Featured in Health Business Daily, Jan. 10, 2017

Unknown Future of ACA Puts Blues Plans In an Uncomfortable Spot Heading Into ’17

Reprinted from THE AIS REPORT ON BLUE CROSS AND BLUE SHIELD PLANS, a hard-hitting independent monthly newsletter on new products, market share, management strategies, profitability, strategic alliances and executive compensation of BC/BS plans. (Not affiliated with the Blue Cross and Blue Shield Association or its member companies.) Sign up for a $72 two-month trial subscription today.

December 2016Volume 15Issue 12

Given the enormous uncertainty around the shape health policy will take under the incoming Trump administration, Blue Cross and Blue Shield executives probably haven’t had a good night’s sleep since Nov. 7. Blues plans with a large stake in the public insurance exchanges, and those that are in the Medicaid managed care space, could have the most to lose (see table, p. 5).

But industry observers tell The AIS Report that the health insurance landscape isn’t likely to change much in 2017. And there could be opportunities on the horizon depending on the shape Health Reform 2.0 takes.

Overall, more than 20 million people have obtained coverage through the heavily subsidized public exchanges or Medicaid eligibility expansion, which will likely prevent an immediate demolition of the Affordable Care Act until alternatives are defined under a replacement plan.

The AIS Report on Blue Cross and Blue Shield Plans

Collectively, Blues plans have about 3.7 million people who enrolled in coverage through a public exchange, and nearly 9 million in Medicaid managed care plans.

In the six years since the Affordable Care Act (ACA) was enacted, most Blue Cross and Blue Shield plans have invested and repositioned themselves strategically and operationally, says Joseph Marinucci, an analyst at the ratings firm Standard & Poor’s. Given the expanded access to coverage, a full repeal of the law would represent a significant and disruptive change for the sector, he says.

‘Replace’ Is an Unknown for Blues

But there could be opportunity for Blues plans, too, if an alternative to the ACA “supports sustainable access to coverage by means of a private-sector solution,” says Marinucci. He says it’s likely that some parts of the ACA will continue in a modified form, while others will be repealed.

“It’s the lack of specific details on the replacement plan that creates uncertainty in the near term,” he says. “In the longer term, ‘repeal and replace’ may reduce the size of the ACA individual market and limit future growth in the Medicaid market,” he says.

In terms of timing, he expects “repeal and replace” to be a 2018, rather than 2017, event.

In a prepared statement, the Blue Cross and Blue Shield Association said it looks forward to working with the new president and Congress to improve the health care system and “ensure that Americans have access to high-quality healthcare at a price they can afford.”

The association said it is sharing ideas for improving the individual market “so that consumers have more choices, better prices and a robust private marketplace that is predictable and stable.”

Analysts See Little Future for Exchanges

While a few Blues plans, such as Florida Blue and Horizon Blue Cross Blue Shield of New Jersey, have done well on the exchanges, others have lost millions of dollars on a population that was far more costly than expected. “I give credit to the Blues plans for staying in the exchanges, losing money and hoping for the best, but there has to be a limit,” according to Sheryl Skolnick, an analyst at Mizuho Securities, USA Inc. Skolnick was one of three panelists at the 21st annual “Wall Street Comes to Washington” roundtable, which was held Nov. 15 at the Brookings Institution in Washington, D.C. “There is no question that the exchanges are deeply flawed for a lot of reasons. What surprises me is that it took this long for the companies to figure it out,” Skolnick quipped.

“It wouldn’t take much to throw [the exchanges] into a tailspin,” added Matthew Borsch, an equities analyst at Goldman Sachs. “There is a fear of being the last plan standing in these markets. In that scenario, you’d be looking at a complete unwind [of the ACA] where the only good news is that it would demand a solution.”

Carriers will need to submit their 2018 product offerings and proposed rates in April — less than three months after President Trump takes office. Given the uncertainty around the exchanges, the individual mandate and federal subsidies, carriers might decide to pull out, especially if a repeal bill is quickly pushed through Congress without outlining a replacement.

