The administration has confirmed that the individual policies that were supposed to be cancelled because of Obamacare can now remain in force another two years.

For months I have been saying millions of individual health insurance policies will be cancelled by year-end––most deferred until December because of the carriers’ early renewal programs and because of President Obama’s request the policies be extended in the states that have allowed it.

The administration, even today, as well as supporters of the new health law, have long downplayed the number of these “junk policy” cancellations as being insignificant.

Apparently, these cancelled policies are good enough and their number large enough to make a difference come the November 2014 elections.

As a person whose policy is scheduled to be cancelled at year-end, I am happy to be able to keep my policy with a better network, lower deductibles, and at a rate 66% less than the best Obamacare compliant policy I could get––presuming my insurance company and state allow it.

But for the sake of Obamacare’s long-term sustainability, this is not a good decision.

The fundamental problem here is that the administration is just not signing up enough people to make anyone confident this program is sustainable.

Yes, the law’s $20 billion “3Rs” health insurance company reinsurance program will prop up the program through 2016––and even be enhanced because of these changes. But then the “training wheels” come off and the program has to stand on its own. As I have said on this blog before, I don’t expect the insurance industry to be patient past 2015 before it has to begin charging the real cost of the program to consumers.

The administration now claims that it signed up 4 million people as of late February. Of course, that number is inflated. It has been widely reported; including here at the New York Times, that about 20% of the people who enrolled in January never paid their premium and were cancelled. Carriers are telling me that another 2% to 5% of those January enrollments never paid their second month’s premium.

So, that 4 million Obamacare enrollment number is likely more like 3 million.

The Kaiser Family Foundation has said that 17.2 million people are eligible both for the new health insurance exchanges and eligible for a subsidy. Because the direct enrollment function hasn’t been working, the only place a person can get a subsidized policy is on the exchanges.

In reporting their enrollments in February, the administration said that 82% of the exchange enrollments were getting a subsidy.

That means only about 2.5 million subsidy eligible people (82% of 3 million) have so far signed up and paid for their coverage out of a total of 17.2 million eligible––or about 15% of the total the Kaiser Family Foundation estimates are eligible.

And many of these already had coverage––they aren’t coming from the ranks of the uninsured that are the people this program was really designed to get to.

Even if the administration gets 20%, or 25%, or 30% of the eligible group signed-up by March 31, that is nowhere near enough to create a sustainable pool. The long-time underwriting rule calls for at least 70% of an eligible group to participate in order to get enough healthy people to pay for the sick who will always show up first for coverage.

Supporters will cite the Congressional Budget Office (CBO) projections saying a third of the eventual participants will sign up each of the first three years. Why would they? If Obamacare, with all of the attention and promotion it is getting, is not attractive the first year, particularly because of its steep deductibles compared to the after-subsidy premium people must pay, then why would it be attractive in the third year?

The response might be that the fines for not buying coverage will eventually more than double and force these people to finally buy coverage. Think about that. People don’t want to buy this and the solution is to fine a family making $60,000 a year $1,500? If the cancelled policies are creating an election-year nightmare for the Democrats, think about how politically problematic big fines for not buying an Obamacare policy that consumers don’t want would be in the 2016 presidential election year.

The health insurance plans participating in Obamacare are a very worried group right now.

The employer mandate has been pushed back twice. Enrollment deadlines have been ignored and delayed. Now, the requirement to cancel non-compliant policies has been deferred twice.

The carriers need the average 35% baseline premium increase they were going to get by converting the old individual health insurance policies, that generally reflect a much healthier group, to Obamacare in order to offset the generally much sicker group that was always going to make up the new Obamacare risk pool.

Why should the insurers believe these policies would ever be cancelled and converted to Obamacare by the end of 2016? Will the Democrats have less of a political problem in 2016?

Will the administration next suspend the individual mandate and its fines for not buying a compliant policy? How can you let me off the hook with my old policy and force my neighbor to buy the more expensive policy?

