Post-2014 Reform-Related Volume Gains are Modest

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The common notion of 30 million newly insured in or around 2014 (13% gain) likely overstates reform-related increases in demand for health care

Persons without a health insurance offer from a current employer choose coverage on the health insurance exchanges (HIE’s) less frequently than the 30 million estimate assumes; and,

Any transition of employees from employer-sponsored (ESI) to HIE’s opens the door for previously insured employees to newly choose to be un-insured.  The total number of employed un-insured actually grows if more than roughly half of subsidy-eligible employees transition to HIE’s

On net, we see best-case gains of 19 million insured (9% gain, assumes no transition from ESI to HIE); worst case, we see zero gain in the insured (complete transition from ESI to HIE’s)

Moreover, the average value of insurance purchased by the employed-insured is likely to fall.  Under ESI, employees have little opportunity to choose very limited coverage, but can make this choice on HIE’s.  And on the HIE’s, enrollees’ pay the entire marginal cost of any insurance more generous than the cheapest option.  As a result, most healthy enrollees buy the cheapest plan available; only enrollees who expect very high health costs buy generous plans.  The result is an average AV on the HIE’s of roughly 0.65; this compares to average AV’s under ESI of roughly 0.82

Thus an ESI to HIE transition can both raise the number of employed un-insured and lower the value of insurance purchased– in fact, if slightly more than one-quarter of ESI beneficiaries are switched to HIE’s, we would expect to see zero reform-related volume gains in and around 2014

HMO’s clearly are pressured by any tendency of previously insured ESI beneficiaries to forego insurance on the HIE’s, and for those on HIE’s to buy less generous coverage.  Assuming 6% medical inflation and no changes in rates of insurance or AV (i.e. zero ESI to HIE transition), we would expect roughly 7.5% gross margin growth for insurers (best-case).  If all current ESI beneficiaries transitioned to HIE (worst-case), gross margin growth would fall to roughly 3.4% from 2014 to 2020.  The most likely case is the median; if half of ESI beneficiaries transition to HIE, gross margin growth would be roughly 5.6%.  Current HMO valuations imply the worst-case; we still see upside to valuations, though upside is more modest in light of recent outperformance

Hospitals in particular are negatively affected; net gains in the insured of +/- 30 million almost certainly will not be realized, nor will corresponding declines in costs of uncompensated care, which may in fact rise as AV’s fall, since falling AV’s simply shift cost responsibility from insurers (98% hospital collection rate) to the insured (+/- 30% collection rate).  The net shift in insurer mix from commercial to Medicaid in and around 2014 is a potent source of incremental price pressure

The tendency of HIE enrollees to choose the cheapest option – unless they’re ill – compounds the already tremendous adverse selection pressures on the HIE’s.  And, the fact that healthy enrollees on cheap plans are more profitable than less health enrollees on expensive plans creates an economic incentive for insurers to exclude beneficiary-preferred providers of chronic care (e.g. diabetes, oncology) from networks.  These findings increase our conviction that PPACA will have to be modified soon after HIE’s begin operating

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