LDI's Robert Field discusses the viability of Obamacare after the exit of several insurers.

The Affordable Care Act (ACA) — otherwise known as Obamacare — has come under scrutiny in recent weeks with high-profile withdrawals from the system by some major insurance companies that complained about losing money by participating. These include Aetna, UnitedHealth Group and Humana. It has also been an ongoing presidential campaign issue, with the program meriting a mention in the recent vice presidential candidates’ debate. But Obamacare has performed reasonably well given how new it is, with many large insurers choosing to stay involved, according to Robert Field, an adjunct senior fellow at the University of Pennsylvania’s Leonard Davis Institute of Health Economics as well as a Drexel University professor. He notes that some of the problems that have cropped up in Obamacare could be solved with additional policy changes that don’t have to be onerous.

A transcript of this Knowledge at Wharton interview with Field follows.

Knowledge at Wharton: We’re talking today about news that’s been out recently about Obamacare, which could cause some to have questions about its viability. That’s because some very high-profile insurers have announced that they’re withdrawing from the program, or at least, largely withdrawing. I guess the poster child for that would be Aetna.

They’re withdrawing, they say, because they are sustaining substantial losses. We’ve seen some headlines that suggest that Obamacare is on the ropes, it’s on the skids, it’s in a death spiral. I’m guessing [from your blogposts] that things aren’t quite that extreme.

Robert Field: It seems as though whenever Obamacare gets a cold, the experts say it’s pneumonia; it’s on its deathbed and all is lost. I don’t think we’re anywhere near that situation right now. Do we know, five or 10 years from now, where things will go? Of course not. But, for right now, it’s still functioning, and there are a few things we need to remember.

No. 1: Of the 20 million or so people who are now insured, who were not before Obamacare, most of those have gained insurance through Medicaid. The recent announcements of the insurers have nothing to do with Medicaid. And even if the exchanges went away, Obamacare would mean new insurance for millions and millions of people.

In terms of the exchanges, volatility in a brand new insurance market like this is to be expected. Obamacare is not unique — this is hardly the first time that we’ve tried something like this. [Former governor and presidential candidate Mitch] Romney did it in Massachusetts in 2006. [Former president George W.] Bush did it with Medicare in 2003, when he beefed up Medicare Advantage, which is a choice of private plans and a structured market. And he did the same thing with Medicare prescription drugs, where you go to a website and choose a plan, and there are government subsidies, and it determines what kind of coverage you can get.

So we know this kind of mechanism can work. We also know that it takes a few years for the market to even itself out. So this is not the death throes of Obamacare.

Knowledge at Wharton: Could you give us a brief explanation of what an exchange is, and how it works in this case?

Field: Sure. If you are an individual who does not get coverage through your employer, or you’re not old enough for Medicare, or poor enough for Medicaid, you go to a website. And every year, between November and January, you can select an individual policy in a manner that’s similar to Travelocity or Expedia. You see a choice of options, and they have different deductibles, and copays, and premiums, and networks and you decide which one works for you.

“Whenever Obamacare gets a cold, the experts say it’s pneumonia. … I don’t think we’re anywhere near that situation right now.”

Knowledge at Wharton: And different companies, presumably.

Field: And, in most areas, different companies. In many areas now, it’s only going to be one company. However, each company has a number of different plans. So, you may not have your choice of companies, but you will still have a choice of different plans.

Knowledge at Wharton: I understand that in some counties — because I think this is done on a county-by-county basis … that we’re down to one insurer. But you’re suggesting that even there, you’ve found a choice of plans?

Field: Right. The significance of there being one insurer is that you have less market competition. And it’s going to be harder to hold down prices. So, those people may well pay more. But they will still have a choice of different kinds of plans — different deductibles, copays, networks of providers, and so forth.

Knowledge at Wharton: I mentioned Aetna, which is the highest-profile company that is pulling out of most of the exchanges it was involved in, but not all of them. And it was citing some pretty big losses; almost a half a billion dollars, I believe. Other companies have cited some pretty big numbers as losses. So this is the grist for saying that things aren’t working so well, and they may be heading into a downward spiral.

