Free Market Forces, Not Political Forces, Will Determine the Fate of Obamacare
By MARTIN LEWIN
Edited by DAVID M TAXER
Here’s a newsflash the mainstream media and political pundits haven’t figured out yet—IT DOESN’T MATTER WHAT WASHINGTON DOES ABOUT OBAMACARE, market forces will determine the fate of Obamacare, which insurance products get offered in the future, and who can buy them.
America still runs on a free market economy, but rather than allowing the health insurance industry to function efficiently in a free market, the government has put more market controls on it than any other industry in our economy.
So far everyone seems to be focused on Obamacare as a political problem in need of a political solution; they are missing the more important and unstoppable forces at work that have nothing to do with elections and who has the power to make laws.
It’s really quite simple—Obamacare only exists as long as there are insurance carriers willing to sell it. It doesn’t matter what subsidies are offered or penalties threatened, what the law says about Minimum Loss Ratios, Minimum Essential Coverage, Open Enrollment Periods, and Guaranteed Issue. If the product simply isn’t available Obamacare will go the way of the horse and buggy and disappear.
We are already seeing this taking place. Smaller carriers like Oregon’s Health Republic, a CO-OP started with Federal grants under the ACA with the express purpose of offering Qualified Health Plans (Obamacare plans) in the marketplace went out of business after two years. Assurant Health, the oldest health insurer in the US sold off its health insurance division to an insurance marketer that was only interested in it for its network of agents, not its product portfolio. Moda Health, who had captured 75% of the market share in the individual market for Obamacare plans in Oregon was basically declared insolvent and taken over by the State on Jan. 28th. And now UnitedHealth, the largest health insurer in the US, is reporting expected losses of “up to $745 million due to its 2016 ACA enrollees.” (Laura Lorenzetti, Fortune Jan. 20, 2016) http://fortune.com/2016/01/20/unitedhealth-obamacare-losses/?xid=yahoo_fortune
In a statement to investors on Thursday UnitedHealth Group CEO Stephen J. Hemsley said “that the company's losses from Obamacare were worsening, showed no signs of improvement, and would be unsustainable beyond 2016.”
When discussing the company’s tolerance for losses beyond 2016, he emphatically stated: "No. We cannot sustain these losses. We can't really subsidize a marketplace that doesn't appear at the moment to be sustaining itself.’"(UnitedHealth CEO: Obamacare losses worsening, not sustainable past 2016, PHILIP KLEIN, Washington Examiner, Jan. 20, 2016)
As insurers exit the Obamacare market the remaining carriers will be left with higher risk customers and will have to either raise rates further or exit the market as well. The key purpose of the exchanges was to increase competition and give consumers more choices. With less competition and less choices even the purpose for having the exchanges goes away.
These are the first dominos tipping in what many in the insurance industry fear is the start of a “Death Spiral,” where industry losses drive much higher rates, drastically increasing the costs to taxpayers of subsidizing lower income participants’ health premiums and making insurance unaffordable for those not receiving a subsidy.
As the cost of insurance rises, healthy people who don’t need the bells and whistles of Obamacare plans will start finding affordable alternatives that give them a comfortable level of protection at a price they can afford. Those market forces will see Obamacare replaced with products similar to what used to be available, because that’s what the free market demands.
Many consumers have already figured out that it’s cheaper to buy a non-Obamacare plan and pay the penalty than it is to buy a Qualified Health Plan. To get these plans you may have to answer health questions, and there are limits on coverage such as no free preventative care, maternity care, or coverage for pre-existing conditions. This is why they are so much less expensive. Fairly quickly the risk pool for Obamacare policies will be solely comprised of sick people with high medical costs. There won’t be a premium high enough for insurance companies to charge that will make it worthwhile to sell the policy.
Here’s why this is happening. Through the Affordable Care Act, otherwise known as Obamacare, the government dictates to the health insurance industry not only what their policies have to cover, who they have to sell them to, how much they can charge, and in the move that will ultimately doom Obamacare, how much of an operating margin they can make on every dollar they take in. Through the Minimum Loss Ratio of the ACA insurance companies have to spend 80% of every dollar they take in on claims and health improvement programs. The 20% left has to cover every staple they use, every stamp they buy, every salary they pay, building maintenance, electric bills, commissions, copiers, computers, and have enough left to return a profit to stockholders. The health insurance industry is finding out that it just can’t be done.
