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healthcare

Obamacare Is Heading for Collapse

Like a house of cards, where every pasteboard is dependent on others, the Affordable Care Act is destined to topple. Too many ill winds are merging into the perfect storm that will blow this house down.

The foundation on which all else would rest was to have been participation by the young and healthy. Their buying into the plan would support the care of the older with their costly illnesses. But the young are not showing up. Their enrollment showed a sudden spurt in late December, but the uninsured Estimated Enrollment Slashed: February 1: True to prediction, the Congressional Budget Office just cut its estimate of the number expected to be enrolled in the health exchanges by year end from 21 million to 13 million. The NY Times tucked that story into the bottom of page 18.
    

under-35 demographic, numbering over 5 million, would rather pay the penalty for not buying insurance than opt for the costly plans. The result is that overall enrollment is expected to be between 9.4 million and 11.4 million by the end of 2016. That is a stunning half of the 21 million initially projected.

doing the math

The Affordable Care Act (ACA) dictates that insurers must accept the most costly applicants, those with prior-existing medical problems. Covering those costs has forced the industry to raise rates sharply for 2016, offering plans with ever higher deductibles and co-payments that no longer make sense to young people more focused on paying off credit card debt or saving to buy a house someday.

That calculus that speaks to older age groups as well. A reasonably healthy prospect for Obamacare has trouble making sense of a plan that costs, say, $300 a month net of a government subsidy, but comes with a $5,000 deductible. The policy holder will have to pay for all health needs out-of-pocket, getting nothing in return (except for preventive care, which is covered, but is a fact not widely known) for the $300 a month outlay. Our prospect is likely to conclude that it's decidedly cheaper to pay the penalty — and risk that nothing catastrophic happens.

dropping out

Beyond those who reason that high deductibles or low penalties make it sensible to skip insurance is another echelon of people who make so little money as checkout clerks at the supermarket or waiting tables at luncheonettes that they simply cannot afford another expense. They can barely pay the rent and the electric bill. With the best of intentions, they may have found a policy that, after subsidies, costs as little as $60 a month, but find their tight budget can't support even that, so they drop out. For a stratum of many millions among us in this low wage economy, there is no money. Yet the government will bludgeon even those in such difficult straits with a $695 penalty.

nudging

In 2014 the penalty for not buying insurance was the greater of $95 per adult or 1% of household income. That rose to $325 per adult or 2% of household income in 2015, and for 2016, it is $695 per adult or 2.5% of household income. The intention is to goad people into realizing that the penalty buys them nothing, but by paying the (declining each year) difference between penalty and policy costs, they could be insured.

But do those choosing not to buy know about the penalty schedule? Or, like the disastrous rollout, is this another lapse of attention by Obamacare management. We have seen no evidence — television advertising for example — that the administration has put the word out about rising penalties despite the ACA's urgent need to promote sign-ups. Moreover, doesn't that leave people to find out about impending penalties long after the moment when foreknowledge might have encouraged them to buy insurance?

Here's what we mean: The buying period for 2016 runs from November 1 to this January 31. Absent widespread advertising, not until 2015 tax returns are filed will the uninformed person discover that failing to buy insurance for last year has cost $325 because the penalty only shows up as a deduction from refunds this year. And for the same reason, that person will not know about the $695 charge for this year– an increase that might have changed minds back in November had it been known — until well into 2017.

red ink

The absence of those customers is causing losses in the insurance industry. Much of the influx of new customers brought about by Obamacare has proved unprofitable. Almost two-thirds of the insurers lost money in 2014 and only 13% made more than $10 million. One report says that companies such as Aetna, Anthem, and Cigna have raised premiums by double digits for 2016 and say they still can't make the numbers work. United Healthcare, the nation's largest carrier, expects a $425 million loss for 2015 from insurance sold to individuals under Obamacare. They have pulled all advertising aimed at attracting new 2016 enrollees and are considering dropping out of Obamacare altogether in 2017.

Consequently, rates for 2016 insurance plans have risen by double digits in a patchwork pattern around the country, as insurers compensate for too many on their rolls who need costly care and a shortage of the healthy who cost next to nothing. The sickest will keep their policies no matter the cost, but those with good health will drop out as rates rise, leading to another increase to compensate for the ever greater concentration in the plans of those who suffer from ill health.