But then, there’s this other wrinkle with Aetna, where it was attempting to merge with Humana. The Justice Department was putting the kibosh on that, and so they somehow — I don’t know if ‘threat’ is the right word — they suggested that if that was not approved, then maybe they weren’t going to be so interested in continuing to participate in certain exchanges. Could you explain that? Is that a form of blackmail?

Field: Well, I guess you could call it that. You could call it a negotiating strategy, if you wanted to be kinder. Aetna and Humana have wanted to merge. The bigger insurer would have more market power. The Justice Department has been concerned about that market power, and threatened to challenge the merger in court. Back in July, Aetna told the Justice Department that if they went through with that, Aetna would withdraw from most of the exchanges. So they would say, “You’re worried about lack of competition? We’re going to show you lack of competition. We’re just going to pull out.” So, it calls into question whether these losses were really so unsustainable, or whether this is a litigation strategy.

Knowledge at Wharton: Were they saying that they were losing money, and this merger would allow them to not lose money? And therefore, if it wasn’t approved, they would have to pull out because they were losing money? How did they actually phrase it?

Field: They didn’t say that they would stop losing money. They said that they would pull out of the exchange. Or, they implied that they would. It’s more a tit-for-tat.

Knowledge at Wharton: And the merger deal was not approved, and they did in fact pull out.

Field: Well, it’s for the court to decide at this point, but they pulled out. They did not pull out of every market. They stayed in a few. And United, which pulled out of many markets before that, stayed in a few. This means it preserves their right to come back in at a later date. So it suggests they haven’t given up on the whole law.

Knowledge at Wharton: Of course, they aren’t the only big insurers in the market. There are others, who seem to be doing very well. Is that right?

Field: Kaiser Permanente, based in California, has tended to do quite well. Now, their plans are mostly available in California and the West, but they actually doubled down on their efforts. And they’re going to be expanding their market presence. Many of the Blue Cross plans around the country have been doing okay. Almost all of them participate. And then there are some other, smaller insurers that have been doing all right. So, it’s not universal deathbed throughout the country. It tends to be focused on certain companies in certain areas.

Knowledge at Wharton: Another point you make in your blog is that in general, these insurance companies are doing very well with government programs. Their profit margins are very good on Medicare and Medicaid. Could you just talk about the bigger picture of insurance and government programs?

“It takes a few years for the market to even itself out. So this is not the death throes of Obamacare.”

Field: Our private insurance industry depends, to a large extent, on government programs. Under Medicare, about 30% of the beneficiaries get their coverage through a private insurer; and under Medicaid, in every single state, coverage is administered by private companies. That’s a huge, profitable line of business for them. So if you take that and subtract out the Obamacare losses, they’re still doing very well through the government. If we were to link the Medicaid expansion with the Obamacare exchanges, the insurers would still be coming out ahead on the ACA.

Knowledge at Wharton: Another point that you make is that some of this is actually hiccups for a program that’s still fairly new, and finding its feet; and that some of the problems that we’re seeing will likely work themselves out, or could be fixed without a lot of difficulty, if certain changes were made. Whether they can be made politically, or not, is a separate question. But could you talk about those two things?

Field: Some of the changes we could make, and this could be done at a state level, is to tell the insurance companies, “You can play in the Medicaid expansion if you also play in the exchanges.” It might mean you’re going to make a little less money in total, but the Medicaid business is worth it. That way, we could make sure that they stayed in the exchanges.

Another idea, which depends a lot on the outcome of the presidential election, is to have what’s called a public option — to have a government program that would compete in the exchanges with the private companies. So we know that each area would have at least two plans: the surviving private plan and the government plan. And we could see which works best, but guarantee that there will always be a fundamental choice.

Knowledge at Wharton: And some price competition.

Field: And competition as well.

Knowledge at Wharton: Is it fair to say that Medicare has a public option? For a while, it was the only option, but now, as you say, you can go through private insurance. So that’s kind of a mixed system now, isn’t it?