If the administration is willing to let employers off the hook, and now these people who had individual coverage before, why won’t it let the people who don’t want to buy an Obamacare policy off the individual mandate hook rather than have them be angry in an election-year––2014 and 2016?

All of these delays are just tinkering around the edges of a law that is deeply flawed.

The biggest flaw is that the product the Obama administration is trying to sell to consumers is not the product people want to buy.

Rejiggering deadlines until this thing is contorted like a pretzel is exactly the wrong thing to do.

Obamacare needs a fundamental fix.

I have to believe that even its most ardent supporters are coming to that realization.

Robert Laszewski has been a fixture in Washington health policy circles for the better part of three decades. He currently serves as the president of Health Policy and Strategy Associates of Alexandria, Virginia. You can read more of his thoughtful analysis of healthcare industry trends at The Health Policy and Marketplace Blog, where this post first appeared.

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19 Responses for “What Extending the Obamacare Cancelled Policy Moratorium Really Means”

  1. Perry says:

    The law was not thought out well and horribly implemented. The website and helplines have been a nightmare for most applicants. Now the administration is changing the rules PURELY FOR POLITICAL REASONS.
    At this point, how can anyone believe the ultimate outcome will be good for anyone except the few low income folks that desperately needed insurance? There is no reason they could not have been helped without creating this monstrosity and upheaval in the system. If we thought there was confusion before, it’s going to be a real mess now.

  2. Peter1 says:

    “How can you let me off the hook with my old policy and force my neighbor to buy the more expensive policy?”

    Health coverage in the U.S. has always been about unfairness. The administration is just continuing that policy because it’s counting votes, not what is right.

  3. Bobby Gladd says:

    “Apparently, these cancelled policies are good enough and their number large enough to make a difference come the November 2014 elections.”
    __

    The Money Quote.

  4. Frank Logano says:

    I have a slightly different perspective, yes this could be politically motivated but this law is trying to change the healthcare landscape that has been in place at least for 60 years. That can’t happen overnight. The big fault I have with the law are the on off switches of the change and now they are using more of a capacitor gradual model. That makes more sense in trying to change as has been repeated correctly noted on this blog, the healthcare industrial complex that we face.

  5. Barry Carol says:

    Can insurance companies sell non-compliant policies to NEW customers? I think the answer to that is no but I don’t know for sure. I also wonder how many carriers will be willing to continue to sell the non-compliant policies to existing policyholders and how many states will let them do that if they want to.

    While the 3R’s are only scheduled to last for three years, the risk adjustment piece is supposed to continue indefinitely, I believe and the other two R’s could probably be extended if need be. This whole episode is starting to feel like a slow motion version of the repeal of the 1988 Catastrophic Coverage Act after seniors objected, especially those higher income seniors who would be required to pay the income tax surcharge to finance its cost.

    One positive aspect of Obamacare, I think, is that people are getting a better understanding of how much comprehensive insurance coverage costs. Most of the 150-160 million people who get their health insurance coverage through an employer have no clue what the cost per covered life is or how much the employer pays on their behalf above their own contribution to the cost, if any.

    In France, their health insurance system is comparable to Medicare and covers only 70% of the cost of covered services, tests, procedures and drugs. For that, the French pay 13% of their income (employer + employee share combined) in payroll taxes. On top of that, about 92% of the population buys a supplemental plan from an insurer to cover the other 30% which presumably costs another 5.0%-5.5% of income on average though those policies may be subject to age rating though I don’t know for sure.

    Americans earning less than 400% of the FPL income amount or about $94K for a family of four are balking at paying 9.5% of income for health insurance with the rest to be covered by subsidies. People who expect to be able to buy comprehensive coverage with relatively low deductibles for a couple of hundred dollars a month are kidding themselves.

  6. Peter1 says:

    “One positive aspect of Obamacare, I think, is that people are getting a better understanding of how much comprehensive insurance coverage costs.”

