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Obamacare ‘Death Spirals’ Aren’t Going to Happen

Apr 10, 2017

President Donald Trump is fond of saying that he will simply let Obamacare "explode" (or implode, then explode). But the health law's marketplaces are actually becoming more stable and may even churn out profits for some participating health insurers by 2018, according to a new Standard & Poor's report.

Trump's insistence that Affordable Care Act (ACA) markets are exploding is based on some legitimately bad news for Obamacare. Health insurers announced substantial premium increases for individual plans sold through the law's exchanges last year (although many of these increases are counteracted by federal subsidies), and insurance companies like Humana have been announcing their departure from the marketplaces, citing losses and general uncertainty surrounding the law. Critics have predicted that this combination of events will lead to a so-called "death spiral" in which Obamacare becomes increasingly expensive and unsustainable, eventually causing a market collapse.

But S&P's dive into the operating performance of Blue Cross Blue Shield plans—which make up the backbone of the individual insurance market and the bulk of the Obamacare exchanges—finds that "2016 was a marked improvement" over previous years for most BCBS insurers. "Our analysis of 2016 results and the market enrollment so far in 2017 shows that the ACA individual market is not in a 'death spiral,'" wrote the S&P analysts.

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S&P also believes that many insurers in the marketplaces are likely to stop bleeding money this year—and may even start making some in the next.

"Looking forward, we expect insurers, on average, to get close to break-even margins in this segment in 2017," wrote the report authors. "If the market continues unaffected, with a few fixes rather than an overhaul, we expect 2018, or Year 5 of the ACA individual market, to be one of gradual improvement with more insurers reporting positive (albeit low single-digit) margins."

The gradual improvement makes sense considering the multiple complexities of the individual market. Before Obamacare's enactment, this market, which is just a sliver of the overall health insurance sector, was essentially the wild west. There were very few rules governing benefits, medical underwriting, or discrimination against the sick; unlike in employer-sponsored health insurance, there were few entities keeping track of the market and its finances.

So when insurers set their premiums for the first time under Obamacare's new regulations, they were essentially playing a huge guessing game. How sick would enrollees be? How many would sign up? How much would it cost to cover them? And would customers remain in the market year after year?

It takes a fair bit of time—and plenty of corrections, such as the steep 2017 premium increases—to both answer these questions and then makes changed to fit the market reality. That's finally beginning to happen, according to S&P, as insurers gain a more nuanced understanding of the exchanges and adjust to the expiration of several early-year Obamacare programs meant to stabilize the markets.

But none of that means that the markets will be fine and dandy going forward. Uncertainty is the single biggest threat to insurance company participation in Obamacare, meaning President Trump and Congress' ongoing efforts to dismantle the law could still wreak havoc on the ACA if ultimately successful.

That's a fact that S&P acknowledges right up top. "[I]f there are significant changes to the individual market, or if [subsidies to insurers that help reduce customers' out-of-pocket costs] are made null and void, the market essentially has to restart with a new set of rules," the analysts wrote.

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