An article this week in Politico entitled “Obamacare’s November Surprise” observes that premium announcements for Obamacare’s exchanges should be published around November 1, and that the news will be offputting, to say the least. Double digit increases from beleaguered insurers are likely, reflecting substantial structural and financial flaws within the exchanges as currently designed. The article suggests that this might be problematic for Democrats.
I’m doubtful whether, even if there is November rate shock, that it will substantially derail the then Democratic candidate, which absent some stunning intervening event will be Hillary Clinton. While the ACA is a natural extension of what Ms. Clinton has advocated for decades, she did not design the exchanges, and to hold her responsible for their design flaws seems a tad unfair. Likewise, she always has taken the position that rather than repeal the ACA, its flaws should be rectified. Easily said, a very safe position to take, and fair enough as it goes.
But what IS going on with the exchanges and the many co-ops that have failed? What happened?
To a major extent, the problems stem from the failure of the creators of the exchanges and the co-ops and their regulations to follow fundamental insurance principles. I wish it were sexier or more mysterious, but it boils down to mathematical consequences resulting from few to no underwriting and other safeguards.
Underwriting safeguards were created by insurers for very good reasons. Perhaps the current administration, in its rush to vilify health insurers, forgot or consciously ignored the business side of health insurance. But if the the administration is going to play in the rough and tumble sandbox of health insurance, it needs a reality check, which it appears it is now getting, whether it admits it or not.
Here are the issues as I see them:
Exchanges must have scale to be able to provide the level of service required in an open marketplace. A lot of it. If membership thresholds are not met, the result is unsustainable increased costs. It’s a sort of inevitable spiral. And in the drive to obtain membership, safeguards must be in place. One cannot purchase fire insurance after the fire. In the same vein, one should not be permitted to stay out of health insurance during healthy years and buy in for the short periods needed to cover illnesses or injuries.
The other part of the equation is that exchanges need large numbers of younger healthier members to subsidize the older sicker members. It’s called spreading the risk. As with fire insurance, again, where you need 100 fire-free houses to subsidize the one burnt house, you need hundreds of low-claim healthy members to subsidize one chronically ill member. You cannot get away from this simple truth.
That was what the highly publicized and bitterly litigated “mandate” (the part of the ACA that required that everyone, with some exceptions, had to be covered, and if you weren’t, you would be penalized via your tax return) was about. The ACA needed a way to compel the younger, healthier men and women to enroll in order to spread the risk and avoid what underwriters call “adverse selection.” Not an easy task in America where rugged independence holds sway and Republican principles abhor such requirements. [Note how the ACA hamstrung itself on this one right from the get go by legislating that insurers keep dependents on the family coverage up to age 26, seriously diluting the pool. Most policies used to permit dependents over the age of 18 to remain on family coverage only if attending college.]
If exchanges and our government are to walk this path, they have to do it right, and the designers of the ACA, its regulations, and the exchanges failed to do it right.
Point blank: The penalties for failure to enroll in exchanges can be avoided. Easily. In attempts perhaps to be kinder and gentler or again politically correct, the ACA and its regulations have loopholes that youngsters (or anyone) can drive tanks through. And they do. Type a web search such as “how to game Obamacare.” A quick online search finds articles such as: “Gaming ObamaCare’s Health Insurance Mandate For Fun And Profit,” “Gaming Obamacare,” and “Five Easy Ways To Game Obamacare.” There were many more. Not quite as egregious as a how-to-do-it for building a small dirty nuclear bomb, but you get my drift.
First of all, at least today, the mandate penalty is too small to compel enrollment. While it is increasing ($95 or 1% of taxable income in 2014; $325 or 2% of income in 2015; $695 or 2.5% of income in 2016), even today’s youth can do the math and realize what is in their financial interest. There are formulas on line showing you how. Secondly, the penalty is levied via your tax return. Assuming you do not qualify for one of the many exemptions (discussed below), and assuming you maxed your take home pay so that a refund is not likely, the options for the IRS sticking you with the penalty are surprisingly limited. You cannot be put in jail, and the IRS cannot use its lien or levy powers. The IRS might seize your refund, and I emphasize “might,” because the Regs say that the IRS “reserves the right to do so,” but don’t come right out and say it will. And you have to have a refund to be seized. So, it’s a big act and a big mandate, but with almost no teeth.
