Last week Aetna, one of the country’s largest insurance companies, announced that it was cutting back its participation in the health care exchanges created by the Affordable Care Act (ACA). With several other major insurers also cutting back their participation, there will be very limited competition in many markets. This prospect has supporters of the ACA worried and opponents gleefully looking forward to the day when millions may lose their insurance.
Before looking at the economics, it is worth mentioning that Aetna is upset because the Justice Department is blocking a merger with Humana, another major insurer. Aetna quite explicitly threatened the Justice Department with reducing its participation in the exchanges if it blocked the merger. While there could be real economics behind both Aetna’s threat and its pullback from the exchanges, it is also possible that Aetna’s main motivation is to retaliate for the refusal to approve the merger.
Leaving Aetna’s motivations aside, there is a real problem with the exchanges. The people who are signing up on the exchanges are proving to be less healthy than the population as a whole. As a result, they are more costly to treat. This means that either people on the exchanges will have to pay more for their insurance or the federal government will have to pay larger subsidies. We can try to make the insurers swallow the cost, which is pretty much the policy currently in place, but they will not stay in a market if they are losing money, as Aetna now claims to be doing.
It is important to recognize that this is not a problem of health care costs rising rapidly in general. The rate of growth in health care spending has fallen sharply in recent years and has been…