    Only those who don’t get a subsidy. $63k for no subsidy is not a lot of income.

    Number of people in the household 2
    Annual household income $62,000
    Age of the first adult 55 Age of spouse 55

    Estimated monthly silver plan premium (without subsidy) $1,026
    Estimated tax credit from the government $535
    ——————————-
    Your estimated monthly silver plan premium $491

    Run the same scenario, except income goes up by $1,000 to $63,000:

    Number of people in the household 2
    Annual household income $63,000
    Age of the first adult 55 Age of spouse 55

    Estimated monthly silver plan premium (without subsidy) $1,026
    Estimated tax credit from the government $0
    ——————————-
    Your estimated monthly silver plan premium $1026

    Your premium jumps from $491 to $1026 per month.
    $1026-491=$535

    $535×12=$6420

    You have to spend $6420 more per year on premiums because your income went up by $1,000. The additional $1,000 puts your over the threshold so you are no longer eligible for subsidies.

    • Barry Carol says:

      Peter1,

      I define the situation you describe as a cliff phaseout of subsidies as compared to a more gradual phaseout. I’ve written about this before and I agree that it’s grossly unfair to those with an income of just above 400% of the FPL. I’m sure the ACA supporters would say something like there will always be both winners and losers in any major new program like this one. Also, the number of people with income high enough to not qualify for a health insurance subsidy and low enough to have to spend more than 9.5% of their income for insurance because they don’t get it through an employer is comparatively small and that the total number of people who previously bought health insurance in the individual insurance market, about 15 million, is itself a fairly small percentage of the total population. It would be interesting to see a quantification of how much it would cost to extend health insurance subsidies to everyone so that nobody had to pay more than 9.5% of Modified Adjusted Gross Income (MAGI) for the second least expensive Silver level plan in their local market.

      Separately, I can think of a couple of reasons why Bob’s new insurance options are more expensive than his old plan which offered better coverage. The less significant reason could be that if the old plan was in his wife’s name and she is younger than he is, rates would go up under the new rules because the ages of both people covered would have to be taken into account to determine the age rating for the policy. The more significant reason, in all likelihood, is that he and his wife were able to qualify for the old plan because they passed medical underwriting. Under the new plan, insurers have to take all comers including those who were previously uninsurable using traditional medical underwriting criteria. Also, the average age composition of the insurance pool probably skews older than before. Even with a 3 to 1 limit on age rating, an older pool and one would more expensive to cover people could easily result in a significant rate increase vs. his prior plan.

  7. Bob Hertz says:

    Note to Barry – I once calculated that the cost of extending subsidies to all individual customers of all incomes could be as low as $12 billion a year.

    That assumes 3 million persons who make more than 400% of poverty trying to enroll, and an average subsidy of $4000 each to get them under 9.5% of income.

    My 3 million might be low, and my $4000 might be high. Depend a lot on the percent needing family coverage.

    But not a budget buster. We spend $12 billion on Medicare more or less every week.

    Also………

    There is a remarkable (to me) paragraph near the bottom of Mr Lascewski’s fine article.

    He says that the carriers needed to convert healthy policyholders over to the exchanges, to balance out the less healthy enrollees.

    Boy, in all the controversy over cancellations last fall, and I must have read 100 articles on the subject, I do not remember anyone being so blunt and honest. (A guy named Larry Levitt comes to mind.)

    The cynicism of this maneuver is pretty repulsive. And in fact it backfired mightily on the supporters of the ACA.

    • Barry Carol says:

      Bob,

      Thanks for your comments. While I agree that $12 billion per year to extend subsidies to everyone who needs them doesn’t sound like a budget buster, the current political process looks to CBO to score these costs over a ten year timeframe. That number would probably come in at $140-$160 billion, including projected inflation, which would then have to be “paid for” somehow but probably not by raising taxes. The same debate is going on right now over the so-called doc fix and the SGR formula. CBO currently scores that ten year cost at $138 billion which is down from over $300 billion a couple of years ago because Medicare cost growth has slowed. Nothing is ever simple in the political world we live in today, especially as it relates to healthcare.

