Obamacare Fail

Cost curve bends upwards; death spiral ensues


Seven years is a long time in politics. So I’ll forgive you, dear reader, if you don’t remember the heady days of 2009, when — in the face of a major banking crisis, economic recession and job losses — our brave President thought it best to spend his time and efforts reforming our health insurance markets. Because reasons, as the young people say these days. Or: Never let a good crisis go to waste, as Hizzoner Rahm Emmanuel is supposed to have said. (Speaking of which — how’s the skyrocketing murder rate crisis working out for you in Chicago this year, Mr. Mayor? Taking the opportunity to reform the water and sewer board? Rewriting the municipal parking regulations?)

At first, one of the key selling points of health insurance reform was the idea that health care costs in America were very high, relative to other First World countries, and had been growing strongly year after year. People believed that market reforms could increase efficiency, cut costs and save money. This may or may not have been true: The French may on average spend far less on health care per person and have slightly better life expectancies than Americans, but then the French traditionally haven’t had to deal with the trouble and expense of patching up perforated inner city “youths” on a wholesale basis, for example. It ain’t cheap. The point being, there may be good reasons why Americans need to spend more than the French. Still, given the crazy-quilt patchwork of the American healthcare delivery and payment systems, it seemed more than plausible that there was money to be saved; it still seems plausible. Some of the old-timers here might remember this being summed up as “bending the cost curve” to increase efficiency and affordability.

All this, of course, was a lie.

All the talk about bending the cost curve and saving money and oh, incidentally, using a teeny-tiny portion of that savings to finance a broadening of insurance coverage to some or all of the perhaps 45 million residents who lacked health plans — well, all the talk of cost savings was just a feint. It was a ruse to get honest, sober, respectable tax-paying Americans on board the health care reform train. Who could argue with greater efficiency, lower costs, and savings for all Americans? But the real goal was always to create a new client base for the welfare state and buy Democratic votes with taxpayer dollars, not increase efficiency in the markets and improve things for all Americans.

So the law was passed along strictly partisan lines and signed by the President. The law survived challenge in the Supreme Court. The law was implemented. The House Republicans, somewhat ridiculously, have to date voted at least 60 times in favor of a repeal, which is to no particular end because President Obama is obviously not going to sign a repeal of his “signature accomplishment.” And so the structures created by the law — most notably the health insurance exchanges — have come into existence. They are now facing their most important test: Reality.

They are failing.

I found some good numbers for the state of North Carolina which illustrate the trend. Adverse selection, or the “death spiral,” is kicking in. The sickest customers rushed into the plans faster than the healthy; remember, insurance companies are no longer able to exclude or selectively increase premiums on customers with pre-existing conditions, so this is a real bargain to someone with many medical needs. Caring for the sickest customers costs insurance companies more than expected (they had initially assumed more healthy customers would join due to the individual mandate, thereby balancing out the mix; the President promised this — and then reneged upon it), so the companies raise rates when renewal season rolls around. This makes their plans even less attractive to healthy customers, who continue to stay away or drop plans as they become ever more expensive. The individual mandate was supposed to discourage this behavior on the part of the healthy, and lavish public subsidies were mean to blunt the costs, but the President bungled all that. Instead, it has long been (and remains) cheaper to pay the tax penalty and avoid buying insurance if you’re young and healthy and expect to consume little healthcare next year. The individual mandate failed and adverse selection kicked in. So: In June 2015, health insurance companies participating in the North Carolina Obamacare exchange filed for rate increases averaging 25.7%; exactly one year later, in June 2016, they were at it again, filing for increases of 18.8% to 24.5%, depending on carrier. (Group policies at workplaces have not been affected in nearly the same way, because their risk profiles and memberships have been relatively stable over the years.)

But the failure is actually more profound than simply runaway Obamacare premium costs. In April 2016, UnitedHealth Group, one of the three large suppliers of health plans on North Carolina’s Obamacare exchange, announced it would pull out of that market during the next renewal cycle. They were losing too much money. This move meant that many North Carolina counties would be left with only one principal provider after United’s departure, as not every carrier sold plans in every county.

Then the other shoe dropped. This week, a second large supplier, Aetna, announced that it would also be exiting Obamacare exchange plans in bulk after the next renewal cycle, dropping approximately 7 out of 10 such plans nationally, including all plans in North Carolina. Again, they were losing too much money. That leaves Blue Cross as the sole legacy provider of Obamacare plans across the entire state (they do apparently cover most if not all counties), but this is not great news because they’ve talked in the past about leaving the market, because… drumroll… they’ve also been losing plenty of money; specifically, Blue Cross lost $282 million last year on plans purchased through HealthCare.gov, more than double the $123 million it lost in 2014. North Carolina’s now got the kind of single-payer plan that the hard-core socialists always dreamed of, only it’s called Blue Cross instead of the NHS, and it’s monstrously expensive and still losing money hand over fist. And still might disappear entirely. Cigna has indicated it may enter the Obamacare exchange market in a handful of North Carolina counties; we’ll see about the other 90-odd counties in the state.  And remember that North Carolina is just an example — the same trend is being felt in most markets across the U.S.

This insurance market is demonstrating a death spiral in its full glory. It must be noted that these things take years to play out, which makes for bad prime-time TV. Still, absent major government intervention (i.e. sharply increased subsidies, sharply stronger individual mandate penalties, re-introduction of differential pricing… something) we’re probably no more than 2-3 renewal cycles away from full collapse. That is, a condition where a substantial number (if not most, or even all) of the counties in North Carolina will have no Obamacare exchange plans whatsoever.

The funny thing is, we’ve seen this movie before. In 1994, Kentucky passed a law requiring health insurers selling individual policies in that state use “community rating” to price them — disallowing differential pricing based on health history, just like Obamacare. By 1998 the death spiral was complete; virtually nobody was selling individual policies in Kentucky. The legislature capitulated to reality, passing a law allowing insurance companies once again to price based on individual characteristics; carriers then returned to the market. Obamacare took longer fully to implement, has a fair bit of subsidy money behind it, and has a weak-sauce version of the individual mandate to push some additional healthy people into the market. So it will take longer to die in its present form. But die in its present form it shall. Aetna’s major national cut-back is just the latest sign; the writing is now on the wall.

Is anyone really surprised, though? This is what happens when a nation elects a false messiah as President —  a “community organizer” and academic with little more than wool between his ears, who has no idea how to think a lasting thought or build a lasting legacy. A man who won the Nobel Peace Prize for doing absolutely nothing at all, and who thinks the best way to govern America is from the golf course. And to think that Hillary Clinton’s policy platform boils down to ‘more of the same, please.’ More failure, more violence, more social division, more hollowing out of the strength of America. I’d like to think that as a businessman — even one who had to put certain of his businesses into bankruptcy — Donald Trump would have seen the obvious problems and not pursued such a doomed reform attempt at such great political cost.

This misbegotten piece of President Obama’s legacy will wither on the vine of its own accord. The only question going forward is how to reallocate, in years ahead, all the subsidies we’ve been spending on Obamacare. A better health plan? Tanks for the military? Tax cuts? But I’ve run out of space — so that is a topic for another day.

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