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Medicaid for the Middle Class?

Medicaid for the Middle Class?
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By Saeculum Research

  • Beware: The public exchanges are entering a “death spiral.” Though the ACA intended to create a health care option for the middle class that curbed costs and expan­ded coverage, public exchanges have attrac­ted a costlier customer base than anticipa­ted—prompt­ing many of the nation’s lar­gest health in­surers to jump ship. The ACA has only further fragmen­ted the health care universe—with growth in the lower-tiered plans (Medi­caid) far out­pacing the upper- and middle-tiered options (employ­er-provided and public exchanges). Look­ing ahead, the fu­ture of health care may be in more cost-effective options like value-based reim­bursement and “capitated care.”
  • Watch for more states to abandon their ACA exchanges. More than 650 counties could have only one marketplace insurer in 2017—with one Arizona county poised to have zero Obamacare options. Some states are taking drastic measures to stop the bleeding: Mississippi approved a 43 percent rate increase to keep Humana. Others may shut down their exchanges entirely now that federal subsidies have run dry. KFF’s Larry Levitt predicted last year that half of state-run exchanges could be abandoned within five years. This would likely hurt plan quality, since states can mandate higher benefits than federal law requires. Thus, fleeing from state exchanges would only further accentuate the “Medicaid-ization” of middle-class health care.
  • Insurers should brace for an impending dearth of high-margin private customers. In 2012, per-enrollee private health care spending for 45- to 64-year-olds was $7,131, $2,000 more than the next-youngest age group. But demographic headwinds threaten this figure: The 45- to 64-year-old population is poised to shrink 2 per­cent by 2030 while the 65+ population will surge 45 percent, the effect of successive Boomer cohorts aging into elderhood. This shift represents the worst of both worlds for insurers. They will face shrinking demand from their highest-margin customers while reaping none of the cost savings—since providers won’t see any shor­tage of demand thanks to a new flood of elderly patients funded by public benefits.
  • Don’t expect the 2016 election results to settle the matter. Clinton has vowed to “defend and expand the Affordable Care Act,” partially through the creation of a government-managed insurer (the “public option”). However, this will only work if the federal gov­ernment can spend enough to incentivize healthier indi­viduals to enroll—something a GOP-controlled House would never agree to. Trump wants to repeal the ACA and to free insurers from antitrust regulations and laws that pro­hibit them from selling policies across state lines—a difficult task considering the complexity of negotiating prices with vast numbers of providers. Nothing that Clinton or Trump has proposed could, realistically, save America’s middle class from health-insurance limbo.

U.S. health insurance heavyweight Aetna recently announced it will leave the public exchanges in 11 out of the 15 states where it currently operates. The company is not alone: Other big-name insurers like UnitedHealthcare and Humana are also heading for the exits. What’s going on? The Affordable Care Act (ACA) set a number of lofty, unrealized goals for U.S. health care. It was supposed to create a new government framework for affordable middle-class health care, but instead the exchanges have attracted a dispropor­tionately costly and lower-income customer base. More broadly, the ACA was intended to extend coverage to the uninsured while simultaneously cutting costs. Instead, cost growth has accelerated, which means that the U.S. health care system must find new ways to rein in spending—such as limiting consumer choice.

The ACA was signed into law by President Obama six years ago amid high hopes that it would become the glorious future of American health care. Through the creation of public exchanges, the law was supposed to provide a standardized hub where all of Middle Amer­ica could find quality health care. The ACA was also supposed to reduce health care spend­ing while slashing the uninsured rate.

Each of these plans has unraveled. The public exchanges have fallen into a two-pronged “death spiral” that both pushes out healthy customers while rais­ing premium prices. The ACA encour­ages lower-income individuals to sign up for marketplace plans through subsidies that eclipse three-fourths the cost of an average premium. This in turn shifts the cost burden onto healthier, more affluent enrollees who do not qualify for subsi­dies, which disincentivizes them from signing up. New York Times correspon­dent Margot Sanger-Katz observes that instead of resembling employer-provided coverage as intended, “the typical Obamacare plan looks more like Medi­caid, only with a high deductible.” Of course, an influx of young, healthy custo­mers would help reverse the flow of this death spiral—but plenty would rather pay the Individual Mandate than shell out thousands annually for a policy.

