Road signsLess than two years ago, the U.S. government began assessing a modest $95 annual penalty for individual adults not enrolled in health care insurance, either through their employers or via an open exchange. Heading into 2016, the average annual household penalty is estimated at $969, up 47% from $661 in 2015, and more than five times the fine in 2014, estimated at less than $200. This penalty is designed to urge 11 million currently uninsured Americans to purchase a plan via the Affordable Care Act exchanges. Unfortunately, early signs show the rising penalty has had little impact; the Department of Health and Human Services forecasts just 1.3 million new enrollees in 2016 compared to the original estimate of 8 million.

For the young and relatively healthy, the segment that is critical to the ACA, even a $1,000 penalty a year is less than the annual insurance fees for a household. As long as the premium exceeds the penalty, they will likely choose the penalty, and health care products and services will only get more expensive. With too few young and healthy Americans signing up for insurance, the current exchange-based insurance model will likely come under increasing pressure for the foreseeable future.

Complicating matters, insurance providers voice growing concerns that the exchanges’ business is proving to be unprofitable. During the 4th quarter of 2015, UnitedHealth, the largest health insurance provider in the country, announced that it might be pulling out of the exchanges altogether by 2017. With operating losses of about $700 million in 2015, it’s hard to blame UnitedHealth for changing its tune.

However, UnitedHealth is not the only company facing profit loss. Other policy providers in the exchanges are also struggling to break even. Although UnitedHealth’s impending exit represents only a small portion of the overall exchanges’ business, it sends a strong message to the industry that its largest player will cut losses. For other publicly-traded insurance companies, the temptations may be too strong not to follow UnitedHealth’s footsteps. if more insurance companies throw in the towel, premiums will increase and choices will decrease.

In a previous blog, we reminded innovators to focus on non-consumers, or those who consume very little of existing products. In this case, we will need more than tax penalties to enroll the millions of Americans who view insurance premiums as nothing more than wasteful taxes to subsidize the sick. Unfortunately, the current model of the healthy subsidizing the unhealthy is not a sustainable model.

We need a new model for underwriting medical insurance, beginning with those who are healthy, so a new market for health insurance focused on healthy living and prevention emerges. The potential exits of established insurance providers like UnitedHealth naturally creates a vacuum in the market. There are currently 11 million customers looking for health insurance products that are priced at the level of annual penalty. Those who can underwrite these healthy customers while balancing the sick patient population will have cornered the exchanges and disrupted the market.

A disruptive insurance model for the young and healthy is a fixed-fee based model at or below the penalty. In the current environment, such fixed-fee model will most likely resonate among self-insured employers with generally healthy workforce. Integrated providers that combine care and underwriting might be another disruptive solution. Whatever the model might be, the core engine will need to be based on cost amortization targeted at prevention, early detection and behavior changes. Based on the current penalty schedule and health care’s cost increase trajectory, the disease management model of the established health care entities will neither be able to stop nor reverse the trends. While these macro dynamics cast worrisome shadows on health care’s near-term outlook, we hope the velocity of disruptive innovations accelerates in response.


  • Spencer Nam
    Spencer Nam