This is the dreaded death spiral that was always the worry in the Obamacare formula, and the question is whether rate rises for 2016 and the laggard sign up mark its beginning.

crashing coops

As consolation to Democrats for no "public option" — what was to have been a government-run non-profit insurance agency to compete with private industry and drive down costs — the ACA provided $6 billion in loans for each state to set up its own non-profit cooperative to accomplish the same. That was cut to $2.4 billion in a budget scuffle at the end of 2012, so there was money enough only for the 23 states that had gotten their programs underway.

Compete they did, buying their way into the market by offering plans with discounted premiums, as a way partly to overcome their prohibition against spending on advertising. The result is that they've lost money. During 2015, state regulators have shuttered 12 of the 23, including the three biggest, owing to fragile balance sheets. Some $1.24 billion in federal loans have evaporated with them. Of the 11 remaining, 10 have never turned a surplus. The closures have left 700,000 without insurance.

The Obama administration did its part to undermine the coops and the industry. When at the outset insurers were forced to cancel existing insurance plans that did not measure up to the more elaborate Obamacare minima, consumers rebelled. Notoriously inclined to tinker with the ACA statute, the White House relented, notifying 4.2 cancelled policy holders that they could keep their old plans. The Republican-controlled House voted its approval, too. The insurance industry was stunned, deprived of the huge bloc of largely healthy customers expected — and after rates for 2014 had been set based on their coming aboard.

the risk corridor

But insurers needn't worry. Under the ACA law, any losses through 2016 are to be covered by a sharing arrangement with the federal government. An insurer that spends anything less than 80% of its proceeds on healthcare reimbursements must fork over the unspent excess, and this is to be transferred to companies that have incurred losses.

But this delicate balancing act has not worked as planned. Insurers experienced losses of $2.9 billion during the first year of operation against only $362 million coughed up by insurers with excess profits. Foreseeing that the Obama administration would cover the difference by reimbursing the money-losing insurers using general funds — that is, from taxpayer pockets — Sen. Marco Rubio introduced a bill in late 2013 that would block use of general funds to bail out insurers. He labeled it crony capitalism to put taxpayers “on the hook for Washington’s mistakes”.

His measure was included in the spending bill for 2015 and appears again in the omnibus spending bill just passed for 2016. As recently as July, the White House was telling insurers they would get 100% reimbursement for their losses. With general funds blocked, and only the profits of a few insurers available for redistribution, they've now been told they'll get just 13 cents on the dollar.

The insurance industry is extremely profitable, stemming from their U.S. revenue rising to $743 billion in 2014 from $641 billion the year before. Their profits principally derive from plans sold to corporations that buy insurance for their employees. But they are unwilling to sacrifice those profits to subsidize Obamacare.

The cooperatives are another matter, with nothing to fall back on. So, for example, Health Republic of Oregon closed its doors when it learned it would receive only $995,000 of the $7.9 million it had expected from the government. The Kentucky plan expected $77 million to cover its losses but will get only $9.7 million. States have been defying federal entreaties not to close the cooperatives, but local regulators face added pressure in states where insurers are liable for the toxic balance sheets of other insurers, and that includes the coops.

if it's broke, don't fix it

A proposed remedy is to raise the penalties close to the cost of insurance to force everyone on board, but that solution ignores our point that so many do not have the money for either insurance or penalty, despite the subsides. Another fix would strip the ACA mandates of their excessive coverage to arrive at plans that concentrate more on coverage of serious illness. Or tighten plans in other ways that bring down premium costs, such as narrowing the network of doctors and hospitals a client can draw upon, and capping coverage for top-dollar specialists, expensive drugs, and high-cost testing. But if part of cost cutting is to keep deductibles high, much of the unappealing calculus remains the same.

If there are ways to fix the Affordable Car Act, standing in the way is a Congress controlled by an entire political party that refuses to enact fixes because it wants Obamacare to fail. By one count the House voted 61 times to repeal the ACA in its entirety, and in early December the Senate finally did much the same, voting 52-47 for provisions that would cripple the law by forbidding the federal government to run its healthcare exchanges, by doing away with the subsidies that make insurance affordable, and by canceling any penalties on individuals or employers who ignore the mandates to buy health insurance.

President Obama will of course veto the bill, but there it sits waiting for a possible Republican president from among a roster of candidates every one of whom has said he or she would sign a bill to repeal — but the economics show signs that Obamacare will spiral into extinction quite on its own and rob them of the pleasure.

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