Costly competition? A closer look at the health insurance marketplace

One of the tenets of a free market society is that competition is good and helps keep prices down. Although this theory works well when the good in question is a gallon of milk or a pair of shoes, it becomes a little more complicated in health care—especially when shopping for health insurance.

The Affordable Care Act (ACA), colloquially known as “Obamacare,” established marketplaces—or exchanges—where people without other health insurance can buy coverage. Although the marketplaces are run by the government, people are buying from private issuers, from the major insurance companies to smaller, more local ones.

The much-publicized news that UnitedHealth, the country’s largest health insurance company, is pulling out of the ACA marketplaces in all but a few states has some people worried that a lack of competition will drive up premiums. Indeed, health insurers are preparing for substantial increases in ACA premiums, with average proposed premium costs going up 9.4 to 37.1 percent, which is significantly more than the more-stable employer coverage market.

On the other hand, the reason for UnitedHealth’s withdrawal is because the relatively low premium prices it was charging weren’t sustainable. UnitedHealth wasn’t alone; many companies appear to have underpriced coverage initially. However, as it turned out, not enough of those consumers who joined were the young, healthy people the insurers were hoping to attract.

“The UnitedHealth decision appears to be driven by adverse selection,” said Michael A. Morrisey, PhD, head of the Department of Health Policy and Management at the Texas A&M Health Science Center School of Public Health. “More ‘sicker folks’ joined the exchange plans than expected, generating losses.”

In Texas, the individual health care market is dominated by Blue Cross Blue Shield (BCBS), although they too suffered major losses in the second year of the ACA exchanges. “BCBS responded by dropping broader network preferred provider organizations (PPOs) from their offerings and going to narrower panel health maintenance organizations (HMOs),” Morrisey said. “United is responding by leaving markets it sees as unprofitable.”

Although they do have more than half of the market share in Texas and are the only insurer to offer marketplace coverage in every county, BCBS does face competition from both regional and national insurers. One report that Morrisey authored, published by the Brookings Institution, found that from an insurer’s point of view, establishing provider networks that provide care at reasonable prices is key to insurer success, and regional carriers are much better at this, so they may have forced BCBS to price more aggressively—just to stay competitive—than they might have otherwise.

UnitedHealth, on the other hand, already left the Texas exchange last year. “Our preliminary research suggests that, controlling for other factors, UnitedHealth offered Bronze plan premiums that were more expensive than the average BCBS plan, but its Silver and Gold plans were less costly than the average BCBS plans in those tiers in Texas,” Morrisey said. Bronze plans pay about 60 percent of the health care costs, leaving about 40 percent of the costs to be paid by the consumer. With silver and gold plans, the insurance company pays more—about 70 and 80 percent, respectively. “So, what impact their departure has is likely to be greater in the Silver and Gold segments of the exchanges.”

Across the United States, competition increased in most areas between 2014 and 2015, with nearly 60 percent of counties having a net gain of at least one issuer, while only 8 percent of counties experienced a net loss of issuers, according the the United States Department of Health and Human Services. Competition among insurers helps to limit premium increases; in counties with a net gain of issuers, premiums for the second-lowest silver plan increased 8.4 percent less from 2014 to 2015 than in other areas without robust competition.

Still, Morrisey doesn’t see the UnitedHealth departure as adversely affecting competition in most places. “The United departures will have little impact in most markets,” he said. “It has been very careful about which markets it entered, and seldom was it a major player.”

“However, its departure will likely have a bigger impact in a few markets where it had a major presence,” Morrisey continued. “The Kaiser Family Foundation suggests, for example, that Oklahoma markets will feel the impact of their departure. However, health insurance markets tend to be local, defined by the ability to negotiate contracts with providers.  So, it’s likely to be a few markets in Oklahoma, rather than the whole state that is affected.”

Furthermore, the proposed premium increases won’t be what consumers will actually pay. Regulators in each state will take the proposals through a rate-review process that may not approve some of the higher rates. Furthermore, the ACA provides tax credits to more than 80 percent of customers, and that assistance will increase as premiums rise.

“United’s withdrawal together with the losses experienced by other carriers suggests that the exchange markets have had much higher claims experience than the carriers anticipated,” Morrisey said. “We should expect to see rising premiums, continued moves to narrower networks and more withdrawals in the future.”