There are other aspects of the law which may surprise you. For example, if you have a hardship (healthcare.gov lists 14 hardship exemptions with a catch-all at the end, and they include such things as facing eviction, homelessness, received a shut-off notice, experienced domestic violence, experienced the death of a family member, etc.), you qualify for a waiver. No questions asked. Try hitting on this link and check out the ways you can avoid the mandate penalty. And note: “You don’t need to provide any documentation to claim this exemption.”
Additionally, you can go without coverage for two out of the twelve months and still qualify for meeting the mandate. So you could sign up for January through October and not pay in November or December. There is no risk to membership because you can reinstate in January. Claims still are paid for the first thirty days and are then “pended” for days 31-60 before the carrier can terminate coverage, but even if you haven’t paid the premium for those sixty days, you can enroll for coverage on January 1 without penalty. If you go to the website (healthcare.gov), it even informs you that you can do this.
You also can use the 90 day non payment grace period and not pay your premium. If you don’t get sick, great. If you do, Obamacare allows you to pay the back premiums without a lapse in coverage.
Another way to game is to understate your projected income. Life IS uncertain after all. That is how your premium is calculated. Obamacare limits what someone has to pay back if he underestimates his income under certain circumstances.
During Open Enrollment, every year, you can enroll regardless of health status (no preexisting condition clauses), and if you already are enrolled, you can switch plans. So if I’m a healthy guy, I enroll in the low cost high deductible plan, and later, if I know I will need surgery or some other expensive treatment, I switch to the better coverage, get my treatment, and later switch back or cease paying the “unaffordable” premium altogether, and shoot for a hardship exemption.
Or you can actually pay the penalty in taxes.
Moreover, HHS hasn’t lived up to its end of the bargain by not paying on risk corridor obligations that it said was one of the three “market stabilization” programs that it used to entice insurers to cover the new exchange populations for which there was NO DATA. This is described in Modern Healthcare’s article, “Feds Short Insurers $2.5 Billion on Exchange Plan Losses.” The risk corridor program was to limit how much money an insurer could lose (or gain) on its exchange plans. Mind you, there were political issues here, with a Republican Congress and Candidate Rubio calling this a “bailout.” But a deal is a deal. And this was a significant contributor to the tanking of many co-ops.
And some state regulatory agencies (where there are state-run exchanges) have reduced or eliminated requested exchange premium increases citing “affordability,” whatever that subjective term may mean in the context of what is fundamentally a financial transaction. I know that sounds cold, but it is what it is.
I could go on. But what this suggests is that when the government, subject as it is to all sorts of political and other pressures, gets into something as fundamentally financial and rigorous as health insurance, it must do so with all the required disciplines and safeguards. That didn’t happen. Worse, in an attempt to be really nice to everyone, it created a system designed to fail financially. And that is what this exchange mess is all about.
Is that reason enough to repeal Obamacare? While that is the stuff for a much more comprehensive consideration, I think not. We cannot repeat the fundamental failure of America to provide quality healthcare to every man, woman, and child legally in our country. Most other countries do this. So should we. And we’ve now suffered through the early-stage agonies of such a program. In my humble view, the bell cannot be unrung, and we need to get on with doing what we always should have done.
So I would hope that the next administration and Congress will move to correct these and other shortcomings of the ACA and make it better, however you might define “better.” The arena for financing healthcare is a messy one, complex beyond belief, and it requires expertise. This is not for amateurs or academics. I do earnestly hope they avail themselves of such expertise in the redoing.
Jim Purcell was the CEO of BCBSRI. Prior to that, he was a trial lawyer in healthcare, and today he mediates and arbitrates complex business disputes and is focused on workplace wellbeing. jamesepurcell.com (healthcare) and jimpurcelladr.com(mediation/arbitration).