Obamacare's Economic Assumptions Collapse
Economic reality is making it increasingly obvious that we are in the midst of Obamacare’s long anticipated death spiral. Most recently, Aetna joined UnitedHealthcare and Humana as the third of the "big five" insurance firms to announce major cuts to its Obamacare exchange business.
For insurers, it's simple math: Premiums collected must exceed claims paid. If too few healthy, low risk individuals enroll to offset the costs of insuring unhealthy, high risk individuals, the math doesn’t work. This imbalance forces insurers to raise premiums on the low risk individuals who do enroll to cover the costs of insuring high risk individuals. The rising premiums cause even more healthy individuals to drop coverage – resulting in what has been called a death spiral.
Aetna’s CEO Mark Bertolini explained that his company was dropping out of the exchanges because "[p]roviding affordable, high-quality healthcare options to consumers is not possible without a balanced risk pool," and that “individuals in need of high-cost care represent” a percentage of the risk pool so large that it “results in substantial upward pressure on premiums and creates significant sustainability concerns.”
The result: Aetna suffered a second-quarter pretax 2016 loss of $200 million and total pretax losses of more than $430 million since January 2014 when the exchanges opened for business. Aetna wasn’t alone.
In April, the nation’s largest health insurer UnitedHealthcare, announced that it was pulling out of nearly all ObamaCare exchanges. In 2017, it will participate in only three exchanges instead of the 34 this year. CEO Stephen Hemsley similarly explained that “[t]he smaller overall market size and shorter-term higher risk profile within this market segment continue to suggest we cannot broadly serve it on an effective and sustained basis.”
The problem extends beyond big insurers. ObamaCare established 23 non-profit health insurance companies called Consumer Operated and Oriented Plans (co-ops). According to the Center for Medicaid and Medicare Services, they received $2.4 billion in taxpayer dollars because they demonstrated “a high probability of financial viability”. To date, 16 of the 23 co-ops (or 70 percent) have failed due to weak balance sheets. Six of the remaining seven are on the brink of collapse.
As a result, the competition between insurers that ObamaCare counted on to keep the quality of coverage up and the costs down is vanishing.
According to a recent analysis by the consulting company Avalere Health, in 2017 nearly 36% of markets may have only one insurer participating in the exchanges, up from 4% in 2016. Nearly 55% may have two or fewer choices, up from 33%. The reasons: “Lower-than-expected enrollment, a high cost population, and troubled risk mitigation programs have led to decreased plan participation for 2017.”
The all too predictable consequence is daunting rate hikes. In an ongoing analysis, independent analyst Charles Gaba recently crunched the numbers for insurers participating in the exchanges. He concluded that for 2017, the national average increase requested is a whopping 24.3%. For the eight states that have approved rate hikes to date (representing about 10% of the total population) the average approved increase was 25.6%. And that’s with current overall inflation at about 1 percent. So much for President Obama’s promise that the average family would see its premiums decline by $2,500.
Even President Obama knows something must be done. As recently as August 2nd, he proposed a “public option” government run insurance company that would compete against private insurers on the exchanges. This "public-option" insurer could operate at a loss indefinitely with taxpayers footing the bill, driving private insurance companies that actually have to turn a profit, out of the market. The result: A massive taxpayer-funded government bureaucracy supporting a single-payer healthcare system that eliminates consumer choice as well as the competition necessary to keep benefits up and costs down.
Hillary Clinton, who sees more government as the solution to every problem, has endorsed the idea. Perhaps those sceptics who saw ObamaCare as an intentionally flawed plan paving the way for a single payer system had a point after all.
But making ObamaCare more bureaucratic, economically indefensible and politically untouchable is not the answer. Americans deserve quality affordable care, not more bureaucracy. It’s past time to do something that makes sense.
Any meaningful effort to repeal and replace Obamacare will require cooperation between the President and Congress on a plan that incorporates economically rational free market principles while preserving ObamaCare’s most popular provisions. The good news is that both GOP presidential nominee Donald Trump and Speaker of the House Paul Ryan have outlined such plans.
Among other complimentary proposals, they both would encourage much needed competition by allowing insurance sales across state lines while using health savings accounts and tax credits or deductions to reduce insurance costs. They would also increase the role of states to more effectively manage and administer Medicaid (the state-federal program for low income Americans that accounts for the lion’s share of those added to the rolls of the insured under ObamaCare).
Ryan’s more detailed plan would, among other things, implement much needed medical malpractice reforms and allow small businesses and individuals to pool their collective purchasing power. It would also preserve ObamaCare’s more popular provisions such as protecting those with pre-existing conditions and prohibiting sudden cancellations if continuous coverage is maintained.
At this point, it is evident that ObamaCare’s economic assumptions are collapsing. It’s time to elect lawmakers who will offer effective legislation, vet it through congressional committees and learn what’s in it before they pass it. Trump and Ryan are on the right path.