An Obamacare November Surprise?

flying cadeuciiAn 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).

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10 replies »

  1. Anish, you got it right about the administration, unfortunately. Our federal government has disabled itself from acting in any coordinated way (sorta like healthcare), and it’s become all about ideology. While I’m not a democrat (heck, I’m not even sure I’m a republican any more), Ms. Clinton is probably the best bet here.

  2. You can’t be serious, Dr. Holm. A public option would eliminate the non-medical expenses that insurance adds to health care costs — advertising, sales incentives, executive compensation and bonuses, shareholder profits, capital expenses (depreciation/amortization) and reinsurance arrangements.

    You are right about political tampering, but that’s been around since forever. The uncomfortable reality is that as long as health care is treated as a commodity instead of a right, there will always be a range of quality and availability. As in the case of dental, vision and hearing problems, the best medical care will go to those with the most money, a lower standard will apply down the line, and those at the bottom will depend on charity, or whatever passes for a social safety net, or do without altogether. Health care is like transportation — some drive new models every year, others have used cars, some depend on public transportation and the rest must hitchhike or walk.

  3. I think the primary rationale for insurance industry opposition to the public option when the ACA was being debated was that the government plan couldn’t be trusted to compete on a level playing field with private insurers even if the legislated rules started out requiring it to do just that. Even assuming the government plan paid Medicare rates, might have lower administrative costs and wouldn’t have to make a profit, what happens if it winds up with a sicker than average patient population? The risk adjustment state of the art isn’t anywhere near where it needs to be yet. General federal revenue would likely be added to cover any losses in order to prevent premiums from rising while private insurers would have to cover their medical claims and administrative costs, including profit, from premium revenue alone.

    The public option was widely seen as a road to single payer which would create a whole different set of problems. Americans like choice. They don’t want a one size fits all approach where government and politics determine what’s covered and what isn’t and they don’t want rationing either. Even within Medicare, people can choose a Medicare Advantage plan run by private insurers which an increasing percentage of the eligible population is doing.

    The exchanges would probably work better if (1) the penalty / fine for not buying insurance were closer to the cost of the lowest cost Bronze level plan in the market, (2) there were much tighter rules around the special enrollment periods with documentation required to prove eligibility for one of the exemptions, (3) income verification requirements to qualify for a subsidy were much more robust, and (4) there were no income ceiling to qualify for a subsidy.

  4. “The genius behind splitting people into tiny pools which are by definition unsustainable, and then crying for more taxpayer money to accommodate this arrangement is astounding.”

    Right on Margalit. While I agree the mandate opt-out is too easy I also disagree with the way subsidies are applied. But the ACA gives those with no other option a way to get a subsidy just like EVERY OTHER AMERICAN.

    As for the rate increases, I’m not sure they are any worse when I was insured by BCBS of NC as a private pay. They were guaranteed to increase 5%-10% every year (compounded) while BCBS executives received millions in bonuses. As well everyone is seeing a transfer of risk with high deductibles and co-pays. I’m not sure what insurance profits also go to outside investments, but many people feel they’re funding more than just health costs.

    There is two sided gaming going on from insurance and those seeing a way to beat the system.

  5. I was fine with there being a public option, but I don’t understand how their outcome would be any different than what the exchanges are experiencing. And yes, it would be subject to the whimsy of taxation/appropriation and congressional politics. Eventually there would be calls to privatize it, just like with the post office, VA and Medicare.

  6. The genius behind splitting people into tiny pools which are by definition unsustainable, and then crying for more taxpayer money to accommodate this arrangement is astounding. I want someone to calculate how much money would it cost to lump all exchange participants (of all ages, in all States) together and throw them into Medicare FFS (with similar subsidies from one public pocket to another). Something tells me there will be order of magnitude differences in price….

  7. Oy. Some tough customers here. Thanks for the informative post. I always enjoy them.

    Does certainly make the point – even to an insurance dummy like me – that you need healthy people in the pool to pay for the sick. That’s what I thought we were going to get – but instead we have this program that mostly the sick only sign up for, because of all the holes – as you nicely point out – the healthy folks can slip through.
    What puzzles me is why the current administration doesn’t talk about any of these problems. It doesn’t give me much faith that they have the ability to fix this. There would be a lot more credibility if the administration spoke in the manner you did. Instead we get a constant stream of you can have everything and not pay for it. And when that gets repetitive – we get the even more meaningless – “Love will trump hate”. Much is made of the poor discourse on the right (and there should be), but little attention is given to the paucity of any educated/intellectual discourse on the left when it comes to healthcare.