The upshot of a less-healthy mar­ketplace is that many big insurers have no choice but to exit. United will operate in just three state marketplaces in 2017—down from 34 in 2016. Humana will offer exchange plans in only 156 counties in 2017, down from a whop­ping 1,351 in 2016. Blue Cross Blue Shield of Minnesota will soon become the first “Blue” to exit a state. This exodus was hastened by the GOP-led closure of “risk corridors,” further hammering insurers that were relying on government funding to offset their losses during the ACA’s early years. In all, three-quarters of insurers—including the entire “big five” (United, Anthem, Aetna, Cigna, and Humana)—lost money on their exchange plans last year.

In fact, the only insurers profiting on the exchanges are those that assumed higher risk from the outset—or those used to working in cost-constrained environments. Insurers like Kaiser have managed to succeed through higher premiums and narrower provider net­works. Kevin Counihan, CEO of the Obamacare marketplace, is particularly bullish on the Blues for their ability to profit without narrow networks. The real dark horses have been traditional Medicaid insurers like Centene and Molina Healthcare used to low margins. These firms may even expand their exchange offerings, according to recent earnings calls.

Given what has happened with the public exchanges, what we are left with is a health care system that is much more divided by income and class than anyone expected.

Instead of a booming middle-market health care option (the exchanges) with smal­ler tiers above (employer-provided coverage) and below (Medicaid), our current health care universe is more fragmented than ever. At the high end, employer-provided plans are themselves splintering. The Kaiser Family Foundation (KFF) finds that nearly half (49 percent) of insured Americans are still covered by employers. But thanks to the looming “Cadillac tax,” fewer high-margin businesses are bearing the full brunt of em­ployees’ health care. Some are building “private exchanges” and giving employees a sti­pend toward the cost of a plan, while others are offering consumer-directed health plans—tax-free medical savings accounts with a built-in high-deductible plan for emergencies.

One step down, the individual insurance market is holding strong—largely because consumers are reluctant to drop their old plans. KFF estimates that, three full enrollment seasons in, 57 percent of all non-employer plans were purchased outside of the exchanges. This figure includes “grandfathered” plans purchased prior to the signing of the ACA (which never expire), as well as “grandmothered” plans purchased prior to the start date of the first open enrollment (which must terminate by the end of 2017).

Finally we have the rapidly growing Medicaid market, as well as public exchanges that are becoming progressively more Medicaid-like. As we’ve mentioned before (see: “After Euphoric 2015, Health Care Industry Faces ACA Hangover”), the ACA’s federal reimbursement provision has led to a full-fledged Medicaid explosion. The latest KFF data indicates that monthly enrollment for Medicaid and the Children’s Health Insurance Pro­gram is up 27 percent from pre-ACA levels. All told, 11 million Americans have gained Medicaid coverage since the ACA’s rollout, accounting for more than half of all Amer­icans who have gained insurance during that period.

The ACA’s second goal, curbing health care spending while broadening coverage, clearly has not happened in full. While the nation’s uninsured rate has dropped steadily post-ACA, total health care spending has climbed to 18.5 percent of GDP as of June 2016, an all-time high. Because the ACA did away with most of the old methods of marketplace rationing (like underwriting, limiting coverage, and lifetime spending caps), officials will need to find some other way to cut costs. One answer would be to offer more high-deductible plans, since members of these plans may think twice or “shop around” before seeking care that may be unnecessary. Yet high deductibles are a poor means of encour­aging most providers to offer more cost-effective care. What’s more, they are a nonstarter for Americans who simply can’t afford to pay a high deductible.

A better way to incentivize providers to be cost-effective is to implement policies that measure and reward quality of care. Methods like “value-based reimbursement” can clamp down on cost by measuring the quality of care that patients receive and rewarding star-performing providers with a portion of the savings. The federal government is already instituting changes that emphasize value, such as the Medicare Shared Savings Program.

But the ultimate future of health care may lie in a more draconian method of care provision: “capitated care.” Here, insurers pay providers a flat, risk-adjusted fee based on the number of patients under their care. This method has been proven to reduce costs by as much as 20 percent while improving patient satisfaction and quality of care. As an added benefit, capitated care would help the entire health care system by reducing physi­cian burnout. (See: “Goodbye, Dr. Welby.”) If quality of care can be successfully integrated into a capitated system, it may be our best shot at making the ACA’s optimistic dream a reality.

Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.

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