Field: Very much so. If you think of traditional Medicare, as you said, it really is a public option; and it is close to what’s envisioned for the public option under the ACA. The private side has been quite profitable and quite popular; almost a third of beneficiaries use it. It’s really a model for what the ACA would look like if there were a public option. And then individuals could choose which way they wanted to go.

Knowledge at Wharton: You have written that a lot of the losses that we’re seeing were anticipated because there’s been experience with other programs, such as ‘Romneycare,’ and that some of [the losses] will go away as the system matures, or they could get a fix.

Field: Right. There were a few mechanisms in place to mitigate the potential losses from this new market world. One of them was risk corridors. So, companies that did better than expected would put some money back into the kitty. Some of them that did worse would get money out of the kitty. And the funding for that was blocked in Congress. So that mechanism hasn’t worked. In fact, there’s a lawsuit pending right now by insurance companies to try to get back some of that money.

The idea was that it’s hard for them to set premiums, not having experience. We didn’t have a market like this prior to 2014, and it takes a few years, in insurance, to figure out what’s what.

“We forget that we now have somewhere between 10 million and 20 million people who have insurance, who didn’t before.”

Another aspect of this is that the losses for the insurers, they say, are because the risk pool is sicker — more people are getting care than they anticipated. One of the reasons for that is because Obamacare has been successful in other ways. They had anticipated, when they passed the law, that a lot of employers would drop coverage, and they would throw a lot of their employees into the risk pool. Well, fewer employers than expected have dropped coverage. In fact, employers have been adding coverage rather than subtracting it since Obamacare went into effect.

So all of these healthy working people are not in the exchanges. And then we have the young people, who are staying on their parents’ policies, who are not in the exchanges. It’s sort of like a balloon: you push down one side, and it pops up somewhere else. We succeed on the employer side and the young adult side, but it pops up in terms of a sicker risk pool. In terms of the overall working of the law, therefore, it doesn’t mean it’s a failure. It means that we need to get the balloon into shape, rather than popping it.

Knowledge at Wharton: On the young adult side — the provision that allows children to stay on their parents’ policies until they’re 26 — it used to be, for those children who went to college, that they were covered until college ended, and then went off at roughly age 22. So as that group moves through and becomes 26, I guess that will start to add healthier people into the pool, for those that aren’t on an employer plan?

Field: Right. Presumably, if those people do go into the risk pool, if they don’t have an employer that provides coverage, yes, it would increase the healthy contingent in that risk pool. One other aspect of this, though, is that the law and the administration of it have been very lenient about enforcing the mandate that everyone buy coverage. A lot of people have slipped through the cracks. They have preferred to pay the penalty, or have not paid the penalty and haven’t been caught. So another way to address this is to be more vigilant about making sure that everyone buys in.

Knowledge at Wharton: Does that require new laws and new regulations? Or is it simply enforcing what’s on the books?

Field: Most of it could be done by enforcing what’s on the books. I think Obama has been trying to tread a line: If he’s too vigilant, there’s going to be pushback, and more political resistance to the law. But if he doesn’t enforce it, then we have the problem that we’ve got, where healthy people stay out of the risk pool. So at this point, I think if the law is going to thrive, the balance is to push the other way, in terms of being tougher on people who choose to remain uninsured.

Knowledge at Wharton: Anything else we should know about this, while we have you in front of us?

Field: It seems as though, as I was saying, the bad news about Obamacare gets plastered on the headlines. We forget that we now have somewhere between 10 million and 20 million people who have insurance, who didn’t before. Now, often, those are not great policies, but it has been a lifesaver for some.

We have shown that it can be done, and going forward, we have opportunities to fix it. To this day, we really don’t have a viable replacement plan out there. Until we do, it’s either scrap the guarantee of coverage, or go ahead as we have been. We don’t yet have a third option. So we will see the politics of the new Congress and the new president — whether the mindset is to try to fix things, or just push over the sandcastle and go back to where we were.