Think of the market forces at work in the health insurance industry like tectonic plates. One plate is the artificial market controls the government has put on the industry; the other plate is the free market forces that are trying to repair what Obamacare has done to the free market. Where the free market plate is trying to ride over the top of the market control plate, you have the equivalent of a fault line in the earth’s crust. The plates hang up on each other and pressure begins to build behind the plates. Eventually the pressure gets so great that the plates break free of each other, which is what causes earthquakes and tsunamis.
There is a fault called the Cascadia Fault, much larger and more dangerous than the San Andreas Fault, laying just off the west coast and running almost the entire length of WA, OR, and CA. There is a good possibility that it will break free in the next few years. If it does along its whole length the ensuing earthquake and tsunami would be devastating. If it just breaks free a section at a time it won’t be so bad.
The same could be said of the health insurance industry.
There are basically two ways economic forces that will wash away Obamacare can play out.
The first is the total collapse of the health insurance industry, with no carrier willing to insure anyone for anything. The effects would be devastating. Doctors and hospitals wouldn’t get paid for services they provide and would go out of business. The collapse of the health insurance industry could precipitate the collapse of the entire healthcare industry.
If that total collapse were to happen the government would have to act very quickly to repair things. All it would really be able to do at that point is put everyone on Medicare from cradle to grave. That’s what Bernie Sanders wants and what whoever is our next President might get stuck with. Even Ted Cruz, if faced with the choice of seeing the entire healthcare industry in the United States collapse or signing a law expanding Medicare to all Americans, will sign the law. He won’t have any other options at that point.
But that doom and gloom scenario, while entirely possible, is avoidable if free market forces reshape the industry quickly.
Insurance carriers like UnitedHealth and many others are already starting to get more creative in their non-qualified plan offerings. They are pushing them alongside, and now in place of, Obamacare offerings.
As rates continue to rise on Obamacare plans the people that can get Short Term Medical and Limited Medical plans will switch to these plans. Many won’t have to worry about paying the penalty. They will be exempt because the cost of the lowest priced Qualified Plan they can get will be more than what the government says they can afford. Each year more and more people will be exempt from the penalty because of rising premiums.
As stated earlier, even people who still have to pay a penalty are finding it can be cheaper to get one of these alternative plans and choose to pay the penalty, saving thousands of dollars a year in some cases.
I say choose to pay the penalty because it is essentially a voluntary penalty. The law is without teeth. The only way the IRS is allowed to collect the penalty is if you’re owed a tax refund. If you’ve wisely arranged your withholding or quarterly estimated tax so that you are not due a refund, all they can do is send you a letter asking you to pay the penalty. Of course they’ll make it sound like hell will fall on you if you don’t pay it, but the truth is that if you thumb your nose at them there is nothing they can do further to collect the penalty until someday you’re owed a refund. Law professors Jordan Barry and Bryan Camp have a nice piece in Tax Notes explaining it all.
2017 is a pivotal year because that’s when programs designed to mitigate risk for insurers through federal backstops will end, despite having mostly failed in their purpose. The idea was that carriers doing well would put their excess profits in a fund to help carriers that are taking big losses. The problem is that no one is doing well enough to put money in, so there isn’t anything in the fund to assist failing carriers with. When those programs completely end next year the free market forces at work will gain even more energy.
After market forces have eliminated Obamacare and the people healthy enough to do so have found more affordable options, we will still have to find a solution for people with pre-existing health conditions. This could happen in the next 2-5 years.
So how do we help the people who really need help the most? The whole of Obamacare should have stopped with the success of the transitional program, between when the law was passed in 2010 and when it went into full effect in 2014.
That program provided high quality, private health coverage to people who were declined insurance because of pre-existing conditions. The plans offered larger networks, and lower deductibles and copays, for similar premiums to a typical Obamacare plan.
That’s all that was needed and all that will be needed to create a softer landing for the collapse of Obamacare.
All this political rhetoric is meaningless as it is free market forces that will determine the fate of Obamacare.
At that point the politicians can weigh in again to figure out how to provide insurance to low income people.
Since carriers lose money with every Obamacare policy they sell it will actually help the health insurance industry achieve a softer landing if the people who can start moving to alternative products do so now. Single men and people in their 60’s should stop paying for maternity coverage and people without children pediatric dental coverage.
If you want to kill Obamacare just let the free market work.
Martin Lewin has been in the health insurance industry since 1980 and is considered an expert on Obamacare and health consumerism. He has appeared on Conservative Talk Radio and has been quoted on all major networks. He is the Director of Operations for Portland Benefits Group and the Chief Operating Officer for Colonial Heritage Insurance Group.
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