Obamacare is failing? Not so fast.


“See? Obamacare is failing!” according to industry expert C. Little, citing Wolf Report 712A just filed by Boy W. Cried.

What is the hue and cry about this time? United Healthcare is saying it has lost large bales and wads of money on Obamacare exchange plans, and just may give up on them entirely. Anthem and Aetna allow that they are not making very much either. Some new not-for-profit market entrants have gone belly up, and the others are having a hard time.

Before we perform the Last Rites over Obamacare, perhsp we should think for a moment about the hit ratio of the first 711 Wolf Reports from Boy W. Cried and ask a few questions.

First: Do we trust implicitly the numbers that the health plans are giving out in press releases, citing unacceptably high medical loss ratios? Medical loss ratios (MLRs) are self-reported. Yes, there is a certain amount of accountability. The numbers have to square with expenses given on their corporate tax forms and so on, but there is wiggle room in just what is reported and how. If is a reasonable supposition that if you wanted to look for the professionals with the greatest skill in juggling numbers, you would find them working for insurance companies, especially health plans, because the stakes are so high. These numbers people at the top of their game have huge incentives to report a high MLR, so if there is wiggle room, I am sure they will find it.

Beyond that, MLR is reported by state, by market segment (large group, small group, individual), against what portion of a premium is “earned” within that reporting period, and by calendar year rather than any company’s financial year. To say, “Our MLR is X” is to claim that X the correct aggregate number across their entire multi-state system, from all their subsidiaries, appropriately weighted for the size of each region. We don’t have access to those numbers, just to what they are telling us. There are plenty of reasons for them to want to report the highest MLR they can get away with, plenty of reasons to be skeptical of the numbers they are giving out, and plenty of reasons not to base drastic policy changes on such pronouncements.

But let’s get down to business here. So they lost money (or barely made it) in 2014 and 2015, and they are projecting the same in 2016? Doesn’t this mean that they misjudged the cost of healthcare, so they need to raise premiums? And they didn’t realize this soon enough to do raise them appropriately for the 2016 year?

Sounds like somebody (or a pile of somebodies) made faulty business judgments. This is not too surprising, given that these are new business models in new markets. Pricing, risk analysis, and utilization projections are hard enough in established markets, doubly difficult in emerging ones, and exponentially more difficult for a new company scrambling to grab any market share at all, like the failed cooperatives.

Well, waah. Welcome to competition, market capitalism, all that stuff. None of this is in the least surprising.

But does it mean that “Obamacare has failed”? Does it even mean that these companies have failed in Obamacare markets? No, it means what it is: These companies have failed to make the profits that they hoped for in the opening three years of Obamacare. And they are telling us all about their pain so that the government (through regulation) or the body politic (by repealing Obamacare) will make it easier for them to churn a profit.

So what’s the real problem here? In any kind of economy, you need to price your products so that (in aggregate, over time) your total cost of ownership is less than what you sell your products for. There’s your margin, the oxygen of your business. These folks are claiming that the aggregate total cost of ownership of what they are selling (access to healthcare) is close to what they are selling it for. Hmmm. That’s a problem. It has two paths out: Lower the total cost of ownership (get the actual costs of healthcare down) or raise the premium.

How about getting aggressive about the real cost of healthcare? Two problems with that part of the equation: 1) It’s really hard and takes years. 2) It does not benefit just them. It will benefit the whole market. So it’s not a path to greater profitability.

A health plan’s profit (margin) is some percentage of the total cost of care for the people they cover. So they have an incentive on the one hand to cover a lot of people (that is, increase their market share). They have an incentive to keep their premiums competitive not in absolute terms but relative to other payers in each regional market. On the other hand, they have no incentive to get aggressive about actually lowering the underlying real costs of healthcare for the whole market. That would not give them a competitive advantage.

What’s the business concern with raising their premiums appropriately? The concern is that these lower-cost narrow network exchange plans are price inelastic. If they raise their premiums, they will lose market share. But wait, if the cause really is the underlying high costs of healthcare, won’t everyone’s premiums have to go up the same amount? This complaint sounds more like an assumption that others can provision the market more efficiently, keep their premiums more competitive, and gobble up market share.

Again, is this a failure of the Obamacare model? Or is it actually proof of concept? To say that the Obamacare exchanges are failing because some companies might give up on them is to imagine that the purpose of Obamacare, the metric on which it should be measured, is to make health plans comfortable and profitable. Wrong.

