Obamacare's next shoe to drop: People buying coverage on the exchanges may owe more money than they're being told


US President Barack Obama pauses as he speaks about the Affordable Care Act at Prince George's Community College in Largo, Maryland September 26, 2013.

Article Highlights

  • Some of the reductions consumers expect in cost of their medical care will never materialize.

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  • Everyone is getting a blatantly false picture of how much the new coverage really costs.

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  • Patients won’t know what they will owe for doctor visits; prescriptions; or their hospital stays — until the bill arrives.

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  • Expect Wall St analysts to cut their earnings projections on the major health plans in the coming weeks.

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The Obama Administration announced a “tech surge” to try and repair the busted Obamacare web site, but even bigger problems lie ahead. The next wave of woes will relate to the coverage itself, and will saddle some consumers with significant and unexpected costs.

People will undoubtedly find that subsidies that they received were miscalculated, and that they owe more money than they were told.

The current IT problems are a sideshow to these looming harms. The next wave of troubles will be hard to fix. The president will need to seek relief from Congress.

Under Obamacare, consumers are eligible to benefit from two different streams of subsidies.

The first category of subsidies (dubbed “premium tax credits”) is based on family income, and will be used to offset the cost of buying the health plans.

The second category of subsidies is less well known.

Dubbed the “cost-sharing subsidies,” these payments help pay for out-of-pocket expenses such as deductibles and co-pays. The “cost-sharing subsidies” also provide a sort of re-insurance to lower someone’s costs when they hit their catastrophic limits as a result of a major illness.

Problems with the way both categories of subsidies are being calculated will saddle consumers with unexpected costs.

On that first category of subsidies — “tax credits” meant to offset the premiums — it’s now clear that a lot of the current IT problems stem directly from the failure of Healthcare.gov to reliably calculate these payments.

Figuring out how much premium subsidy an individual or family is entitled to requires that the Healthcare.gov “hub” communicate across servers housed at state Medicaid agencies, the Internal Revenue Service, Health and Human Services, and the Department of Homeland Security (among other federal agencies). That necessary data sharing has proven too much for the site’s architecture to handle.

This is what’s causing so many applications to get kicked out — but what about those applications that make it all the way through? At least half a dozen states have already said publicly that their systems are coming up with the wrong calculations.

It’s a sure bet that some consumers who make it through the website’s maze, and enroll, will also have their subsidies calculated incorrectly.

Under current law, those who get more money than they were eligible for will see the excess payments clawed back on their subsequent years’ tax return.

As for the second category of subsidies, the cost sharing subsidies, the problems could be even worse.

Unlike subsidies for premiums, these subsidies are subject to cuts under the sequester. (The Commonwealth Fund drafted a lucid but unfortunately little-noticed summary of these problems earlier this year). What this means is that some of the reductions consumers expect in cost of their medical care will never materialize.

This will hit hardest those who actually use their health care insurance, especially people with catastrophic medical bills.

These cost-sharing subsidies are based on income, and are higher for lower income individuals. Right now, when consumers go to Healthcare.gov to select a plan, the website isn’t baking in these cuts. Everyone is getting a blatantly false picture of how much the new coverage really costs.

These cost sharing subsidies represent a big piece of the overall relief that consumers were supposed to receive. Their 10-year total is $149 billion.

The Office of Management and Budget has confirmed that cost-sharing subsidies are subject to sequester. (See page 23 of OMB’s report on sequester, it lists cost sharing subsidies as subject to sequestration but not premium subsidies). For its part, the Obama administration hasn’t even begun to factor this into their numbers.
As a consequence, patients won’t know what they will owe for doctor visits; prescriptions; or their hospital stays — until the bill arrives.

Right now, the Obama administration is suggesting that it will eventually force the health plans to absorb this shortfall. A May 31, 2013, report from the Congressional Research Service, titled “Budget Control Act: Potential Impact of Sequestration on Health Reform Spending,” contained a tantalizing footnote that hinted as much.

Footnote 42 read: “The impact of sequestration is unclear. ACA entitles certain low-income exchange enrollees to coverage with reduced cost sharing and requires the participating insurers to provide that coverage. Sequestration does not change that requirement. Insurers presumably will still have to provide required coverage to qualifying enrollees but they will not receive the full subsidy to cover their increased costs.”

Translation: Insurers are going to have to eat the shortfall.

But there’s little chance that the insurers are going to absorb these costs, or can.

Given the failed launch of Obamacare, many insurers will be looking at far lower enrollment numbers, and losses on their new exchange health plans. Want proof? Expect Wall Street analysts to cut their earnings projections on the major health plans in the coming weeks.

If the Obama administration saddles insurers with this additional cost, many plans would probably exit the market. The entire program would fail fast. Instead, the Obama administration will have to seek relief from Congress, to prevent the sequester cuts from hitting these cost-sharing subsidies.

After the recent budget showdown, it’s hard to imagine relief coming easily.

Taken together, all of these problems mean that many consumers will end up getting subsidies they weren’t qualified for. As I wrote in The Wall Street Journal on the day that the Healthcare.gov web site launched, Washington will have to claw the money back a year after consumers spent those checks. These problems create a massive pay-and-chase problem as people move in and out of the exchanges and get subsidies they won’t even know that they didn’t deserve. This mess will make today’s IT troubles look tame.

Today’s problems will only get worse when people try and reconcile their new insurance coverage with their medical needs. Providers could also get stuck with some of the costs of what insurance didn’t cover because the subsidies were miscalculated. We could see providers start to pull out of these networks.

This could help explain signs that providers are holding back, even this late in the implementation process, and taking a wait and see approach. A Morgan Stanley survey out today, of 124 nonprofit hospital executives, found that 62 percent of respondents had still not signed any exchange contracts as of September.

Of the 38 percent of hospitals that have signed exchange contracts, the majority has signed contracts with fewer than 10 percent of their managed care partners. (Given the way enrollment is unfolding, it’s hard to see why hospitals that were taking cautious approach to contracting would jump in now, or offer up discounts).

For all of these reasons, the Obama administration should approach its failed rollout with much more humility and candor.

These website woes aren’t merely “glitches.” They flow from the hyper-engineered, technocratic way that the entire health care program was designed.

The same features are going to hurt consumers when they try to use their new health plans.

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