Aetna’s decision to withdraw, in 2017, from 11 of the 15 states where it is currently offering plans on the Affordable Care Act’s exchanges is another clear signal, coming as it does in the wake of many other insurer withdrawals, that the insurance marketplaces are financially unstable. Because of unworkable federal rules, the exchanges are increasingly unable to offer a choice of attractive, affordable health plans.

There is nothing inherently wrong with a mechanism for facilitating consumer choice in health insurance that would doom it to failure. Numerous private sector businesses have developed web-based tools to aid consumers in making choices from a wide array of products, including health insurance. By simplifying the range of options and making comparisons easier, such businesses attract millions of consumers who want to be better informed about the choices available in the market.

Buying health insurance can be intimidating. Consumers have varying personal circumstances, and it can be difficult to understand what services are covered and what the costs will be. There is clearly an important role for a service that helps consumers select health insurance plans that meet their needs.

The Problems Plaguing the ACA Exchanges Will Not Disappear on Their Own

The main problem with the exchanges is not the exchanges themselves, but with ACA policies that have undermined the ongoing viability of the entire individual insurance market. The federal government has imposed poorly conceived regulations on all insurers selling products directly to consumers. It holds a monopoly over the sale of insurance plans that are eligible for enrollment by consumers receiving a federal taxpayer subsidy. It tightly controls what plans can be sold and how they can be sold.

The consequences of these policies are only now becoming evident. Insurers face adverse selection, with enrollment in exchange plans tilted too heavily toward consumers with higher than average health expenses. As a result, insurers on the exchanges suffer persistent, large, and growing financial losses, and large-scale withdrawals from the exchanges by major insurers are expected. For insurers remaining in the exchange market, premiums are expected to rise sharply next year.

The ACA included provisions that were intended to stabilize the market but which haven’t achieved that goal. The risk adjustment provision shifts funds from plans with enrollment that has lower than average health risks to plans with higher than average risks. This is a permanent provision of the ACA and was intended to be budget neutral.

In addition, there are two other ACA provisions—a reinsurance scheme and a risk corridor program—that were enacted as additional, and temporary, backstops for the insurers participating in the exchanges. The reinsurance program imposes a tax on most insurance plans, including those not offered in the exchanges, and uses the funds to subsidize plans for their customers with very high claims experience. The risk corridor program shifts funds from plans with total claims that are below 97 percent of their expected target to plans with claims exceeding 103 percent of their target. The reinsurance and risk corridor provisions expire at the end of 2016.

While these provisions of the ACA have shifted funds towards plans with high costs, there have been problems. In 2014 and 2015, there were far more plans with high claims experience than those with low costs, and so the resources available under the risk corridor program fell short of what the plans with high claims cost were expecting to receive under the terms of the ACA. In addition, the reinsurance program was supposed to collect enough tax revenue to make payments to insurers totaling $20 billion over the three years of the program, plus $5 billion for depositing in the U.S. Treasury. It now appears the taxes collected will fall far short of meeting these statutory objectives, thus creating more uncertainty for the insurers participating in the program.

The problems with the ACA exchanges are unlikely to disappear on their own. To stabilize them and promote participation by competing health insurers, it will be necessary to change the law.

Policymakers from both parties should view the need to take action on the ACA exchanges as an opportunity to move health reform toward a broader political consensus. The ACA remains controversial in large part because of the manner in which it was enacted — entirely with votes from one party in Congress, in a highly charged political environment. The resulting resentments have lingered, making it difficult to reach a level of broad public support for changes that would make the ACA less vulnerable to the problems that have emerged.

The goal of renewed effort at reform should not be limited to stabilizing the exchanges as they are constituted today. The goal should be to create a functioning marketplace and a balance between personal and governmental responsibility that both major political parties in Congress can support.

The ACA Exchanges in Context

The problems emerging for the ACA’s exchanges are a direct result of the law’s transformation of the individual insurance market. For the first time, health status information cannot be used to set the price of insurance products or to determine the kind of coverage offered to consumers. Guaranteed issue makes insurance available to everyone regardless of pre-existing conditions, but it also drives up premiums unless the exchanges can attract younger, healthier customers.

Premium Rating

The law also limits how much insurers can charge their oldest customers to reflect their greater use of health services, a practice known as age rating. Previously, premiums charged to the oldest customers were often as much as five times higher than those charged to the youngest. Under the ACA, the maximum premium charged for the oldest customers can be no more than three times the premiums charged to the youngest customers.