The core idea of the Obamacare exchanges has been that health plans should compete on a level playing field to see who could offer the best service and the best access to healthcare at the lowest price. That’s what markets are for. The assumption built into this logic is that some organizations will do it better than others, some will not be good at it, and the market will shake out. If nobody ever failed in the Obamacare exchanges, then we would have to say that they failed to establish anything resembling a true market.

Joe Flower is a healthcare futurist and author. He is a contributing editor with THCB.

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14 replies »

  1. When we look at healthcare we wonder “What’s the future of this entity?” The future of our children, grandchildren, and the next generation. We live in a country that is suppose be for the people and by the people. The people should never suffer or feel that they have no future. Some people only have the government resources as their means of survival. When the people no longer have access to healthcare this is a serious problem. People have go to the doctor when they have a health issue. When you cannot take your child to doctor because you do not have health insurance. This is a problem that people in the United States never dreamed would happen. How can we fix this problem to ensure everyone has healthcare and they have a reasonable plan. We as American’s want healthcare at its best. We want to have a health plan that benefits everyone. We want to make sure every citizen in the United States has coverage. We want to make sure everyone can get coverage without worrying about whether their pre-existing condition will not allow them to get coverage. How can this be accomplished? Obamacare was created for the people of the United States. We want to make sure the people benefit from this plan. I think reform of the original plan this will help the people. We have to look at the plan and make changes based the issues that arose once the plan implemented. I think this is the right approach to the issues we have with Obamacare. We have to look to our Senators and Representatives to help make these changes come about.

  2. “This is the market place at work.”

    Like how the “marketplace” liked managed care the last time around?

  3. “We know what a single-payer environment would look like in U.S. healthcare, because we have it for people over 65.”

    Not even close Joe.

    “it is not drastically lower cost. It is not half the cost.”

    That’s because it’s not single-pay. It survives in a high cost private health care system – the weak sister, protected politically but also restrained politically to not have much leverage on the “market”.

    “There is little reason to imagine that a single payer system would seriously reduce healthcare costs.”

    Except the entire rest of the world. If the U.S. system is so “efficient” it would show so in the prices and access compared to other systems.

  4. There is little evidence for that assertion, Peter. We know what a single-payer environment would look like in U.S. healthcare, because we have it for people over 65. Medicare is somewhat lower cost and more efficient than private pay healthcare, but it is not drastically lower cost. It is not half the cost.

    You might say that CMS has been able to dictate prices for 32 years through the coding process. But that 30 years has been exactly the 32 years in which US costs (per capita and percentage of the economy) have steeply diverged from those of the rest of the world. Clearly the coding process can be, and has been, gamed by the industry.

    The most powerful coercive effect customers have on prices in a market is not to dictate prices, but to walk away from the over-priced product, to choose a lower-priced substitute instead. Single payer collapses all customers into one customer, and that one customer cannot do the most powerful thing — it cannot walk away from the deal. By definition, a single government payer must buy product from everyone who meets certain criteria, at prices set through a coding process that is heavily influenced by the sellers, that is, by the industry itself.

    There is little reason to imagine that a single payer system would seriously reduce healthcare costs.

  5. Relative to employer based healthcare, the exchanges represent a small marketplace. You may be seeing within the next 5 years employers divesting themselves of responsibility for offering employee health benefits. Instead, they may offer a support sum, which supplements any payments on a qualifying plan purchased at an exchange by the employee. When the market shifts in this direction the prices will shift accordingly.

    It is also likely there will be a tie between a health program and an insurance plan. If you buy insurance plan x, you will be required to enter health program y, where you will be required to do 1 of these: fulfill the health requirements of the program, be charged penalties for noncompliance or lose your eligibility.

    Managed health care programs tied to insurance plans are a way of managing costs, while allowing people with pre-existing conditions to be covered. If the health care programs are well done, it will increase peoples awareness of their own bodies and drive them to live healthier lives — This is the market place at work.

  6. Bruce, banks are not the government, although they seem like it and depend on it for protection from failure. In a “free market” the government is not supposed to pick winners and losers, the market will figure that out. It is in the bank’s interest to ensure they’ll get their money back even if a stupid borrower wants the money – unlike conditions in the recent crash when fraud was rampant.

    If it were me the government would control most health care in a single-pay environment. In the long run that’s the only way to get these costs down.

  7. Here’s a direct parallel from the world of real estate entrepreneurship, which is about as pure a market as exists.

    Private lenders (1-to-1 lending, no governmental intermediaries) will often refuse to take a loan because the developer will not be able to make a profit. This happens even though the lender will have a lien on the property, and will be able to resell the property at a profit if the developer defaults.

