3 states are down to one Obamacare insurer. What if they fall to zero?

There are at least three states that currently have just one health insurer planning to sell on their Obamacare marketplace in 2017: Alaska, Alabama, and Wyoming.

The health care law doesn't have a backup plan if any of those states have their sole carriers drop out.

"This is a tough situation because there isn’t a good contingency plan right now," says Caroline Pearson, senior vice president at the research firm Avalere Health, who focuses on the Obamacare marketplaces.

A federal official told the Wall Street Journal he was "pretty confident" there would be no areas with zero carriers — but he also couldn't rule out the possibility.

An Obamacare market with no sellers would leave thousands of enrollees unable to use tax subsidies to buy insurance coverage. And the government doesn't have any particular legal power to cajole carriers into setting up shop in the markets they find undesirable. The most they can do, it turns out, is ask really nicely.

"There is no lever that the government can pull except moral assuaging," says Sabrina Corlette, a research professor at Georgetown's Center on Health Insurance Reforms.

Why these three states are down to one carrier

The three markets that currently have one carrier — Alabama, Alaska, and Wyoming — are all largely rural and, in the case of the latter two, sparsely populated states. Wyoming has the smallest population of any state, while Alaska comes in at 48th.

These markets aren't the most appealing to insurers, who can find more customers in better populated states. But each state has a bit of a unique situation that left it where it is today:

• Alaska lost a carrier that was struggling to survive in the Northwest. In 2016, Alaska's marketplace had two competitors. One of them, Moda Health, dropped out of the Alaska marketplace in early May, citing "significant financial loss" in the state. This leaves only Premera Blue Cross behind.
• Alabama lost two national carriers. Humana and UnitedHealth both recently announced they would leave the state at the end of the year. United's departure was part of the company's national retreat from the Obamacare marketplaces. Humana was a relatively small presence in the Alabama marketplace, covering about 15,000 of the state's 200,000 Obamacare enrollees. The one remaining carrier will be the local Blue Cross Blue Shield plan.
• Wyoming was a one-carrier state in 2016 — and will likely stay that way next year. Like the two other states, it is only served by a Blue Cross Blue Shield carrier.

In other states, some counties — largely rural areas — will also be down to one plan. The Wall Street journal estimates that, all told, 650 counties will have only one carrier in 2017 — up from 225 counties in 2016.

Obamacare did have a backup plan to increase competition. Regulations watered it down.

There's a section in the health care law — Sec. 1334, to be exact — that does look like the exact type of program that could help in this situation.

Sec. 1334 requires the federal government to contract with two multi-state plans, or MSPs. These MSPs would, in theory, provide coverage in all 50 states. And that would mean every Obamacare enrollee would get some choice of plan.

Building a national plan can be difficult. It means contracting with doctors all across the country. So the law intended for the MSPs to scale up over their first four years. They would have to sell in at least 60 percent of all states in their first year, 70 percent in their second year, 85 percent in the third, and 100 percent in the fourth year.

This year is the fourth year — and the program has fallen behind schedule.

From the get-go, the federal government only found one insurer willing to participate in the MSP program, Blue Cross Blue Shield.

And BCBS hasn't been able to scale up its nationwide coverage as quickly as the law envisioned. In 2016, it sold MSP coverage in 21 states — fewer than half of what the law had envisioned at that point in time.

"The experience of the first three years of the program has demonstrated that providing nationwide coverage for any issuer or group of issuers is difficult to achieve," a January 2016 memo from the Office of Personnel Management observed.

That same memo officially relaxed the rules for the MSP program: It announced that plans would not have to cover all states in 2017, as the law had envisioned. And it encouraged other health plans to apply to join the program, "whether or not they can commit to a four-year schedule for nationwide coverage."

Obamacare has survived this type of challenge before — but the solution usually isn't perfect

The closest Obamacare has come to a zero-carrier situation happened in 2013, right before the marketplaces launched. At the time, there were 36 counties in Mississippi where no insurance plan wanted to sell.

Humana swooped in a few months before the marketplaces launched and decided to offer coverage, which gave tens of thousands of Mississippi residents the chance to buy insurance.

But the story wasn't all positive: Alabama ended up having some of the highest Obamacare premiums in the nation, and part of that was attributed to the lack of competition. Humana didn't have to compete with other plans; it had free rein to pick a price point.

And this is what experts say would likely happen in a state with no interested sellers. Congress could, in theory, pass a fix — it could create a public option, for example — but legislators haven't exactly been keen on creating Obamacare fixes.

A health plan would suddenly become interested in setting up shop in a monopoly market.

"Carriers can set their prices not just to make sure they only have to cover their costs, but also make a little profit," says Corlette.

Or as John McDonough, a health policy expert at Harvard who worked on the health law's drafting, puts it, "With only one plan, they certainly have pricing flexibility to make it work for them financially."

Blue Cross — the single remaining carrier in Alaska, Alabama, and Wyoming — has already warned of steep price increases. It released a lengthy report in March on how the health law's enrollees have been sicker and more expensive than the plan had expected.

"What really surprised us was that we had thought the costs in this new market would be similar to the group market," Alissa Fox, Blue Cross's senior vice president for policy, told me when the report came out. "What we've found is that costs are much higher than the group market."

That means the health plan will likely need to raise its premiums in 2017, to cover those higher costs — and in states where it's the only plan, patients won't have anywhere else to go.