California provides model to replace the Affordable Care Act

The new administration and Congress are under intense pressure to craft a market-based alternative to the Affordable Care Act. It won’t be easy. To achieve the financial stability required to make the market work, reformers should heed some important lessons from California.

Health plans and risk-taking medical groups essentially made a “deal” with Congress to participate in the ACA. They agreed to cover applicants with pre-existing conditions without charging higher premiums in return for: an expanded individual market driven by a federal mandate that everyone buy insurance; premium and cost-sharing subsidies financed by insurers and the government; and three federal risk-mitigation programs to help stabilize the new marketplaces.

It didn’t work out. Many health plans were priced incorrectly because more sick people enrolled and fewer healthy people signed up than expected. To compound the problem, Congress held up billions of dollars in promised payments from the federal risk corridor program to partially offset losses.

Most health plans responded by raising premiums. This year, premiums on the federally run exchanges rose about 25 percent, raising the annual benchmark premium to $5,586 for single coverage. Even then, about two-thirds of insurers are losing money in the individual market, several in the hundreds of millions of dollars.

For a model of how government and health insurers can work together to sustainably expand coverage and ensure stable markets, Congress should examine what happened in California.

Covered California, the state-run marketplace, took several steps to ensure long-term health plan involvement. The result has been a robust, competitive exchange that covered 1.5 million people in 2016 across 12 insurers. Premium increases were half the national average.

Here are the California approaches that any federal replacement plan should encourage other states to adopt:

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