(Bloomberg) – After failing to repeal or replace the ACA, Senate Republicans are slimming down their ambitions to target the one piece of the health law they loathe most, in what’s being called a “skinny repeal.”

For insurance companies, that may be the most problematic health-overhaul option yet.

The Affordable Care Act’s individual mandate requires everyone to have health coverage and penalizes those who choose to go without it. Making the purchase of coverage compulsory is meant to distribute risk evenly among healthy and sick people and keep overall costs down.

But Obamacare’s requirement has been a far from perfect solution to prod people to buy insurance. The penalties are far less than the cost of insurance, and people who skip out on coverage can still buy it later. President Donald Trump has even suggested that he won’t enforce the mandate.

Senate Majority Leader Mitch McConnell (R-Ky.)
Senate Majority Leader Mitch McConnell (R-Ky.) Bloomberg

Insurers have taken notice. Many have raised premiums or pulled out of certain markets as healthier people decide to forgo coverage. They warn that overturning the mandate will only create more instability.

“Eliminating the individual coverage requirement by itself will likely result in fewer people covered and a deterioration of the risk pool, which will increase premiums,” the trade group America’s Health Insurance Plans said in a letter to lawmakers on Thursday.

Penalty Puzzle

In 2015, more than 19 million people either claimed an exemption from the mandate or paid a penalty for not having insurance -- more than the 11.7 million who signed up for private coverage under the law that year.

Of those who didn’t have coverage, 12.7 million were people who claimed an exception, according to the Internal Revenue Service, including some who weren’t eligible for subsidies under Obamacare despite having lower incomes, because they lived in states that didn’t fully implement the law. About 6.5 million people paid an average $470 penalty for not having insurance, the IRS said in a statement. The agency hasn’t yet released 2016 numbers.

“I don’t buy the argument that this paltry penalty with a feckless mandate, I don’t buy that it is the major deterrent that people think it is,” Robert Moffit, a senior fellow in health policy studies at the conservative Heritage Foundation, said in an interview. The Heritage Foundation backs repeal of the Affordable Care Act.

Nonetheless, many insurers have already begun to prepare for a world without an individual mandate, whether it comes through a change in law or in enforcement. ConnectiCare Inc., a Connecticut-based insurer, said that it increased its rates by 2.3% to account for such a scenario.

“Even a perception that the mandate will not be enforced will affect consumer behavior in a manner that will erode the risk pools in the individual market,” the company said in a filing to the state’s insurance department.

Another smaller insurer, BridgeSpan Health, said that it would pull out of counties in Oregon. It attributed its smaller footprint to “a weakened federal mandate to have health insurance coverage.”

“The only thing insurers know today -- and have throughout this entire year -- is that nothing is certain,” said Ceci Connolly, chief executive officer of the Alliance of Community Health Plans. “And the uncertainty has been increasingly problematic from a business perspective, especially for nonprofit community plans that often run on margins of 2% or less.”

Less Coverage, Higher Costs

The Congressional Budget Office estimated Wednesday that a skinny repeal could result in 16 million more people uninsured in a decade than under Obamacare. The nonpartisan agency projected previously that premiums could climb about 20% compared to Obamacare if the individual mandate was repealed, according to an estimate it issued in December.

Younger, healthier people dropping insurance because they no longer get penalized for not having it could “make coverage more unaffordable and inaccessible,” the Blue Cross Blue Shield Association said in a statement Wednesday.

“Republicans are in a box,” James Capretta, a resident fellow at the conservative-leaning think tank American Enterprise Institute, wrote in RealClear Health. “They have argued repeatedly that they need to pass legislation to steady the insurance marketplace, but they are proceeding with legislation that will almost certainly have the opposite effect.”

It’s unclear whether Senate GOP leaders will muster enough votes to pass a skinny repeal. The proposal’s prospects already face challenges in the House after Representative Mark Meadows said the conservative Freedom Caucus he leads won’t support it, possibly setting up a scenario where both chambers would have to work out a compromise.

Tight Timeline

Insurers are asking for more certainty than a skinny repeal bill would provide, and the timeline is tight. In many states, they’re supposed to set final premiums by the middle of August.

Companies have also warned of serious disruption to the markets if the Trump administration stops making payments the companies use to reduce low-income customers’ costs. On Wednesday, Anthem Inc. threatened to hasten its retreat from Obamacare’s marketplaces unless the government makes a firm commitment to fund the program.

Without the subsidies, called cost-sharing reduction payments, Anthem said it would need to boost rates for its ACA-compliant plans as much as 18% to 20%. In some markets, Anthem would probably quit instead, the company told investors on a conference call.

“If we aren’t able to gain certainty on some of these items quickly, we do expect that we will need to revise our rate filings to further narrow our level of participation,” Anthem Chief Executive Officer Joseph Swedish said.

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