These restrictions have the effect of lowering premiums substantially for older and sicker customers, and raising them for young and healthy people who buy coverage on their own. Absent other changes, these provisions predictably shifted the customer base in the individual insurance market toward high utilizers of health services, and premiums rose to cover their elevated use of medical care.

When several states enacted similar policies in the 1990s, the result was disastrous. In Maine, Kentucky, Washington, New Jersey, and New York, these policies disrupted the individual insurance market. Premiums increased sharply, driving down the percentage of the population enrolled in individual plans.

The authors of the ACA were fully aware of the danger and put in place two policies intended to mitigate the adverse selection that is inherent in the law’s regulatory framework: an individual mandate that penalizes those who do not purchase insurance, and large taxpayer-financed subsidies to encourage lower-income households to apply for coverage. The push of the mandate and the pull of the subsidy were expected to bring most people into coverage.

Individual Mandate

The ACA’s individual mandate imposes a tax on uninsured households, collected at the time a household files their income tax form. For 2016, a family must pay a tax equal to 2.5 percent of their income above the minimum threshold for filing income taxes. The tax tops out at the total annual premium for the average bronze plan sold on the exchanges, and is pro-rated based on the number of months without insurance.

The size of the subsidies also depends on household income. Households with incomes between one and four times the federal poverty line (FPL) are eligible to receive federal subsidies lowering their premium payments. Those with incomes between one and two-and-a-half times FPL also receive a cost-sharing subsidy. Importantly, the subsidies are only available to households who buy their insurance through the ACA’s exchanges.

Taxpayers who are on the fence about enrolling in health insurance face a complex calculation. They must weigh the cost of paying premiums to enroll in a plan against the tax they would pay for going uninsured, plus the risk that someone in their family might need medical treatment for which they could be fully liable.

The decision for those with very low incomes is likely to be easy. They are eligible for generous federal subsidies, substantially reducing the premium — in some cases, the net premium could be zero. Cost-sharing subsidies further reduce the cost of health care. That explains why most of the enrollment in insurance plans offered on the exchanges is concentrated among those with incomes just above the level of eligibility for Medicaid.

For those with higher incomes, however, it is a more difficult choice. They are often eligible for some subsidies but are still required to pay substantial premiums themselves. According to Bob Laszewski, a family of four living in Roanoke, Virginia with an income of $60,000 in 2016 would have a premium payment of $4,980 for the year for the second lowest-cost silver plan. That plan has a $5,000 deductible. That means the family could spend almost one-sixth of their pre-tax income on health costs before they received any insurance payment.

In contrast, the tax for going uninsured would be about $725. Of course, an uninsured household would face the risk of paying entirely for major medical expenses out of pocket. But that risk is limited. The ACA allows individuals to purchase insurance at least once a year without paying a premium penalty—even if they have incurred very expensive medical bills and regardless of whether they had previous coverage.

Unintended Consequences

An important and often overlooked aspect of the ACA is the new opportunities it gives individuals to choose the least disruptive option, even if that choice is not what policymakers intended. Many uninsured people could have obtained insurance coverage through Medicaid or had enough resources to enroll in coverage on their own even before the ACA was enacted, but did not. The ACA’s individual mandate has given these people a reason to reconsider their options and seek coverage that minimizes their own costs.

That might mean signing up with a spouse’s employer-sponsored plan, or making adjustments to their own work schedules to qualify for an employer offer themselves. It could mean working fewer hours so that their incomes drop enough to qualify for Medicaid. In many cases it means not applying for insurance and waiting another year.

The ACA exchanges are becoming the insurance option of last resort. For many of the uninsured, ACA options are too expensive even with the subsidies. Deductibles of $5,000 or more and limited provider networks result in coverage that is less flexible and more expensive than what they had hoped for. That necessarily means the exchanges will be a market that is attractive mainly to persons with higher than average medical expenses, in addition to those receiving large federal subsidies.

Despite concerns raised when Aetna and other large insurers announced their intention to drop out of exchange markets, the ACA is not in a full-scale insurance death spiral. The federal subsidies alone are enough to create a captured market of several million people. But it is clear that the exchanges are suffering from some degree of adverse selection, which means the tendency for younger and healthier consumers to seek other options will only be reinforced in the coming years.

Improving the Individual Insurance Market

The problems emerging in the ACA’s insurance exchanges are better understood as problems in the newly regulated individual insurance market. Americans strongly approve of the ACA’s new rules prohibiting the use of health status information to determine premiums and coverage for consumers. But those rules are only viable if the risk pool is stable and does not suffer from excessive adverse selection.

