Understanding the Challenges Facing the Health Insurance Exchanges

A new study by Avalere Health identified the key challenges facing health insurance exchanges created by the Affordable Care Act (ACA) and considers a range of potential policy options that could be combined to improve the sustainability of the market into the future.

For example, the new analysis found that individuals who enroll in exchange coverage through special enrollment periods (SEPs) in fact have higher costs and lower risk scores than open enrollment period (OEP) consumers. Specifically, the SEP enrollees in 2015 had 5% higher per-member, per-month (PMPM) costs than the OEP enrollees. Their risk scores were also 20% lower on average.

“Consumers enrolling through special enrollment periods have higher healthcare spending than those picking a plan during open enrollment, and they are staying in the program for shorter periods of time,” said Dan Mendelson, president of Avalere. “This is one of many technical problems that is presently destabilizing this program, and should be fixed by the administration and the Congress to ensure continuity for patients.”

Challenges Facing the Exchange Market

Since their inception in 2014, exchanges have enrolled millions of consumers in health insurance. While it is a major accomplishment considering one-third of these enrollees didn't even have insurance before, some challenges still remained.

Enrollment was lower than projected: Even though millions of Americans enrolled in the exchanges, the numbers were still short of projections. The Congressional Budget Office had projected 22 million enrollees by 2016. However, based on the current trends, enrollment by the end of 2016 is expected to be just over 10 million.

Penalties may be less effective: The ACA had established an individual mandate penalty for individuals who forgo purchasing insurance. However, the penalty was too low to effectively attract enrollment. For middle-income, healthy individuals, paying the penalty was easier than opting for insurance.

Adverse selection of exchange population: The population that has enrolled in the exchange programs in fact did not represent the population eligible to enroll. The enrollees were disproportionately older, lower-income, and in poorer health than the potential population.

Overall, the lower-than-expected enrollment, a costlier and less stable enrollee population, and inadequate risk mitigation programs are posing a threat to the stability and sustainability of the market.

Policy Options to Combat Challenges

The paper also provides a range of potential solutions that may improve the long-term viability of exchanges. They include:

• Improving risk mitigation programs
• Increasing accuracy of the risk model by reconsidering coverage criteria for the diseases included in the model
• Shortening grace periods from 90 days to 30 days
• Increasing individual mandate penalty
• Offering new plan options to attract younger and healthier enrollees at lesser cost and additional benefits

The report concluded: “A combination of these and other policies may need to be considered by the executive branch, Congress, or states to ensure market stability into the future.”