- Offering plans on the exchanges is a bad business deal.
- Obamacare is a failed marketplace. But its breakdown will affect all of us.
- The Obama team is spinning the lack of participation by the big insurers as natural business caution.
- The administration broke the marketplace, and now the insurers will get to own it.
An ominous and largely ignored outcome of Obamacare’s failed launch is that the large insurers have not signed up to offer health plans on the state exchanges.
The nation’s big insurers have mainly sat out of the program, even after a reported browbeating from the White House.
The reason is simple. Offering plans on the exchanges is a bad business deal.
This past week the White House took some additional steps to make that market even worse for big insurers (on top of the problems with the web site). The Obama team seems to be going out of its way to squeeze the insurers. These measures make sure that 2015 will be an even more dismal experience for Obamacare than 2014.
It’s already off to a bad start.
As I noted recently in the New York Post and on Forbes.com, Obamacare regulations force insurers to either be all in, or all out of a particular state exchange.
A survey of 36 federally run exchanges (plus six state exchanges where data was available) found that Aetna [NYSE:AET] was offering health plans in just eight states and was even more selective in the counties where they chose to play. In Florida, for example, Aetna was only operating plans in 23 of the state’s 67 regions.
Cigna [NYSE:CI] only entered five states. United Healthcare [NYSE:UNH] (the nation’s largest insurer) entered just 12.
Humana only went into 14 states. In Colorado it’s offering plans in just 2 of 11 regions and in Florida, just 12 of the 67 state regions.
The result? According to one recent analysis, just one or two insurance carriers are serving exchanges in more than half of the country’s 2,500 counties.
The problem is that the law was tilted against the health plans at its inception. These challenges are being magnified by the Obama team’s present day decisions that will discourage plans that sat out of the market in 2014 from entering in 2015.
One such ruling, made last week, will allow third parties (like drug companies and hospitals) to subsidize the cost of health plan premiums.
The decision was laid out in a letter sent by the Department of Health and Human Services to Representative McDermott (D-WA) indicating that the Obama team does not consider qualified health plans purchased through insurance exchanges to be “federal health care programs.” This includes plans purchased through state and federal exchanges, as well as plans for which consumers receive advance payments of premium tax credits and cost-sharing reductions.
This means that exchange plans are not subject to federal anti-kickback rules. So manufacturers can offer direct support to exchange enrollees. Most interpreted this to mean that drug companies can provide financial assistance to help offset drug co-pays. But the impact of the decision probably extends much further.
Drug companies, for example, can probably help offset the costs of plan premiums, under the ruling, and not just the costs of individual drugs. Simiularly, hospitals could help subsidize the cost of buying health coverage for a local population of uninsured individuals who are frequently admitted to their institutions. This would reduce the hospital’s bad debt (from unpaid bills) by getting these chronically ill individuals into insurance schemes. Even if these local residents were very sick, so long as they are young and poor, then purchasing entry-level coverage for them could cost very little (owing to premium subsidies and favorable age-based rating).
This ruling is clearly good for some consumers. It’s also good for the president. The decision will encourage the use of private-market subsidies to help more people purchase coverage (boosting the dismal enrollment numbers). The Obama team is trying to stuff as many people into the exchanges, as quickly as possible. Once these exchanges grow big enough, they become politically inevitable.
Even when a bare bones “bronze” plan saddles a lower-income beneficiary with hefty cost-sharing (that could go unpaid), to a local hospital, the covered portion of the hospital stay will still be worth the negligible cost of purchasing the plan for the consumer.
But you can see how the decision could spell trouble for health plans, which are already worried about adverse selection of a mostly older, sicker population of patients into the exchanges as a consequence of Obamacare’s failed launch.
Hospitals and drug makers aren’t going to subsidize the purchase of health care for the healthy beneficiaries that insurers need in order to make these new exchanges viable. These entities are going to cherry pick the sickest consumers, and help to pay for their coverage.
Drug makers want to find patients who will use expensive medicines. Hospitals want to find local residents who are uninsured but are being frequently admitted to the hospital for chronic and costly conditions.
As one Wall Street analyst noted this week, “premium outlays would be small relative to the potential uncompensated care cost burden borne by health care providers on behalf of these heavy users of the health care system.”
This single decision could do a lot more than the botched website to help make sure that the pool of consumers who enter Obamacare are a sick and costly population.
The Obama team is set to unload other challenges onto the insurers.
The White House has to make a decision about how it will apportion cuts to the cost-sharing subsidies that are a consequence of sequester. The White House has strongly hinted that it will force the insurance companies to absorb these cuts. The general refrain is that the Obama team was waiting until after an October 31st deadline, when health plans could still pull out of the exchanges for a “material breach” of their contracts. Expect the White House to announce this soon.
It’s looking more inevitable that Obamacare will remain a niche market, and become mostly a high-risk pool. It will provide coverage to lower-income families who earn too much to qualify for Medicaid and will benefit most from the exchanges subsidies. The exchanges will also benefit consumers with chronic medical conditions who have an reason to put up with the exchange’s comparatively high premiums. They will buy more comprehensive “Gold” or “Platinum” coverage rather than “Bronze” plans that are likely to sold much more cheaply outside the exchange risk pools.
Consumers who are younger or largely healthy will gravitate to the risk pools outside the exchanges, and to the cheap bronze plans. They will end up with policies that are more costly (and less generous) than the plans many of them currently enjoy. But for families of four earning more than about $60,000 in annual income (and individuals earning more than about $30,000) these bronze policies sold outside the exchanges will be cheaper than the pricy risk pools in the exchanges, (even without the benefit of the subsidies that they could get under Obamacare).
As I noted in Forbes, by staying completely outside the exchanges, insurers will be able to create a separate risk pool, and price premiums to these lower costs.
The Obama team is spinning the lack of participation by the big insurers as natural business caution during a new program’s initial year.
But the launch of Medicare Part D didn’t face similar woes. The pundits said that the problem with Part D’s launch was too many plans initially entering the market, not too few (creating confusion for consumers). Rest assured, the Obama White House spent a lot of time trying to coerce the big insurers to enter more state exchanges.
The insurers sat out because it makes better business sense for them to be completely outside the exchanges, rather than in them – even just a little.
The failed launch of Obamacare meant that the initial pool of applicants this year was likely to be older and sicker than what the insurers had envisioned. The Obama team’s subsequent decisions seem to be squeezing the health plans still further.
Nobody should feel overly sorry for the nation’s big insurers. So far, they’ve been able to pass most of their new costs to consumers. They also made a Faustian bargain in supporting Obamcare’s passage in the first place (on the premise that it would boost their business) only to find that the Obama team was a bad partner. Their early and obsequious support now looks naïve.
The fiery speech that President Obama gave in Boston’s Faneuil Hall last week, reprising some of the same anti-insurance-industry demagoguery that he used in the run-up to passage of Obamacare, is likely to be standard fare going forward.
The insurers can expect to catch the blame at each “glitch.” The administration broke the marketplace, and now the insurers will get to own it.
But the fact remains that they are being squeezed, and their pain will be our pain. Obamacare is a failed marketplace. But its breakdown will affect all of us.
The law was designed to distribute its costs across the entire health care sector. That’s exactly what’s unfolding. Whether you have Obamacare, or can keep your private coverage, your costs will rise, and your choice of providers will narrow.