In the fall of 2016, Dr. Tiffany Radcliff and I conducted a series of interviews with Texas health insurers, hospital executives, insurance brokers/ agents and navigators, and with the state Department of Insurance. As part of a five-state study funded by the Brookings Institution, we were interested in how the health insurance exchanges were working, why insurers were withdrawing from some states, and what could be done to enhance insurer competition.
The broad outlines of what has happened are pretty well known to Texans. After expanding competition in the first three years, there were withdrawals from the exchange by UnitedHealth, Aetna, Cigna and Scott & White. Broad-panel PPOs were replaced with narrow-panel HMOs, and premiums increased substantially. Many counties once again had only a single insurer. Even Harris County is reduced to three insurers: Blue Cross Blue Shield, and two traditionally Medicaid managed care plans that have expanded their mission: Molina and Community Health Choice.
What did we learn? We learned that health insurance markets are local. Circumstances in Midland are very different than in Temple or Houston. The issue isn’t just market size, the issue is the availability of hospitals and physicians with which to contract for services. An insurer is only willing to enter a market if it has a reasonable chance at success. This chance depends on the ability to negotiate low enough prices with providers that allow the insurer to offer premiums that are competitive with other insurers. When there is only a single hospital or a single hospital system in the community, insurers aren’t able to effectively negotiate over price. Unfortunately for Texas and many other states, there has been substantial hospital consolidation over the last 15 to 20 years. Some communities won’t see more than one insurer.
Second, we learned that “adverse selection” swamped the emerging insurer competition. Adverse selection occurs when people have better knowledge of their likely use of health services than does the insurer, and uses knowledge when getting coverage. The upshot in the exchange was that many more “sicker” folks enrolled in the exchange plans than the insurers anticipated. One insurer told us that they expected the exchange enrollees to be 30 percent sicker than average, but it turned out they were 70 percent sicker. As insurers discovered these losses – and it wasn’t until the summer of 2016 that they had reliable data – many withdrew from the exchanges. Others moved from PPOs to HMOs in an attempt to mange utilization, and ultimately most of those insurers who remained raised premiums substantially.
Many of our respondents see a “death spiral” in Texas where declining enrollment and higher utilization leads to rising costs and all plans to exit the exchange.
So as the Congress debates health care reform, what might be done to help insurer competition re-immerge in Texas? First and foremost, deal with the adverse selection problem: improve and better-fund the risk-adjustment process used by the ACA or implement a high-risk pool to provide care to those with serious pre-existing conditions. Unfortunately, the 30 percent “late fee” that the Congress was debating for those who don’t sign up for coverage is likely to make adverse selection worse. With this provision, healthy folks of any age have an incentive to forego coverage and only buy it when they intend to use services. The good news is there are insurers offering coverage off the exchange that could quickly re-enter the Texas markets if the adverse selection problem were corrected.
The report can be downloaded at: https://www.brookings.edu/wp-content/uploads/2017/02/texas-aca-competitiveness-2-6-for-print.pdf
Dr. Michael A. Morrisey is a Professor of Health Policy & Management at the School of Public Health at Texas A&M University. His research interests are health insurance exchanges, employer-sponsored health insurance, and healthcare regulations.