    You’d think that lenders would write any old loan, hoping to foreclose when the loan can’t be repaid. A few do, but mostly we don’t do that.

    Instead, the lender will work with the developer to alter the project, find alternative financing, share equity, or explore other means to make it a success. Or just not do the project.

    Do I interfere in the market when I do this?

    No, I’m actually enabling the market to operate smoothly. I fully understand, and deeply care about, the collateral damage that will occur if this developer fails–both to the market I operate in, and to the people involved.

    And that’s what the government is doing… trying to avoid some of the collateral damage that will occur if they allow someone to grossly under-price their policies.

    Think it through… they’re actually enabling an orderly market to exist.

  8. “A national single payer would be worse than what we have now.”

    Agreed Bill. Canada lets the Provinces do the managing and spending while the Feds maintain core values and goals with Fed money and legislation. Local hospital boards manage hospitals with budgets and get fired when they don’t perform.

  9. “It is more likely that the market will settle down”

    “the Insurance Commissioner actually forced the bottom feeders to raise their prices substantially for this round because they were pricing themselves to death.”

    How is a “market” a market when government forces success with higher prices? Too bad the commissioner couldn’t force success by cutting costs to go with lower premiums.

  10. If the MLR is high, it suggests the public would learn that it is getting a good value and that it would gradually increase the take-up of HI. I.e. high MLR suggests high actuarial value = high acceptance of plans = more take-up of exchange HI in general.

    Yet take-up seems to be decreasing…at least from what I have read recently.

    I think the firms have to figure out some way to offer more value. There may simply be too many stakeholders. And each has to be fed and housed. Docs are getting exhausred dealing with all these insurers and plans and ideas. We may have to socialize the whole mess. If we do, I wish we could run it from hospital districts or counties and not nationally. A national single payer would be worse than what we have now. Put the docs, administrators and everyone on salary. Make hospital care a public good. No billing. Forget ambulatory care–let the public do whatever it wants here (with exceptions). Canada did this at first, ie only covered hospital care.

  11. Point #1: the ‘disaster’ is a pre-existing condition. The many moving parts of ACA make the transition an inherently rocky road.

    Point #2: The ‘churn factor’ in small group an individual markets is no secret, nor are cyclical underwriting profit/loss cycles. To pretend that discernment of where we stand is possible so early in this game is both naive and disingenuous. Volatility is both inherent and inevitable in the early innings of this experience. Normalizing the experience and thus guiding pricing, network inclusion, terms and benefit design offerings vis exchange listed QHPs in a semi stable underwriting cycle will take years to grasp and manage. Breaking: don’t hold your breath.

    Point #3: you are right on Joe. It strikes me as quite odd that there is so little discussion of the tacit failure of the zeitgeist of health plan community to devise ways to manage clinical risk at or below trend. An otherwise abject collective failure remedied only by leveraging the cost shifting charade into ‘HDHPs’, cuz we ‘patients’ need skin in the game to be a prudent utilizer of healthcare services – the biggest heap of crap ever used to justify the whole ‘health 2.0’ or patient empowerment movement into digital, wearables, etc., ad nauseam. That HDHPs are now becoming the standard bearer is an unfortunate artifact of the ACA.

    Keep it up, your last two pieces are a needed moment of sobriety given the up-leveled whining by Bob L., et al.

  12. Correct. But I don’t think this will be a permanently recurring phenomenon. It is more likely that the market will settle down, we will have fewer bottom feeders emerging, and more realistic pricing. You see this in Oregon, for instance, where the Insurance Commissioner actually forced the bottom feeders to raise their prices substantially for this round because they were pricing themselves to death.

  13. Joe, I work in an insurance agency and so I am watching the ACA exchanges in “real time.”
    There is competition on price, but I am not sure it will last.
    What I see is that every year a new entrant comes into the market with lower premiums, like Preferred One in MN and the co-ops in Colorado and Iowa.
    They attract a lot of customers, but by the second year they are losing massive amounts of money on truly awful MLR’s.
    If they do not get state or federal aid, then they leave the marketplace, and their pollcyholders must go to a higher but more-realistically priced carrier.
    In my view, the designers of Obamacare have tried another version of the ‘managed competition’ idea of the early Clinton plan. The idea is to make insurance a commodity like airline tickets or hotel rooms, and then the internet will force prices down.
    I am not sure this will work. Insurance is a product with a two or three year measuring life, so to speak. Selling more airline tickets with a lower price gets you revenue, and the buyers do not cost you money in later years.