What if exchange enrollment never catches up?

By now, everyone knows that if enrollment in the Obamacare exchanges doesn’t mount a roaring comeback, health insurers could end up with far more sick people than they counted on and sustain serious losses.

But until last week, I had never seen anyone try to calculate—in public—exactly how far short of projections the exchange enrollment might come. Or what that might mean for the premiums health insurers charge next year.

Seth Chandler, a law professor at the University of Houston, started a blog called ACADeathSpiral in mid-November, because he believes the exchanges will either fail as insurance marketplaces or will require far more financial propping up before they succeed.

Some readers will dismiss his (and my post) at this point as hopelessly biased. But I would encourage you not to. The conclusions to come are not good for Obamacare, but they’re not quite as bad as you may think.

Chandler’s basic methodology is to take what we know about enrollment via Healthcare.gov and extrapolate it over the entire open enrollment period, to see how many people are likely to actually get insurance coverage before March 23, 2014—the last day individuals can sign up without triggering Obamacare’s individual mandate tax.

Nationally, the 36 states that are relying on Healthcare.gov for exchange enrollment—which includes Indiana—saw 127,000 enrollments in October and November, according to data reported by Reuters. November enrollment was about 100,000, or four times as much as the 26,000 that enrolled in October.

November enrollment hasn’t been reported for Indiana, but let’s assume that it too was four times as much as October’s enrollment of 701. That would mean that as of Nov. 30, 3,505 Hoosiers had enrolled in private insurance via Healthcare.gov.

We also know that, on Dec. 1 and 2, a rush of 29,000 people enrolled via Healthcare.gov. Let’s assume that Indiana got its proportional share of those enrollments (1/36th of the total). That would mean Indiana saw 806 enrollments on those two days, for a pace of 403 enrollments per day.

That pace could very well be higher than normal, since there was pent up demand caused by Healthcare.gov’s technical problems in October and November. But let’s assume that Indiana maintains that pace of enrollment from Dec. 1 through March 23. That’s a period of 113 days. So enrollment during that time would total:

113 days x 403 enrollments per day = 45,539 enrollments.

Add to that total the 3,505 figure we calculated before, and we get total exchange enrollment of 49,044 Hoosiers.

But I’m not entirely satisfied with that number. Because there will likely be two additional rushes of enrollment, before the year-end deadline of Dec. 23 and then again before the March 23 deadline.

Chandler noted that as many as 25 percent of Americans wait to file their taxes each year until two weeks before the deadline. So let’s add that same assumption to Indiana’s total.

To do this, we must subtract four weeks (two in December, two in March) from our previous period of 113 days. That leaves us with 85 days, during which enrollment averages 403 per day. That gives us enrollment during that period of 34,255. We add back in the 3,505 from October and November, to get 37,760.

Then we assume that that number is only half the actual total, because 25 percent of enrollees will sign up before the Dec. 23 deadline and another 25 percent will sign up before March 23. So we double our number, to get total enrollment of 75,520.

How does enrollment of 75,500 stack up against insurers’ expectations? Not well.

The four insurers selling exchange policies in Indiana told the Indiana Department of Insurance that they expect about 200,000 total enrollees.

If enrollment, instead, totals 75,500, it will equal just 38 percent of that total. That’s just more than one-third—even though I used fairly generous assumptions about enrollment.

Chandler asserts that such low enrollment will inevitably lead to higher premiums for 2015. He noted that enrollment in the temporary high-risk pool that Obamacare established, called the Pre-Existing Condition Insurance Plan, totaled just one-third of expectations. That low enrollment led to costs more than double projections.

The same thing occurred here with the Healthy Indiana Plan. Enrollment in that program has been about one-third of initial projections, while costs per member have been double what was expected.

So let’s assume expenses per member insured in the exchanges are double what insurers were expecting. Using Anthem Blue Cross and Blue Shield’s rate filing, that means the average member would generate claims next year of $745 per month, instead of the expected $372.50 per month.

A spike like that, assuming everything else remains the same, would cause Anthem to suffer losses next year of $314.25 per member per month in its exchange plans. Ouch!

The good news for Anthem is that Obamacare includes provisions—known as risk corridors—that will absorb 80 percent of those losses, leaving Anthem will losses of just $65.85 per member per month.

Still, Anthem will certainly want to recover those losses. To do so, it would need to raise average premiums for 2015 by 15.4 percent. And if medical costs keep trending up at the same rate they have been, Anthem will have to pass on an average rate hike next year of about 28 percent.

That would push Anthem’s average premium to $520 per member per month, or $6,240 per adult, before tax subsidies kick in.

Is that large enough of an increase to cause a death spiral, as Chandler expects in some states? I don’t know.

As pointed out by former Indiana Insurance Commissioner Sally McCarty in her comments below, any increase in exchange losses will likely be mitigated because customers buying off-exchange policies will also be included in insurers' risk pools.

Also, because insurers are supposed to file their 2015 rates with regulators in April 2014, they will have very limited data on which to base any rate hike request. So there may be more time for enrollment to catch up before it directly affects premiums.

Even if low enrollment leads to larger losses, some in Washington are discussing ways in which to cover more than 80 percent of insurer’s losses, which might mitigate 2015 rate increases.

Lastly, Obamacare also raises its tax on individuals that don’t buy insurance in 2015 to $395 per adult, or 2 percent of household income, up from taxes next year of $95 per adult or 1 percent of household income. So that will put more inducement on uninsured individuals to buy, even with rising prices.

But it’s likely that the cost of insurance in 2015, even after subsidies, will continue to be far higher than the taxes for a large chunk of Hoosier families.

Chandler also proposed an alternate scenario, in which member expenses rise only 25 percent due to under-enrollment, rather than the 100 percent rise assumed in my first scenario. That lower projection should account for some of the mitigating factors I listed above.

If losses exceeded projections by 25 percent, then Anthem would lose only $7 per member per month. After factoring in the risk corridor payments from the federal government, Anthem would need to raise rates just 1.7 percent. Again, assuming rising costs of medical care, that would lead Anthem to seek a 2015 premium increase of 14 percent. Not good, but not out of the ordinary in the individual insurance marketplace.

For low-income Hoosiers, most if not all of those higher premiums would be absorbed by Obamacare's tax subsidies. For those who don't qualify for a subsidy, or only get a small one, that alternate scenario may cause them to start scoffing at Obamacare’s formal name, the Affordable Care Act. But it might not induce a death spiral, in which only sick people buy through the exchanges and premiums spike ever higher.

We’ll just have to wait and see.