A well-functioning individual insurance market would allow for more product flexibility, insist on greater personal responsibility, and harness the expertise and experience of the private sector. The following could serve as the starting point for stabilizing the individual market and building political support for a reformed insurance market that can adapt to the rapidly evolving health care system and the changing needs of consumers.

Let Consumers Buy the Kind of Coverage They Want

The overly restrictive federal rules for what must be covered by insurance should be substantially rolled back. Many consumers are being forced to buy coverage that exceeds what they would purchase on their own if given the choice. States should be allowed to work with insurers to establish regulations more likely to result in plans that are attractive to all customers, including those who are healthy.

Ease the Age-Adjustment Restrictions that Increase Premiums for Young Consumers

The ACA’s insurance regulations require insurers to charge premiums to older customers that are no more than three times the premiums charged for the youngest enrollees. This is a far narrower band than existed in most states prior to 2014. The result is higher premiums for young people that do not reflect their lower use of services. Restricting premiums in this way makes no sense on a number of levels, including the fact that younger people have lower incomes and fewer assets than older workers. This policy prices out of the market the very customers the ACA needs most.

Move Toward ‘Continuous Coverage Protection’

The ACA’s individual mandate has not been very effective in bringing into the exchanges consumers who are not eligible for large subsidies. The market might be stabilized by imposing a heavier penalty on the uninsured, and strictly enforcing it. But the individual mandate is already among the law’s least popular provisions; an effort to further strengthen it will only narrow the political coalition in favor of the law.

A better approach would provide a stronger incentive to promote insurance enrollment, and make it easy for all Americans to be enrolled. That could be done with a combination of steps. First, the ACA’s insurance protections could be reformulated to apply to people who have stayed continuously insured, rather than to everybody. This would require consumers to take responsibility for signing themselves up for coverage. Doing so would protect them from having their health status affect their premiums or coverage. Persons who do not have continuous coverage could face penalties (perhaps with some limitations imposed by regulations) when they rejoin the insurance market.

Next, states should be allowed to auto-enroll persons into default insurance coverage. In the reform plan we favor, those without access to an employer plan would be eligible for a refundable tax credit for health insurance. States would work with insurers to establish default insurance products for consumers who fail to make a selection on their own. Such default coverage would be eligible for premium subsidies that would cover the full cost of insurance, with the deductibles adjusted as necessary to ensure that is the case. The consumer would owe no premium for this coverage. By definition, these would be high-deductible insurance plans, but they would provide out-of-pocket protection for enrollees.

With tax credits and default enrollment, there would be no reason for anyone in the United States to go without health insurance protection. Consumers could opt out of coverage if they wanted to, but very few people would do so.

End the Exchange Monopoly

In addition to imposing regulations that drive consumers away, the ACA established a federal monopoly on the subsidized insurance market. Consumers who are eligible for a premium credit can only use it to purchase coverage through an exchange established by the ACA. Moreover, the federal government has taken the lead on marketing both the exchanges and the available insurance products to the American people.

The private sector is much better positioned to market products effectively to the American consumer. The rules for using premium (or tax) credits to purchase coverage should be eased substantially to allow consumers to purchase a plan outside the exchange, or through a privately run portal. This kind of competition, if allowed within a single regulatory framework (including risk adjustment mechanisms) would improve outreach and the quality of the process for selecting an insurance product.

Toward a Broader Consensus

The Affordable Care Act is much more than the exchanges that were set up to facilitate the individual insurance market. The law expanded Medicaid, implemented far-reaching changes in Medicare, imposed new requirements on employer-sponsored insurance plans, increased federal spending by hundreds of billions of dollars over a decade, and raised taxes on individual and numerous industries in the health sector. Opponents of the law have significant and legitimate concerns over the direction of all of these changes, in addition to their concerns about the viability of the exchanges. It is highly unlikely that they would set aside these concerns and agree to a narrowly written plan to make modifications just to the ACA’s exchange framework.

Nor, in our opinion, would that be advisable. The problems emerging in the exchanges are a symptom of a larger disease, which is that the ACA moved far too much power and regulatory control over the health sector to the federal government. Building a broader consensus around reform of the individual insurance market will almost certainly require revisiting other fundamental aspects of the ACA that have sharply divided policymakers.

The ACA exchanges will not be able to continue indefinitely without substantial reform. But reform will only be possible if the American public believes that this will not merely be another intrusion into their personal health decisions and their wallets. It will be up to Congress and the next President to decide if America’s health care system is worth the political risk needed to enact responsible and necessary reforms.