Anatomy of a death spiral

The loss of healthy enrollment leads to such an expensive risk pool that no one can afford to buy coverage, thus killing the market.

In just three years, new insurance regulations imposed by the Affordable Care Act (ACA)—otherwise known as Obamacare—have injected a devastating amount of volatility into Minnesota’s individual health insurance market. Health plans report enrollment dropped to 190,000 people in 2017, down from 293,000 in 2014. This 35 percent drop follows from steep premium increases in the neighborhood of 30 percent for 2016 and another 55 percent for 2017.

These numbers clearly show Minnesota’s market is in a death spiral. As premiums rise, healthy people are dropping coverage and leaving sicker, more expensive people behind in the individual risk pool. The sicker pool requires even higher premiums, which then leads to another cycle of healthier people who drop coverage. Actuaries call this a death spiral because at some point the loss of healthy enrollment leads to such an expensive risk pool that no one can afford to buy any coverage at all, killing the market

What led to the present tumult? To better understand the present problem and possible solutions it’s helpful to review the basics of insurance.

Most insurance products—auto, home, life, etc.—are bought and sold within a relatively free and competitive market.

With some regulation, competitive markets deliver affordable insurance for most people.

Importantly, in a free market, insurers must charge a premium based on the predicted risk of each customer, which works fairly well for most insurance markets, but presents serious challenges for health insurance.

If health insurance worked like auto insurance—for which premiums are adjusted from one coverage period to the next based on any new information the auto insurer gleans about a customer’s risk—then insurance premiums would likely become unaffordable to anyone in the year following an expensive health diagnosis, such as diabetes or multiple sclerosis.

To address this issue, Minnesota regulations, even before the ACA, required health insurers to guarantee renewal of coverage each year without adjusting premiums for any change in risk.

Then there is the much bemoaned problem of people with a preexisting condition who need to buy coverage. In a free market without rate regulation an insurer would either reject the applicant or need to charge a risk-adjusted premium that would likely be unaffordable to all but the very rich.

Unlike other losses people might experience—a stolen car, flooded basement, and even the death of a spouse—society has a very, very hard time saying tough luck to
someone with a preexisting condition.

Prior to the ACA, states tended either to require insurers to guarantee coverage to all regardless of health status, or to create high risk pools that provided guaranteed coverage to people with preexisting conditions through a separate pool outside the individual market.

Back in 1976, Minnesota lawmakers opted for the high risk pool option and created the Minnesota Comprehensive Health Association (MCHA). Over the years MCHA was widely acknowledged as a model for how a high risk pool can successfully foster a stable individual health insurance market.

Leading up to the 2008 presidential election, the Washington Post reported how MCHA reflected a key component of John McCain’s vision for reforming health care. The article explained, “Among the high-risk pools in 34 states, Minnesota’s is the oldest,
largest and, many believe, the most successful. ‘It just seems to work,’ said Doug Holtz-Eakin, senior policy adviser to McCain.”

MCHA did seem to work. Minnesota’s individual market was not subject to abnormal premium or enrollment swings in recent years. Figure 1 shows individual market premium rate increases followed group trends between 2000 and 2013. Over the same period, enrollment grew between 2002 and 2006 and, otherwise, remained consistent from year to year. In 2009, the last year AHIP surveyed state individual health insurance markets, the average annual premium for single coverage was $2,978 in Minnesota, nearly identical to the national average of $2,985.

Though the ACA became law in 2010, the major insurance regulations did not kick in until 2014. Since then, Minnesota’s individual insurance market has been possibly the most volatile in the country

Minnesota entered the ACA era with the lowest rates in the nation. But, since then, rates rose in dramatic fashion. To compare states, the Kaiser Foundation identifies the premium for the second-lowest cost silver plan for a 40-year-old non-smoker in each state’s largest market. In 2015, Minnesota premiums jumped 19 percent, the second largest increase next to Alaska. Premiums jumped another 29 percent in 2016, a higher jump than all but six other states. Then, in 2017, rates spiked another 55 percent. Altogether, rates rose by 138 percent over those three years.

These are just rate increases reported for the Twin Cities, which happens to be one of the lower cost regions in the state. Some Minnesotans faced triple-digit increases in 2017 alone.

After these rate hikes, according to a federal report, average premium rates in Minnesota are now 13 percent higher than the national average for a young adult purchasing the second-lowest cost silver plan and nearly 30 percent higher for a family of four.

As rates jumped, enrollment dropped. Starting at 293,000 in 2014, Minnesota’s health plans recently reported that enrollment for 2017 declined to 190,000, a 35 percent drop.

Health plan choices are also shrinking. Blue Cross Blue Shield of Minnesota exited the market. HealthPartners left 56 counties and is now only available in the Twin Cities and St. Cloud region. Medica stopped selling products outside MNsure, the state ACA insurance exchange. And every plan except Blue Plus imposed caps on enrollment. These exits reduced the number of health plans available through MNsure from 47 to 18 in 2017. Making matters worse, the health plan choices that remain are nearly all narrow network plans.

After a 55 percent premium spike and a 62 percent reduction in plan choices in just one year, the 2017 market looks nothing like it did before.

How is it that Minnesota’s individual health insurance market experienced such devastation in such a short amount of time?

To begin, the ACA’s new insurance regulations aimed at covering people with preexisting conditions opened up opportunities for people to game enrollment and wait until they needed care before buying coverage. The guaranteed issue requirement forced insurers to sell coverage to all comers. The community rating requirement then restricted insurers from basing premiums on health status.

With a guarantee in place, the only obstacle to people waiting to get coverage until they need care is the ACA’s open enrollment period that limits enrollment to one period during the year. However, the open enrollment period isn’t nearly tight enough to stop people from gaming the system. The open enrollment period ran for four and half months in 2014 and three months every year thereafter, which opened far too much time for gaming.

