Underlying Aetna's ACA pullback: Despair of Congress?

In a major scoop, Jonathan Cohn and Jeffrey Young of the Huffington Post obtained via FOIA a July 5 letter from Aetna CEO Mark Bertolini to the Justice Department spelling out that Aetna would cut back its participation in the ACA marketplace if Justice moved to block the company's pending merger with Humana.

Citing Aetna's losses in the ACA marketplace to date and the costs of a busted merger, Bertolini wrote that if  DOJ opposed the merger -- as it did two weeks later -- Aetna would cancel plans to expand its participation in the ACA marketplace from 15 states to 20, and instead cut back to 'no more than 10 states" --- and probably exit the market entirely in future years.

Cohn and Young provide a balanced view of partisan perceptions that Aetna is, in one view, engaging in regulatory hardball (or blackmail) or, in the other, responding to real losses and difficulty in the ACA marketplace.. Probably a bit of both, as Nicholas Bagley suggests  While Bertolini expressed conditional optimism about the ACA marketplace as recently as an April earnings call, Cohn and Young cite an Aetna spokesman's claim that losses have accelerated since then.

Regardless of the precise mix of Aetna's motives and calculations, Bertolini's response to a question about the ACA marketplace* in the April call, quoted by Cohn and Young, is interesting in retrospect. Below is a longer excerpt from his response, with the portion cited by Cohn and Young bolded.

Let me just give you a different basis to think about our participation in the exchanges. We have 911,000 members on the public exchange as individual. We have 1.2 million members that are exchange or ACA compliant.

If we were to go out and buy those members, it would cost us somewhere around $1.2 billion to acquire them. If we were to build out 15 markets, it would cost us somewhere between $600 million to $750 million to enter those markets and build out the capabilities necessary to grow that membership.

So in the broad scheme of things, we are well, well below any of those numbers from the standpoint of losses we've incurred in the first two-and-a-half years of this program. So we see this as a good investment, hoping that we have an administration and a Congress that will allow us to change the product like we change Medicare every year, and we change Medicaid every year.

But we haven't been able to touch this product because of the politics. But if we can get to that point, we believe we are in a very good place to make this a sustainable program.

While Bertolini's letter to DOJ cites the sunk costs of the merger as a reason to cut losses in the marketplace, this earlier statement cites the costs of getting established in the marketplace as a relative bargain (which would in turn become sunk costs if Aetna exits altogether).

So that's one side of the equation. On the other is Bertolini's rueful closing comment about the politics of the ACA.  He suggests that a public benefits program can't be frozen in amber: it requires constant adjustment. Unspoken: Republicans' rooted enmity against the ACA is making such adjustment impossible.

The same point was made implicitly in a report issued yesterday by Georgetown healthcare scholars Sabrina Corlette and Jack Hoadley, laying out Lessons from Medicare as a source of strategies to stabilize the ACA marketplace. The chief (implicit) lesson: get a Congress willing to fix problems as they arise.

The report usefully illustrates that the price spikes and insurer exits that the ACA marketplace is currently experiencing are far from unique, and are in fact par for the course for insurance markets. Similar gyrations have occurred in the Federal Employees Health Benefits Program, state Medicaid managed care programs, and Medicare Advantage. The history of MA is particularly instructive:

 Between 1998 and 2002, the predecessor to today’s MA program (called Medicare+Choice) faced insurers’ decisions to terminate nearly half of the existing Medicare contracts.13 These terminations meant that between 300,000 and 1,000,000 enrollees annually could not stay in the plans they had selected. Terminations occurred disproportionately in rural counties where payment rates were lower. Total enrollment dropped between 1999 and 2003 from 6.4 million to 4.6 million. When Congress increased payment rates, the market stabilized and enrollment grew rapidly. In 2016, there were 17.2 million beneficiaries in Medicare Advantage...

