The healthcare debate in Washington is heating up again following the passage in the House earlier this month of the American Health Care Act, the Republican-sponsored legislation to repeal and replace the Patient Protection and Affordable Care Act (ACA), commonly known as Obamacare. While the debate in Washington rages, new research suggests a smaller, and less politically fraught, tweak could significantly improve coverage through the individual marketplaces — extending contract terms from one year to two.
The individual marketplaces created through the ACA have hit a number of stumbling blocks since their launch. The federally run exchange Healthcare.gov notoriously faced a number of technical hurdles during its rollout, and the exchanges have struggled to attract insurers. On May 10, the insurance giant Aetna announced that they would be pulling out of the exchanges in 2018, joining UnitedHealthGroup and Humana. Aetna claims they’ll have lost $900 million in their individual business line between 2014 and when they finally withdraw from the exchanges after the end of this year, due in large part to picking up a significantly less healthy population than they’d planned for. As insurers have attempted to recoup their losses, premiums have jumped as much as 38 percent for the second-lowest-cost plans for a family of four, according to the website PolitiFact.
“There has been a continuing increase in premiums in the markets, accompanied by a shift towards less-comprehensive bronze and silver plans,” explains Olivier Darmouni, an assistant professor at Columbia Business School and an author of the new study. “Our goal was to consider what kind of regulatory reform can be implemented in Obamacare to fix some of the current issues with the market.”
Essentially what is currently happening is a process of adverse selection. Younger, healthier people, — who are inherently lower risk — tend to opt for the cheapest, lowest coverage plans. As the young and healthy pile into lower coverage plans, the overall risk for more comprehensive plans — necessary for older, sicker patients — grows, driving up prices. As those prices grow, the young and healthy are further discouraged from signing up for more comprehensive plans, causing an upward spiral in premiums.
One way to reverse this spiral, Darmouni and his coauthor Dan Zeltzer of Tel Aviv University contend in a new working paper, would be to lengthen the term of health insurance contracts in the individual markets.
Under the current design, low risk individuals, secure in the knowledge they’ll be able to change plans within a year should their health deteriorate, can reasonably gamble on a lower coverage plan in any given year. That creates a “perverse incentive to only switch to higher coverage plans when you get sick,” Darmouni says. Extending the term of the contract to two years makes it much more difficult for individuals to predict the likelihood that they will become sick before their contract is up. “Instead of just thinking about one year in the future, a younger, healthier person has to think farther out, and the risk is harder to predict,” Darmouni says.
By making it riskier to choose low-cost, low-coverage plans, extending the contract term incentivizes healthier people to opt for more comprehensive coverage, making the pools for those plans less risky, causing premiums to fall. While the shift could negatively impact some individuals — namely, those who become unexpectedly ill while locked into a lower-coverage plan for a longer period — the researchers’ model predicts that by lengthening contracts to two years coverage levels would expand 6 percent and “yield average annual welfare gains of $100–$200 per person in aggregate.”
“It would definitely help insurers have a much more predictable view of the risk pool they’re going to have,” Darmouni says. “It’s much easier to know how to price each of these plans when you have people staying on the same plan for multiple years, rather than constantly switching around.”
And the best part of extending insurance contracts from one year to two? It’s a non-ideological solution that leaves market mechanisms — and consumer choice — in place (pleasing Republicans) without doing away with the extended healthcare coverage Obamacare promised in the first place (pleasing Democrats), a rare possible win-win for Congress and the American people.
Read the research
About the researcher
Professor Olivier Darmouni is a financial economist whose research interests span corporate finance, banking and industrial organization. He applies a variety of empirical methods...Read more.