Ana Gupte, an analyst at Leerink Partners, noted that among large publicly traded insurers, Anthem, Inc. had been very bullish about the exchanges since they launched…until the end of 2015. “I heard kind of an ‘oops’ in the fourth quarter of 2015,” she told attendees. “They underestimated the claims and the adverse risk selection.…They have backed off considerably.” In a conference call last month to discuss third-quarter earnings, Anthem executives acknowledged they continued to lose money on the exchanges, but expected to break even in 2017. But those comments were made prior to the election, and even before that, investors were skeptical, she said.

Large national carriers, such as Aetna Inc. and UnitedHealth Group, have pulled out of most exchange markets. Few Consumer Operated and Oriented Plans remain. And two of the ACA’s three risk-mitigation programs sunset at the end of the year. Leaders at Anthem, along with those heading regional Blues plans, “are very concerned about increased adverse selection,” said Gupte. Even Medicaid HMOs are very concerned about risk-adjustment payments not working out the way they’d like, she added.

What Happens to the Individual Market?

There could be opportunities for Blues plans if the Trump administration eliminates the ACA’s essential health benefits requirement. Mini-medical plans and short-term policies, for example, could flourish.

Sally Pipes, president and CEO of the Pacific Research Institute, says if the next Congress could get rid of the ACA’s essential benefits requirement, Blues plans would likely come up with more flexible options so more people could buy cheaper, stripped down plans. And such plans wouldn’t have to disclose in 14-point type that they don’t comply with the ACA, adds Eric Fader, a health care attorney in the New York City office of Day Pitney. Blues plans that lose money on an operating basis, but make money from investments, could have opportunity on the exchanges. He points to Blue Cross and Blue Shield of Massachusetts, which recently reported that it lost $40 million on an operating basis in the first nine months of 2016, but had investment income of $55 million (see briefs, p. 12). “There’s no question the exchanges are a difficult place for carriers to make money, but there are opportunities for well-run companies that know how to make it work,” he says.

But Blues plans could face increased scrutiny if they don’t have any competitors on the exchange. “If you’re the only one, the public notices…and there is almost a presumption that they will charge premiums that are too high just because they can,” Fader adds.

A Republican ACA replacement could expand the individual market if it allows insurance carriers to design products tailored to young and healthy populations, suggested Borsch. While admitting he has a “glass-half-full” view, he said a bipartisan effort to replace the ACA could include some variation of insurance exchanges, significantly more product flexibility for carriers, 5:1 age-rating bands, a requirement for continuous coverage and the creation of high-risk pools for the most costly patients. He acknowledged such a scenario would be asking a lot of lawmakers. He warned that removing the federal premium subsidies and the individual mandate would lead to an individual market that resembles New York state’s market prior to the ACA. There would be far fewer covered lives and much more expensive coverage.

Skolnick was less optimistic. Prior to the ACA, the individual market was expensive and didn’t work well, and nothing has changed, she said. “The fundamental problem is insurance is expensive because people who buy it are sick, and companies need to stay in business,” she said.

Full Repeal Is Unlikely

Without a 60-vote majority in the Senate, it’s unlikely that President-elect Donald Trump — and Republican leaders in Congress — can make good on the promise to quickly repeal and replace the Affordable Care Act (ACA). But a full repeal isn’t needed to gut the law. Without a 60-vote “super majority” in the Senate, any repeal effort will be met with a filibuster. Instead, Congress is expected to take advantage of the upper chamber’s budget reconciliation process, which requires just 50 votes, to strip funding from the law. Reconciliation will take time and can address only those provisions of the law that deal with revenues and outlays of the federal government. Through that process, Republicans could play havoc with the ACA’s financing.

Many GOP leaders have said the repeal must be accompanied by “replace.” House Speaker Paul Ryan’s (R-Wis.) plan, even if the GOP falls in line behind it, is still far from being a bill. But Ryan’s “Better Way” document, which was released last June, is “as detailed as the plan Bill Clinton or Barack Obama had in the early part of their administrations,” according to industry consultant Robert Laszewski.

Given the daunting task of replacing such a massive law, he says he wouldn’t be surprised to see Obamacare “more fixed than replaced before this is over.”

The AIS E-Savings Club offers regular opportunities to buy AIS products and services at substantial savings. Click here to see the current specials — including a $50 discount on How Will President Trump Change the Health Care System?

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