In the wake of high-profile market exits in the Medicare Advantage program, policymakers were able to entice insurers back into the program by increasing payment rates. The Medicare Modernization Act (MMA) of 2003 changed the method Medicare uses to pay plans to a system in which plans bid against a benchmark price that varies geographically. Overall, the new system led to payments to plans that were approximately 10 percent higher relative  to local fee-for-service (FFS) costs from about 2006 to 2010.

These changes, together with other changes described below, led many insurers to re-enter markets they had departed and brought other insurers into the program. Whereas 31 percent of Medicare beneficiaries had no private plan option available in 2000, by 2006, nearly every Medicare beneficiary had access to at least one MA plan. Enrollment more than doubled from 2005 to 2010.

Fixes are (relatively) easy when no one hates a program. A functional equivalent of raising MA payments to insurers in the ACA marketplace would be to improve the premium and cost-sharing subsidies, which many prospective buyers find too skimpy to render coverage attractive -- particularly those with incomes above 200% of the Federal Poverty Level (FPL), the current cutoff for strong Cost Sharing Reduction (CSR) subsidies. At present, most subsidized buyers with incomes over 200% FPL can't afford a plan with an actuarial value higher than 73%, or over 70% for those with incomes above 250% FPL. The latter generally AV translates to deductibles in the $3000-5000 range. To take an example from the Chicago marketplace: If you're a single mother earning $32,000, you just may be willing to pay $175 for a benchmark silver plan for yourself (with your child placed in CHIP) -- but a deductible of $3,500 or $4,500 may make that plan seem close to useless. Boosting the subsidies is one of Corlette and Hoadley's "lessons."

Subsidies were sweeter in the version of the ACA passed by the House in November 2009, which could not be properly reconciled with the Senate bill after Democrats lost their filibuster-proof majority in January 2010.  In the House bill, the benchmark plan for those with incomes in the 200-250% FPL range would have been 85%, vs. 73% in the enacted ACA, and 78% for those in the 250-300% FPL band, vs. 70% in the ACA. Premium subsidies in the House bill were higher for those under 200% FPL, though not for those much above that threshold (and in fact somewhat lower for those over 300% FPL). For those not eligible for cost sharing reduction subsidies, three levels of coverage were available, at actuarial values of 70%, 85% and 95%.There was no AV 60% tier equivalent to ACA bronze, which carry prohibitively high deductibles and copayments for low income buyers.

Improving ACA subsidies would cost money, of course. A Dec.2009 Urban Institute-RWJF analysis estimated that House-level subsidies would cost about 16% more than those included in the bill introduced by Senate leadership in November 2009, which had a subsidy schedule close to that enacted by in the ACA, though with somewhat weaker CSR.  But part of the cost would be offset by improving the risk pool, helping to prevent steep premium hikes.

Other than being funded adequately, there's a more fundamental way the ACA marketplace could be made more like Medicare Advantage: the federal government could be the ultimate payer. In MA, the government sets a benchmark capitated rate for each region, calculated so that insurers can be profitable paying something close to traditional Medicare rates to providers. MA is therefore really neither a "public option" nor a private one; it's a menu of public-private options.  The great advantage is that provider payment rates are controlled, at one remove, by the government. The same is true -- at lower payment levels -- for managed Medicaid plans, and for the Basic Health Plans run under the ACA by New York and Minnesota. I've argued before (once, twice) that the ACA marketplace should be structured this way.

In addition to proposing subsidy sweeteners, Corlette and Hoadley suggest other incremental reforms, such as easing network adequacy requirements for new entries in a a market, or to create a "fallback plan" for markets left with no regular market entrants, or rendering the reinsurance program permanent.

All of those changes, except perhaps the network adequacy requirements, are premised on a Congress motivated to make the marketplace work better. As Bertolini suggested, the first requirement for a program like the marketplace is that it be treated as a perpetual work-in-progress.  It's hard to see that requirement being fulfilled in the foreseeable future. Perhaps the dominant element in Aetna's exit is political despair.

---
* Posed by Anne Gupte of Leerink