Penalties Too Low to Force Young Adults to Get Insured, Report Says

Before the ink was dry on the Affordable Care Act (ACA) in 2010, Princeton University healthcare economist Uwe Reinhardt, PhD, warned that the penalties for young adults who failed to buy coverage were simply too low—that the United States needed to learn from European nations (which do things like garnish wages) if it was to create a healthy risk pool.

Fast forward 6 years and that prediction by Reinhardt and others is proving accurate—insurers like Aetna and UnitedHealthcare who have bolted from many states say it’s the lack of healthy young people on the exchanges that have sent them packing.

On Tuesday, a day after HHS announced that the average premium hike on the exchanges would be 25%, Aetna CEO Mark Bertolini went so far as to tell Bloomberg that young adults preferred “beer” to Obamacare. More precisely, Bertolini said, in their calculus, it made more sense to pay $695 in penalties and have money left over for gas and entertainment than to pay $1523 for a low-cost silver plan they were unlikely to use. He worries that the exchanges are entering a “death spiral” in which the more premiums go up, the more the young and healthy will drop out.

A new report by Avalere Health suggests the same, as it outlines a host of challenges the exchanges face as the 2017 open enrollment period begins. For starters, the exchanges cover fewer than half the numbers that were projected when the ACA passed. Today, about 10.4 million people are enrolled, compared with the 22 million that were projected by 2016.

Not only does the 2017 Open Enrollment Preview make the same argument about young adult finances as Bertolini, but it notes that in 2017, more adults (12.4 million) claimed individual mandate coverage exemptions than signed up for coverage on the exchanges.

However, it should be noted that as of September 1, 2015, 20 states still had not expanded Medicaid, which put an estimated 3.1 million people in a “coverage gap,” making them ineligible for the exchanges but eligible to claim an exemption, according to the Kaiser Family Foundation.

Besides the dearth of young people, the Avalere Health report notes that the exchanges have not attracted wealthier enrollees—those earning 400% of the federal poverty level (FPL) or higher, or about $47,520 for an individual. Avalere’s analysis found that in 2016, about 80% of those on the exchanges earned 150% of FPL or less (making them eligible for tax subsidies), but only 2% were in the highest income category.

Avalere’s report said a stable employment market may explain some of these trends, but they still don’t help the risk profile of the exchanges. Nor does the fact that the exchanges are dominated by those aged 55 to 64, who account for 26% of the enrollees, even though they account for just 16% of the eligible population.

According to the US Department of Labor, this group experiences a significant drop-off in labor force participation, not necessarily by choice. Labor force participation rates for adults aged 25 to 44 are 80.9% and hold steady for those 45 to 54 at 79.6%, but then drop to 64.1% for those aged 55 to 64. Democrat Hillary Rodham Clinton has discussed allowing this age group to pay to enroll in Medicare, but that proposal would have to be approved by Congress.

Risk management. The Avalere report notes that the ACA created “3 R's” of risk management—risk adjustment, reinsurance, and risk corridors—but the latter 2 are set to expire at the end of 2016. Risk corridors were designed to insulate insurers from losses during the early days of the ACA when they were trying to price products for consumers who had gone their whole lives without coverage, and the whole point was to protect consumers from wild spikes in premiums.

But the losses were never fully funded; the shortfalls were so steep that HHS was only about to pay 12.6 cents on the dollar. This has led directly to the market exits, and with risk adjustment the only tool remaining (and many say a badly designed one that), most experts believe Congress must act to avoid the ongoing trend of winners and losers that has caused the failure of nearly all the co-ops set up by the ACA.