Also, anyone could sign up outside the open enrollment period through a special enrollment period by claiming they experienced a special life event, like a lost job or a divorce. The trouble is, no one verified these special life events. The enrollment system depended on self-attestation.

According to proposed federal rules to stabilize the individual market, people were indeed gaming the system. They cite a study that found 21 percent of consumers stopped paying premiums in 2015. Of those people, 87 percent repurchased plans in 2016 and nearly half of them repurchased the same plan.

These new regulations upset Minnesota’s market to a far greater degree than most states. The regulations forced Minnesota to move from a stable model—MCHA—to a completely different model. States that had already required guaranteed issue didn’t experience much of a change. And unlike states with less effective high-risk pools, Minnesota had been covering a much larger number of people through MCHA. As a result, Minnesota’s individual market was exposed to the largest influx of people from a high-risk pool in the country.

What really set Minnesota apart were state actions regarding MinnesotaCare, MNsure, and rate setting.

First, Minnesota decided to step forward as the first state to establish a Basic Health Plan (BHP) for people with incomes between 138 and 200 percent of the federal poverty guideline. The state BHP operates as a continuation of MinnesotaCare—an existing state program to provide health care to working adults and families. MinnesotaCare now functions as an alternative to using tax credits to buy individual market health plans. This decision removed around 100,000 potential customers from the individual market. By reducing the number of potential customers, the BHP reduces a health plan’s incentive to participate.

Second, the state completely botched the rollout of MNsure in 2013. Severe technical problems made it very difficult to enroll in coverage through MNsure and its entirely likely large numbers of people failed to persist in purchasing coverage. Less healthy people, of course, had a much stronger incentive to persevere through the shopping experience. As a result, technical problems with MNsure may have attracted the more persistent, higher-risk customers. Modeling by economists Florian Scheur and Kent Smetters suggests this type of adverse selection might have long-lasting impacts on the market by steering the market to converge to a bad equilibrium.

Third, and by far the most damaging action, the Minnesota Department of Commerce placed pressure on insurers in 2013 to keep 2014 rates unreasonably low. As reported
by the Star Tribune, “Sometime after the insurer PreferredOne submitted its proposed rates for the first year of the MNsure exchange, state regulators asked the company to consider lowering the numbers” and the insurer then “responded with ‘a total rate decrease of 37 percent,’ according to a July 2013 letter from an outside actuary to the company.”

Research on the early impact of the ACA by Yale economist Amanda Kowalski confirms Minnesota rates were more out of touch with reality than any state in the country. Kowalski collected data on the average monthly premium and average monthly cost for individual market policies in the first two quarters of 2013 and 2014. Her data shows Minnesota was the only state in the country where the average cost incurred by insurers exceeded the average premium paid in the first half of 2014.

Setting 2014 rates so low triggered a chain reaction leading to where we are today. To start, PreferredOne attracted a disproportionate share of former MCHA enrollees in 2014. Both PreferredOne and MCHA enrollees were new to the individual market. Without any base of customers carrying over from 2013 and offering among the lowest rates to new MCHA entrants, PreferredOne must have accumulated a disproportionate share of former MCHA members.

After attracting so many high risks, PreferredOne responded by dropping coverage through MNsure in 2015 and raised rates by 63 percent. In response, most of the 77,000 people enrolled in PreferredOne left the company. 2015 enrollment data suggests a majority of them migrated to Blue Cross Blue Shield (BCBS), which experienced a surge of 41,000 enrollees in 2015. Then in 2016, BCBS enrollment dropped from 193,000 to 103,000. No doubt those leaving BCBS were healthier people fleeing the sicker population BCBS attracted from PreferredOne. That left BCBS in an untenable position and, after losing an estimated $500 million in the first three years of the ACA, BCBS announced they would exit the market.

For 2017, the 103,000 BCBS enrollees who got canceled needed to find a different plan. Again, these are likely higher risk people. Knowing this, the remaining Minnesota insurers have employed every trick in the book to avoid attracting them. They’ve narrowed their networks, set enrollment caps, and Medica even stopped paying brokers to sell their product.

To sum up, gaming open enrollment, the infusion of MCHA enrollees, opting for a basic health plan, botching the MNsure rollout, and setting rates too low all worked together to create the necessary ingredients for a death spiral—a deteriorating risk pool, rising premiums, and declining enrollment. The dramatic deterioration of the individual market’s risk profile is revealed in Figure 2. In the space of just two years, the individual market went from having 33 percent lower medical claims per member month than average to 15 percent higher.

With around 100,000 disproportionately high risk people leaving BCBS for a different plan in 2017, the cycle begun in 2014 could persist this year if too many high risks again latch on to any one plan. If that happens, the state may experience the loss of a third health plan in 2018. However, with most health plans taking the same approach to avoid those high risks, there may be less reason for high risks to gravitate to any one plan, at least where a choice of plan exists.

Adding to the uncertainty is the ongoing debate in Washington D.C. over how to repeal and replace the ACA, as well as the ongoing debate in Minnesota over how to stabilize the individual insurance market in the face of all that federal uncertainty. For 2017, state lawmakers agreed to buy down premiums by 25 percent, which gave people a last minute opportunity to buy into the market who are hopefully lower risks. Throwing money at the problem was really the only thing lawmakers could do to achieve any immediate impact.

Can Minnesota’s individual market pull out of its death spiral? Maybe,
so long as the market settles to some equilibrium in 2017, federal repeal and replace doesn’t aggravate the problem, and state lawmakers remain committed to doing everything they can to stabilize it.