Why Obamacare’s Insurance Marketplaces Won’t Implode Next Year

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Worried that’s botched rollout — and ongoing problems with some states’ Obamacare web portals — could wreak havoc on enrollment efforts and create an unsustainable insurance marketplace that has too few young, healthy enrollees? Don’t be.

Two new reports by the Kaiser Family Foundation (KFF) and the Urban Institute/Robert Wood Johnson Foundation (RWJF) find that Obamacare can survive lower-than-expected enrollment numbers in its first year, and that premiums won’t necessarily skyrocket even if just a small number of young and healthy Americans get coverage this year.

Insurers in the pre-Obamacare market regularly charged sick people more for their coverage. That practice of medical “underwriting” is prohibited under the Affordable Care Act, which allows insurance companies to base their premiums on just three variables — a consumer’s geographic location, age, and whether or not they smoke. Age is largely used as a stand-in for health status, since younger people are also generally healthier. And in order to keep marketplace premiums in check and stop insurers from cherry-picking their customers, the health law only allows companies to charge older people up to three times the amount they charge younger people.

That’s why the White House and KFF has projected that, in order to keep the marketplaces stable, about 40 percent of the expected seven million people who will enroll in private Obamacare coverage in 2014 must be relatively young and healthy. Otherwise, the insurance pools might be filled with a disproportionate number of sicker and older people — known as “adverse selection” — who are in greater need of health coverage but more expensive for insurers to cover, forcing companies to aggressively hike premiums across the board. That would then further discourage younger people from enrolling in coverage and lead to a vicious cycle that policy experts refer to as the insurance “death spiral.”

However, “because premiums are still allowed to vary substantially based on age, the financial consequences of lower enrollment among young adults are not as great as conventional wisdom might suggest,” explain the authors of KFF’s new report.

KFF found that if just one-third of a marketplace’s enrollees are between the ages of 18 and 34, insurers’ total costs “would be about 1.1% higher than premium revenues.” Strikingly, even a 50 percent lower-than-expected enrollment rate among young people — considered a worst-case scenario — would result in costs just 2.4 percent higher than revenues.

“[E]ven in the worst case, insurers would still be expected to earn profits, and would then likely raise premiums in 2015 to make up the shortfall,” concluded the authors. But the required premium increase would likely be limited to one or two percent, “well below the level that would trigger a ‘death spiral.'”

RWJF’s new study points to several other reasons that insurers are unlikely to hike rates even if enrollment skews toward sicker and older Americans. For instance, “risk corridors” — an Obamacare mechanism meant to limit how much insurers can profit or lose in the marketplaces — lets the government take money from insurance companies that set their 2014 premiums too high and use it to stem losses for companies that ended up setting their rates too low. Several other provisions will also limit insurer losses and consequently reduce the need for higher premiums.

The study authors also say that young people will be encouraged to sign up — if not in 2014, then during the next enrollment period — because of the way that Obamacare’s subsidies are structured. Since younger people tend to make less money, they’ll have access to more robust financial assistance under the health law. In fact, between 65 and 70 percent of 18 to 35-year-olds are expected to qualify for Obamacare subsidies. The youngest Obamacare enrollees are also far more likely to fall in an income bracket (less than 1.5 times the poverty level) where their out-of-pocket expenses are further limited under the law.

Thus, neither low enrollment numbers nor potentially sicker and costlier risk pools “is likely to affect the long term viability of the reforms or to substantially affect the nongroup premiums faced by consumers in future years,” concluded the researchers.