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Why Are Insurers Bailing on Obamacare?

It's no secret that the GOP has never liked the Affordable Care Act, aka Obamacare. Now, as insurers are bailing out of the program right and left, Republicans are taking this phenomenon as proof that Obamacare is inherently flawed. Yet this insurer exodus doesn't owe solely to Obamacare's shortcomings.

Health insurance companies of all sizes have been pulling their plans off the Obamacare Exchanges due to an inability to turn a profit on ACA plans. At this rate, one-third of all U.S. counties are projected to have just one insurer in their exchanges by the end of 2017. One Arizona county was briefly left with no Obamacare insurers when Aetna left the exchange. State and federal regulators eventually persuaded Blue Cross Blue Shield to take Aetna's place, but if insurers continue to pull out of the program, further plan shortages are likely to arise.

Image source: Getty images.

Taking losses

Many insurers say they've chosen to pull out because they're losing money on their Obamacare plans. This isn't entirely surprising, as the people most likely to sign up for healthcare on one of the Exchanges are people who qualify for the premium tax credit and healthcare subsidies -- in other words, low-income Americans. And economically disadvantaged people tend to be in worse health than wealthy or even middle-class people, meaning they're more expensive to insure. Blue Cross Blue Shield says its Alabama Obamacare insurance plans cost the company $1.20 for every dollar it collects in premiums, and Wellmark claims to have suffered $90 million in losses on its Obamacare plans over the past three years.

Subsidy uncertainty

Someone signing up for health insurance through one of the Obamacare Exchanges may qualify for a subsidy if he or she meets certain income requirements. The subsidy reduces their health insurance premiums by a certain amount, up to as much as 100% of the premiums. That aspect of Obamacare is fairly well-known, but what many people don't realize is that an additional subsidy -- called the cost-sharing reduction -- is paid by the federal government to the health insurance provider in some of these cases to help reimburse insurers for lost premiums.

In 2017, the federal government is projected to pay $7 billion in cost-sharing reduction subsidies. However, since President Trump's inauguration, GOP leaders have refused to say whether or not they intend to continue offering these subsidies in future years. This uncertainty has been a big factor in insurance companies' continued flight from the Obamacare exchanges.

State matters

Individual states have also made decisions that affect how expensive Obamacare plans are likely to be for insurers. For example, 32 states allow insurers to continue offering their non-Obamacare-compliant plans. These plans can require health tests to screen out applicants that are in poor health or have pre-existing conditions, and they are allowed to raise their rates for clients who get sick. Thus, people who have these plans tend to stay on them until they get sick, and then transition to an Obamacare plan after their rates go up on the original plan. This greatly increases the percentage of sick clients on Obamacare health insurance plans compared to non-Obamacare plans, making the Obamacare plans far more expensive for insurance companies.

Looking to the future

Until Congress passes healthcare reform in one form or another, the fate of Obamacare (and insurance companies offering Obamacare Exchange plans) remains in limbo. The Senate has just released its version of the healthcare reform bill, and it includes funding for cost-sharing reduction payments through 2019. Should this bill pass the Senate, it should give some much-needed peace of mind to health insurance companies for the near future. However, even if the bill does pass, Congress will then face the task of reconciling the House and Senate bills in order to come up with a final version that can become law. In other words, healthcare reform has a long way to go before it becomes reality.

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