Obamacare Is Falling Apart
Insurers are bolting from the exchanges.
President Obama has been hammered for his failure on ISIS in the wake of the Paris attacks. But there's at least
one bright spot for him in that criticism: At least it deflected the spotlight from the unfolding catastrophe that is Obamacare.
Indeed, last month brought arguably the worst news for the program since the healthcare.gov debacle: UnitedHealthcare, the nation's largest insurer, announced that it might quit Obamacare's exchanges next year. Should UnitedHealthcare act on this threat, there may not be enough (red) tape in the desk drawer of even future President Hillary Clinton to put the Obamacare Humpty Dumpty back together again.
United announced during an investor briefing Thursday that it was expecting a whopping $425 million hit on its earnings this year, primarily due to mounting losses on its Obamacare exchange business. "We cannot sustain these losses," United CEO Stephen Hensley declared. "We can't really subsidize a marketplace that doesn't appear at the moment to be sustaining itself."
Avik Roy, who serves as GOP presidential candidate Marco Rubio's health care advisor, suspects United may just be the first domino to fall. Other commercial insurers, such as Aetna, Anthem, and Cigna, have raised premiums by double digits and still say they can't make the numbers work in their favor. Hence, they have withdrawn from counties where their losses were particularly acute.
For-profit companies that have shareholders breathing down their necks don't have much latitude to absorb losses. But even companies that don't face similar profit-maximizing pressures can't escape the basic dilemma confronting the industry. For example, state filings of the non-profit Blue Cross Blue Shield show that the company barely broke even in the first half of 2015. In Texas last year, BCBS collected $2.1 billion in premiums and paid out $2.5 billion in claims. If Obamacare's condition worsens, such companies will have to scale back their participation too.
And Obamacare's condition will worsen. Why? Because not only are far fewer patients enrolling in the exchanges than projected, but those signing up are too old or sick for anything resembling a balanced risk pool.
Even the administration has admitted that Obamacare enrollment has essentially flatlined, with only 1.3 million new members expected to buy coverage next year, compared to the 8 million projected when the law was passed. This means that overall enrollment by 2016 will be somewhere between 9.4 million and 11.4 million. That's half—half—of the 21 million initially predicted. So much for universal coverage!
The reason for this pathetic take-up rate is that the lavish benefits—in-vitro fertilization for 50-year-old women*, for example—that Obamacare mandated for qualifying plans have backfired. This mandate was intended to make sure that the young and healthy would purchase full—not bare-bones, catastrophic—coverage so that they would offset the cost of sicker patients. Instead, it has forced companies to jack up rates so much that only those eligible for full subsidies (the relatively poor) or the sick find it worth their while to buy coverage. The relatively young and healthy are opting to pay the penalty and "go naked." This, in turn, is forcing insurers to raise prices even more, which is causing more healthy people to drop out, unleashing the dreaded adverse selection spiral.
Obamacare tried to prevent this downward spiral by, ironically, insuring the insurers against losses until 2017 through something called the risk corridor provision. Basically, the plan was to shake down companies making higher than expected profits and handing their proceeds to companies with higher than expected losses. Setting aside the perversity of forcing successful companies to subsidize failing competitors, the program hasn't worked because the entire industry is confronting losses and Congress has barred the administration from dipping into general funds—aka taxpayer pockets—to bail it out. (United withdrew partially because it sees no relief in sight from the government. "We see no indication of anything actually improving," CEO Henley said.)
The best medicine for the exchanges? It might involve letting the insurance industry offer pared back, cheap coverage at prices that reflect the risk profile of patients. This would bring back the young invincibles, but jack up prices for sicker patients. That problem could be solved by targeting subsidies on these patients on a strict means-tested basis rather than showering them on everyone up to 400 percent of the poverty level. The crucial upside to this approach is that it would allow the insurance marketplace to function again. However, market pricing based on health is against the religion of liberals. Clinton won't go there. She could twist the screws on opt-outs by raising their penalty to something close to the price of the coverage they are refusing. But that would require Congress to override the statutory limits on these penalties in Obamacare. And so long as the House remains in Republican hands, that ain't going to happen.
Hillary's only other option will be to impose price controls on the health care industry. She's recently taken to demonizing drug companies but, notes Roy, they account for only 12 percent of health care costs. The real "savings" that could lower the price of coverage would be from going after doctor and hospital reimbursement, but that would be the political equivalent of stepping on a land mine.
Obamacare is falling apart limb by limb, and there is really no keeping it together. It could well become President Obama's Iraq: A costly and conceited intervention that destroyed an imperfect but functioning system just because it didn't fit his utopian designs.
This column originally appeared in The Week.
Update: * Although Obamacare — aka ACA — does not have a universal mandate to cover in-vitro fertilization, states with this mandate are expected to offer this benefit in their benchmark ACA plans.