What will the health insurance market look like in 2020

If someone tells you they know how healthcare reform is going to impact the health insurance market, feel free to ignore them.  From where we stand right now, it’s impossible to know what Americans’ health insurance will look like in 2020, even if healthcare reform is implemented in its current form.

Projections by the respected Congressional Budget Office (CBO) suggest that reform may reduce the number of uninsured by 56% by 2019.  The CBO projects that some employers will cut insurance, but millions of the previously uninsured will enroll in Medicaid or use subsidies to purchase insurance on the individual market.

This CBO base case suggests the individual market for health insurance may grow by $80 billion, even if premiums are held constant in 2010 dollars.

Unfortunately, this base case will probably turn out to be wrong in significant ways.  The law will almost certainly produce unintended consequences.  But there is no way to know with certainty what those consequences will be.

Here are four possible scenarios:

Scenario #1 – The Rise of the Individual Market.  We have an employer-based system because the government gives employers a tax deduction for premiums, making it economical for companies to buy insurance and pass the tax savings on to their employees.  But the reform bill significantly undermines this economic tilt by providing subsidies to individuals who earn up to 400% of the national poverty line.

If Americans respond to this shift in incentives, then the CBO base case may significantly underestimate the disruption in the private market.  Small employers – those with less than 51 employees – are not required to provide any insurance to their employees, and large employers can eliminate coverage by paying a paltry $2000 fine per employee.  If there are good options available on the individual market, then employers of all sizes may dump their coverage.

The American Action Forum – headed by a former director of the CBO – has calculated that the advantage of employer-based insurance may disappear for a family of four making less than $60 thousand, and up to 40 million Americans could shift to the individual market if employers and employees follow their economic interests.  That could result in an individual market up to 5X as large as it is right now, and twice as large as the CBO projects for 2019.

Scenario #2 – The Public Option in Disguise.  The bill provides for the creation of two types of government-sponsored health plans: the so-called CO-OPs and the Multistate Plans sponsored by the Office of Personnel Management (OPM).  These plans may have significant advantages over traditional private health plans.

The OPM plans, for example, will have the imprimatur of the US government and will be allowed to sell to consumers across state lines.  If the OPM plans are able to offer better benefits and lower premiums, they may be able to achieve significant scale, which would further increase their competitive advantage.

If most Americans feel comfortable with government-sponsored options, then employers will likely cut coverage, driving even more people into these plans.  It’s not hard to imagine that this positive feedback loop could – over decades – create a de facto public plan covering the vast majority of Americans.

Scenario #3 – Much Ado About Nothing.  In this scenario, all the hullabaloo around reform turns out to be just that. The typical American expects his or her employer to provide health insurance, and companies may have a difficult time cutting coverage, even if the new law gives them the incentive to do so.

In this case, reform only impacts the health insurance market on the margin.  The vast majority of Americans still receive coverage through their jobs, and the increase in Medicaid enrollment and the individual market is less than the CBO base case.  Congress will likely repeal – or regulators will water down – any provisions of the bill that produce significant disruptions.  HHS has already granted waivers to employers like McDonald’s who offer “mini-med” plans that were supposed to be outlawed by the bill.

Scenario #4 – Armageddon.  The reform bill – and the CBO’s projections– are based on a delicate balance between coverage requirements for insurers and mandates on individuals.  If the bill got this balance wrong, then prepare for possible doomsday.

In this scenario, employers find it economical (and politically viable) to cut coverage.  Healthy individuals, knowing they can’t be denied coverage, refuse to buy insurance until they get sick.  The fines for being uninsured prove to be too small (or the government doesn’t enforce them).

With a risk pool made up of the sick, insurers are forced to raise premiums, which causes even more individuals to drop coverage.  The resulting negative feedback loop pushes insurers into a death spiral, and the government is forced to step in and bail them out.

In the 1990’s, several states  - including Kentucky, Maine, and Washington – passed laws requiring insurers to offer coverage to all comers (guaranteed issue) and limit price discrimination (community rating).  In those states that didn’t have an effective individual mandate (like Massachusetts does), the individual market soon dried up, as healthy individuals declined to purchase coverage and insurers withdrew their offerings.  In almost all these states, reforms had to be repealed.

Of course, the law may be repealed, amended, or even overturned by the courts.  But – even if it stands - no one knows what’s going to happen.

About the Author

Tim DeRoche is the founder and president of DeRoche Consulting Group, a boutique consultancy that specializes in strategy work for senior executives.  He has previously written for the Washington Post, Education Week, and the Los Angeles Business Journal. tim@derocheconsulting.com