Increase Competition under The Affordable Care Act

May 2016

By David Friend, MD and Scott Gottlieb, MD
A recent analysis by Kaiser Family Foundation shows that more than 650 counties are on pace to have just one insurer on their state exchanges in 2017.
This is mostly a result of exits by large insurers such as Aetna and United Healthcare. Competition is diminishing under the Affordable Care Act. Even Blue Cross Blue Shield plans, which are the backbone of the exchanges, are struggling in many states. In fact, the only large insurers that are growing their exchange footprints are the Medicaid HMOs like Molina Healthcare. But their presence is still too small to offset the plans that are exiting.
These problems rest with a combination of factors that have made it hard for health plans to turn a profit in the exchanges, but easy for them to lose money. That has left existing insurance carriers weary of entering the exchanges, or expanding their presence. But equally important, regulation has made it very hard for brand new health carriers to get started.
When Medicare’s Part D drug benefit and its Medicare Advantage program first launched, hundreds of new carriers started to offer products in these markets. Many were backed by venture capital. When it comes to the ACA, there has been no new net health carriers started since 2008. In other words, for the small number of new carriers that got started (mostly “co-ops” and provider sponsored plans) there were an equal number of exits.
That means most of the “new” insurance plans on the exchanges are just different iterations on health plans already being offered by legacy insurance carriers. The ACA has been devoid of the kind of brisk new health plan company formation that was seen with the launch of Medicare’s Part D drug benefit and its Medicare Advantage program. The question is, why?
One of the big culprits, we believe, is the cap that the ACA places on the operating margins of insurance carriers. Under new provisions, insurers can only spend 20 percent of their premiums on running a health plan if they offer policies directly to consumers or to small employers. The spending cap is 15 percent for insurance policies sold to large employers.
The Obama Administration included these provisions as a way to manage insurance industry profits and, more notably, to make sure that the bulk of premium revenue was funneled back to patients in the form of medical care. But the provisions have had an unfortunate consequence -- constraining the ability of brand new insurance carriers to get started.
Health plans often lose more money when they are first launched. This is, in part, a result of high start-up costs associated with a new insurance plan. So new carriers need to channel a higher proportion of premium revenue into overhead to pay for start-up costs. For these reasons, the medical loss ratios are typically low on new plans. They erode over time as more of the premium revenue is consumed by medical costs and less is spent on overhead.
Caps on profit margins make it hard for new insurers to get started. These rules have the effect of favoring existing carriers that don’t have start-up costs. They also favor larger insurers that are able to spread their administrative costs over a larger number of health plans and beneficiaries. The ACA included some provisions to exempt very small plans (with low enrollment) from these caps. But these “credibility adjustments” are so narrow that few plausible start-up health plans will qualify. Moreover, new plans would quickly outgrow the exemptions, even though their high start-up costs would persist for many years. So the exemptions don’t offer much of a reprieve to brand new, start-up health plans.
If policy makers want to instigate more competition on the exchanges, they can start by broadening these “credibility adjustments” to make it easier for new plans to get started. The exemptions should cover any brand new carrier that enters the exchanges. They should apply for an extended period over which a carrier can expect to face high start-up costs.
This reprieve would make it easier for new health plans to attract capital to enter these markets. It’s one step toward enabling more choice and competition on the exchanges.