  8. Bob Hertz says:

    I agree that the 10-year measuring process tends to make molehills into mountains.

    Prof Uwe Reinhardt has a good method of dealing with this rhetorically.
    He just multiplies government revenues by ten.

    Over the next ten years, the fed govt will probably collect at least $30 trillion in revenue. Collecting another $120 billion is indeed peanuts.

    • Barry Carol says:

      Bob,

      The cost of health insurance subsidies for all who need them only appear cheap if looked at in isolation but the system doesn’t work that way. The Medicare Part D donut hole exists because of budget constraints. Why don’t we have universal pre-K or spend more to repair and modernize our aging infrastructure? Why doesn’t Medicaid pay at least as much as Medicare for each service, test or procedure? Again, it’s budget constraints. Heck, every agency or regulatory body at every level of government claims to be underfunded. I’ve never heard a government entity admit to being overfunded or even adequately funded. The theoretical capability of politicians to spend money, all with the best of intentions, is virtually infinite. The fact is that money is government’s constraining resource and the line has to be drawn somewhere within reason which necessitates tradeoffs and compromises across the budget. Taxpayers have their limits which are lower in the U.S. than they are in Canada or Western Europe. For better or worse, that’s the reality.

      • Cynthia says:

        Perhaps Barack Obama should learn to pay for his main cause the same way Bush paid for his main cause, the Iraq War — as in, don’t pay for it at all.

  9. healanyone says:

    He says that the carriers needed to convert healthy policyholders over to the exchanges, to balance out the less healthy enrollees.

  10. healanyone says:

    This whole episode is starting to feel like a slow motion version of the repeal of the 1988 Catastrophic Coverage Act after seniors objected, especially those higher income seniors who would be required to pay the income tax surcharge to finance its cost.

  11. Bob Hertz says:

    Mickey Kaus in CA is not a health care wonk, but he had a very good idea last fall.

    If the ACA had just expanded the age of eligibility for Medicare down by 5 years, and done the same thing 5 years from now, there would be no losers other than a small tax increase for everyone. (probably under 1% of payroll).

    Instead we have this extremely fragile ACA risk pool, and people with still-modest incomes are being dragooned into the exchanges to balance out other enrollees.

    There is a good article called “Kludgeocracy” at the New American website that gives details about the futility of these indirect and cowardly liberal ‘taxes.’

  12. Lisa Basset says:

    It would be interesting to see a quantification of how much it would cost to extend health insurance subsidies to everyone so that nobody had to pay more than 9.5% of Modified Adjusted Gross Income (MAGI) for the second least expensive Silver level plan in their local market.

  13. Bob Hertz says:

    Lisa, I estimate that cost of extending subsidies to everyone in the individual market would be about $12 billion a year.

    This assumes that 3 to 4 million persons are (or were) in that market and make over 400% of poverty.

    My numbers would have to be refined based on how many in that group would take single coverage and how many would take family coverage.

    Anyways, it is not an enormous amount of money by Washington standards.

    The drafters of the ACA probably figured that it would be embarassing to give subsidies to persons making over $50,000 a year as individuals, or over $65,000 as a couple.

    As it turned out, this omission created a large contingent of very vocal ‘losers’ due to Obamacare. High ranking Democrats have been pretty smug about losers, figuring that most of them were Republicans anyways and expecting the Democratic base to drown them out.

    I always had a little different take on the subsidies. I looked on them as an attempt by Washington to do something for persons without a generous employer.

    And I supported that. Employer mandates will never work in the USA, so using the tax code gives a little bit more equality.

    I would have extended the subsidies to everyone, though no one asked me.

  14. Peter has it right:

    “Apparently, these cancelled policies are good enough and their number large enough to make a difference come the November 2014 elections.”
    __

    The Money Quote.

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