The new administration and Congress are under intense pressure to craft a market-based alternative to the Affordable Care Act. It won’t be easy. To achieve the financial stability required to make the market work, reformers should heed some important lessons from California.
Health plans and risk-taking medical groups essentially made a “deal” with Congress to participate in the ACA. They agreed to cover applicants with pre-existing conditions without charging higher premiums in return for: an expanded individual market driven by a federal mandate that everyone buy insurance; premium and cost-sharing subsidies financed by insurers and the government; and three federal risk-mitigation programs to help stabilize the new marketplaces.
It didn’t work out. Many health plans were priced incorrectly because more sick people enrolled and fewer healthy people signed up than expected. To compound the problem, Congress held up billions of dollars in promised payments from the federal risk corridor program to partially offset losses.
Most health plans responded by raising premiums. This year, premiums on the federally run exchanges rose about 25 percent, raising the annual benchmark premium to $5,586 for single coverage. Even then, about two-thirds of insurers are losing money in the individual market, several in the hundreds of millions of dollars.
For a model of how government and health insurers can work together to sustainably expand coverage and ensure stable markets, Congress should examine what happened in California.
Covered California, the state-run marketplace, took several steps to ensure long-term health plan involvement. The result has been a robust, competitive exchange that covered 1.5 million people in 2016 across 12 insurers. Premium increases were half the national average.
Here are the California approaches that any federal replacement plan should encourage other states to adopt:
Manage the marketplace. California’s exchange is not a free-for-all for every insurer that wants to participate. Rather, it’s managed proactively. Plans are required to offer standardized benefit packages – e.g., set copayments and deductibles, and capped monthly drug costs. These features may seem to limit choice, but behavioral research has found that it also makes consumers better shoppers. California also actively negotiates rates with the plans, just as employers do, and requires adherence to quality goals.
Ensure a balanced risk pool. Health insurance plans must continuously attract healthy people to subsidize the costs of the less healthy. By expanding its Medicaid program in 2011, the state assumed the costs of enrolling some of the sick and disabled. Also, California did not grandfather “pre-ACA” plans, thus ensuring a level playing field for health plans that had to price for new, standardized, comprehensive policies. It also ensured that the relatively healthy people with “pre-ACA” plans joined the ACA market.
Aggressively market the exchange. Covered California successfully targets its marketing to younger and healthier people to achieve more balanced risk pools. If there is no individual mandate, it will be even more important to allow exchanges and insurers to aggressively market their plans. The Trump administration decision to halt ACA advertising impacted sign-ups, demonstrating the importance of marketing throughout the enrollment period.
Finally, the president and Congress must honor their commitments to states and health plans in any replacement plan. Health plans are in the business of managing risk. Certainty needs to be built in to any new rules so premiums can be set accurately.
Congress has an opportunity to establish a long-term political legacy with viable health reform legislation in cooperation with the private sector. To make it work, they will need the nation’s health plans as fully committed partners, just as they are in California.
Leonard D. Schaeffer is the founding chairman and former chief executive officer of WellPoint, known as Anthem. He is the founder of the Leonard D. Schaeffer Center for Health Policy & Economics at the University of Southern California. He can be contacted at email@example.com. Dana Goldman is director of the Schaeffer Center and a professor of public policy, pharmacy and economics at USC. He can be contacted at firstname.lastname@example.org.