    Lastly,I thought your most important point came in your last few sentences. This is not a problem for ‘academics or amateurs’ to solve without the help of folks that do this every day. From Meaningful use, to healthcare.gov, the ACA – the strong impression I’ve been left with is that the folks with expertise have been left out. The weekend piece in the new york times (http://www.nytimes.com/2016/05/08/magazine/the-aspiring-novelist-who-became-obamas-foreign-policy-guru.html?_r=0) on who guides US foreign policy justs adds credence to the idea that this administration has valued ideology over competence. Regardless of who the next president is, here’s hoping the next administration takes advice from folks with expertise in reshaping/repealing/redoing policy.

  8. “Paul Ryan and others have suggested we could use high risk pools to insure the unhealthy and already sick.”
    And how much might the price of admission be for a previously healthy sixty-year old who has never darkened the door of a hospital, following an accident leaving him nearly dead, requiring medical/personal care for the balance of his (or her) life?
    Or would that be funded by the insurance industry (much like FDIC is funded) by premiums from the industry and earnings on investments in U.S. Treasury securities?
    Sounds like real job security for providers — almost as close to endless demand as life insurance sales and mortuaries.

  9. This was and continues to be a preventable outcome.
    Two words — PUBLIC OPTION.

    Wikipedia has this at

    ||> The debate over healthcare reform in the United States has included a proposal for a “public option” or “Medicare for All” – a government-run insurance program, available to all U.S. citizens, that would compete with private insurance plans. The stated goal of such a program would be to reduce costs through vigorous competition, while preserving choice of insurance coverage for patients. Opposition to this option has centered on concerns that the government program would have an unfair advantage (a removed profit goal and a budget limited only by taxation and Congress appropriations), and that it could thus result in the elimination of private health insurance through attrition. <||

    I cannot imagine any rational person believes either insurance or private-pay medicine will be "eliminated through attrition." As long as there is wealth there will be both insurance and the best of modern medicine for those who can pay. The biggest problem we face is very much like what I faced as a cafeteria manager — too many people expect full-service food and service at cafeteria prices, or as someone once said “champagne at beer prices.”

    It is no accident that teeth, eyes and hearing are not typically covered by insurance. Aside from the fact that they do not typically present life-and-death issues, all reflect the most widespread limitation in the world, affordability. Those who can afford dental implants and crowns, stylish designer frames or the latest in hearing devices will get them. Others settle for less costly alternatives. And those who cannot afford any of the above will do without. That, unfortunately, is the final disagreeable reality of health care. We can understand why cosmetic surgery is optional, but it’s hard to accept life-and-death decisions based on price (or as the insurance and accounting people say the cost/benefit analysis).

    Excuse me for being frank, Mr. Purcell, but this kind of foolishness from insurance industry apologists is tiresome.

  10. The free market types, as you know, think we should repeal the ACA, go back to medical underwriting and let healthy people buy whatever insurance plan works best for them, including a mini-med plan or even choose to remain uninsured if that’s their preference. Paul Ryan and others have suggested we could use high risk pools to insure the unhealthy and already sick.

    Of course, high risk pools were around since the 1970’s and existed in 35 states plus DC but were woefully inadequate. The other 15 states didn’t offer them at all. For the pools that existed during that time, I was told by a couple of state insurance commissioners that the average medical loss ratio for all state pools was 250%-300% of beneficiary premiums. The balance was paid for by a combination of general state revenue and surcharges on insurance policies.

    So, my question is, putting aside the people who have employer provided health insurance for the moment, how many of the remaining people who aren’t eligible for Medicare or Medicaid would fail underwriting and what would it likely cost to insure them through state high risk pools at a subsidized premium that they could afford which I would define as no more than 10% of Modified Adjusted Gross Income (MAGI)?

    I suspect the total cost to properly fund high risk pools for the people who need them would significantly exceed what republicans think it would cost and would likely exceed what most politicians are willing to vote to pay for, especially if it would mean having to raise taxes. They would probably say, at least off the record, that high risk pools cost too much to insure too few people many of whom are too sick to even vote? It’s just not a winning political issue for them.

    If the unhealthy and already sick could be covered for a reasonable sum that the society could afford and was willing to pay for, presumably we would have had good insurance in place to take care of them decades ago. That might have been sufficient to make the ACA unnecessary.