us to a death spiral. It’s well known that subsidies are calculated based on the price of the second-lowest-cost silver plan offered on the exchanges. What’s less well known is that the law contains a trigger that could change that formula: Once total expenditure on premium subsidies hits 0.504 percent of GDP, annual subsidy adjustments switch to an inflation-based formula. If premium subsidies stop going up in lockstep with premiums, eventually, we could see a lot more current customers decide that the price isn’t worth it, even on the exchanges. And, well, commence the death spiral.

Right now, we’re a very long way from hitting that trigger, because of lower-than-expected enrollment, and also a slower-than-expected growth in the cost of health care. But if premiums go up enough, we could start bumping up against its limits. At which point, things in the individual market start looking dire indeed.

But that’s a lot of “coulds” and “maybes” and “mights.” Ultimately, right now we just don’t have enough information about those off-exchange policies to know what effect offering short-term plans will have on their customers. What we can say is that the market for individual health insurance policies is still pretty fragile. And that the Trump administration sure isn’t making it any stronger.