It may not be possible for 5,000,000 people to get their insurance back.
Over 5,000,000 people have lost their existing health insurance under the Affordable Care Act. Even though they liked their health insurance, they were not able to keep it. These people then experienced significant sticker shock when they went to purchase health coverage in the new Exchanges. The President’s solution is to reauthorize health insurance companies to reissue the “banned” policies for an additional year. Forget for a moment the debate about whether the President has the ability to unilaterally modify the requirements of the ACA, the greater immediate concern for those who lost their insurance is: Can insurance companies actually turn those policies back on? What the President doesn’t understand is that it isn’t that easy.
Let’s consider the health insurance market at the aggregate level. While I’ve never worked in the insurance industry, there are some simple price setting rules we can apply to understand how premiums are set. When insurance companies set premiums, they do so based on certain assumptions. First, they have to estimate the cost of total claims that will be paid out during the year. They then have to determine the total amount of revenue they need to generate to pay claims and administrative expenses and provide a profit for shareholders. Based on that total revenue goal, they set premiums.
The challenge the government faces is that these premiums have been set for 2014 and are based on an assumption that 5,000,000 people will be moving to more comprehensive and expensive plans. If they don’t move to the new plans, the premium pricing model is incorrect and premiums are too low for comprehensive plans.
Insurance companies have three options to deal with this situation. They can reissue the cancelled plans and raise premiums on other plans, which they probably can’t do because they’ve been locked in for 2014 by ACA. They can sacrifice profits, even to the point of loss. Or, they can choose not to reissue the cancelled plans.
The fact that the President assumes they can simply be turned back on demonstrates his significant lack of knowledge about how business and the private sector economy work. The implementation of ACA has disrupted the insurance market, and he may just have to live with it.
Dr. Holly A. Bell is an Associate Professor teaching business and economics at the Mat-Su College of the University of Alaska Anchorage in Palmer, Alaska. You can visit her website at www.professorhollybell.com or follow her on Twitter at @HollyBell8