Health insurance

Obamacare Struggles to Survive Its Second Act

Premiums are rising and enrollment is stagnating as the health law heads into its third year.

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Whitehouse.gov

In a Hollywood screenplay, the second act starts when the protagonist leaves her home and life behind and sets out on the journey that will define the story. Think of Dorothy being swept from her home in Kansas by the tornado in The Wizard of Oz, or Luke Skywalker escaping from Mos Eisley in Star Wars, or Neo choosing to take the red pill in The Matrix. The second act marks the point of no return—and the point at which the real problems begin in earnest.

This is the point at which Obamacare exists today.

As the third annual open enrollment season begins this week, the law is firmly entrenched in American life and politics. Health coverage rates have increased noticeably in the years since the law went into effect, and millions of people rely on it, in some form or fashion, for insurance. Full repeal at this point is at most a distant possibility, one that can only be imagined over the horizon of next year's election, if at all. Some of the law's critics are quietly coming to the conclusion that repeal may now be impossible.

Yet the law is now struggling to stay afloat, to survive and thrive on its terms.

Problem number one for Obamacare is enrollment. The law has consistently undershot its targets. The Department of Health and Human Services (HHS) expects only about 10 million people to sign up for plans the coming year—barely more than the initial expectation for last year, far short of the more than 20 million the Congressional Budget Office (CBO) originally predicted for 2016. It's possible that HHS is lowballing the estimate, yet if sign-ups outpace expectations by a million or more, the tally will still be far lower than the CBO estimated. Even with the help of the law's mandate to buy insurance, the federal government is having a difficult time convincing people to sign up.

Related to this problem is the fact that premiums are on the rise. Stories of Obamacare sticker-shock abound, and even the feds have acknowledged that premiums are on the rise. According to HHS, the average price of a benchmark plan—the second lowest cost option in the "silver" tier of coverage (in which plans must cover an average of 70 percent of health expenses)—is set to rise 7.5 percent this year in federal exchange states.

But that's only one way to look at premiums, and it doesn't provide a complete picture. Silver plans only account for about two thirds of sign-ups, and averages that attempt to capture rate changes across the full spectrum of  plans have found bigger raises. Charles Gaba, an Obamacare supporter who runs the remarkably useful ACA Sign-Ups site, estimated a weighted average increase of 14.4 percent across Obamacare-compliant plans (on and off exchange) in federal exchange states. (A separate estimate which included states running their own exchanges found an average increase of 12-13 percent.) As Gaba cautions, it's not a strict apples-to-apples comparison, but it suggests that the story on premiums is more complicated than the headline HHS estimate.

It's not just how many people are signing up. It's also who is signing up. So far, the people signing up for coverage appear to be sicker than expected, and thus more expensive to cover. Although revenues for health insurers have increased along with the influx of new customers, the expansion of the customer base has not been profitable: According to a recent McKinsey report on health insurance enrollment and revenue, insurers lost a total of $2.5 billion on the individual market—or an average of about $163 per customer.

The unexpectedly high cost of Obamacare's enrollees has contributed to the demise of many of the law's government-backed insurance cooperatives. Of the 23 non-profit insurers started using $2.4 billion in loans provided by the health care law, 10 have already closed or announced plans to shut down, and most of the rest are financially strapped. As a result, hundreds of thousands of customers must switch plans, and average premiums, held down somewhat by the artificially low rates these non-profit plans offered, are on the rise.

(The law's backers have suggested that the failure of these plans is the fault of the law's political opposition, and urged the administration to offer more government support. But these insurers were supposed to be self-sufficient after the initial loans; there is something rather desperate about insisting that these plans, already backed by generous federal loans, and selling heavily subsidized policies at artificially low rates, should require even more government assistance to stay in business.)

These problems build on each other: Low sign-up numbers mean that the people who do enroll tend to be sicker and therefore more expensive to cover, which means that insurers must raise rates in order to compensate, which makes Obamacare even less attractive to the relatively health people who are concerned primarily about affordability, which in turn dampens sign-ups, which makes it harder for insurers to stay in business, which then makes way for competitors to raise rates, and so on and so forth.

Premium subsidies can offset these effects somewhat, blunting the impact of premium increases for many consumers.  But the subsidies are most effective for those at the bottom of the income spectrum, and may not be enough to encourage more middle class customers to buy in.

These problems place Obamacare in an increasingly precarious position, and they are only likely to get worse for now. That's the way things work in second acts, which tend to culminate in a moment of disaster and lost hope. But from that low point comes the eventual solution—ditching the old ways and attacking the problem again with an entirely different approach, one that accounts for the failures of the past. Out of the ashes of the old comes something new and better. For Obamacare, and America's health policy, the third act can't come soon enough.