Spiking The Football Too Soon on Obamacare

May 31st, 2015

Seth Chandler, who teaches at the University of Houston, delivered an insightful speech to a group of insurance professionals about the future of the ACA. Seth’s main point is that the results from the first two or three years of the ACA must be taken with an entire salt mine (a grain is not nearly enough).

The ACA takes a bold risk.  It places our economy and our health on an metaphorical aircraft whose ability to fly is challenged by history. It proceeds on the assumption that, whereas almost all community rating systems in health insurance have crashed in ugly adverse selection death spirals, the craft engineered by the Obama administration and its consultants is so sophisticated that it will avoid such a fate.  Many will tout what they see as the success of the ACA thus far in reducing the number of uninsured and the absence of many catastrophic failures as evidence that the ACA flies.  But we have not seen turbulence. It is an open question whether, long term, the ACA can survive in its present form.

Seth addresses five aspects of the law that are keeping the regime afloat, that will either phase out, or disappear in the next few years. As these dominos fall, so too may the ACA.

First, beyond the tax subsidies everyone knows about in King v. Burwell, the insurers are receiving so-called “cost sharing reductions.”

Every insurer that I know of is accepting payments from the federal government for cost sharing reductions.   But those payments are almost certainly illegal. Congress never appropriated any money for Cost Sharing Reductions.  So, under the law as written, insurers who want to play in the Exchanges are really supposed pay for cost sharing reductions themselves.

Of course, to my knowledge, that’s not happening. The money now landing in insurer’s bank accounts is coming from a fund set up for tax refunds that is, by law, dedicated exclusively to that purpose.  That, I believe is unlawful and, should another party ever control the Executive branch and want to look for a villain or want to extort various favors from someone whom they have over a barrel, might it not chase insurers for receipt of diverted funds?

If a Republican wins the White House, expect them to clean house, and cease all of the illegal Obamacare subsidies that are being payed out by the administration. (This may be the subject of yet another book on the topic).

Second, reinsurance subsidies disappear after 2016, causing premiums to go even higher.

How much support does it provide? If you use the data from the2016 draft actuarial value calculator produced by CMS, you can compute that the subsidy will still be about 3% of premiums for 2016.  It was higher in 2014 and 2015. How will the ACA continue when prices increase at least 3% more just due to the elimination of this single subsidy.  The naive might think that 3% is not all that much.  And, without taking adverse selection into account, I would expect the market to shrink only by about an equal percentage.  But if history and economics tells us anything — and it does — because of adverse selection, the actual price increase will be greater and the resulting decline in enrollment will be greater.

Third, the risk corridors, which are keeping the insurers afloat, are based on voodoo math that will also likely end after 2016.

Insurers may not have to wait until 2017 for Risk Corridors to disappear.  They are already in grave trouble.  Congress also never appropriated any money for Risk Corridors. And this wasn’t an accident. The statute, as written, depends on assessments on insurers based on a formula to magically equal payments out to insurers based on a formula over the 3-year span of the program.  We are already seeing, as many predicted, however that such an assumption was unwarranted.  Due perhaps to loss leader pricing and the predictable propensity of consumers to pick precisely those plans that were charging too little relative to actuarial risk, it appears that, on balance, at least after what I would hope would be clever but lawful accounting, that few insurers are making enough money under Obamacare policies to provide any funding to the many insurers who gained volume at the expense of profitability. So, when the Obama administration suggested it might lawlessly raid other government accounts to fund Risk Corridor deficits, Congress responded in section 227 of the Cromnibus bill by walling off the plump Medicare Parts A and B trust funds and CMS operating accounts as a source to repay obligations created by the Risk Corridor program.

Fourth, due to all the waivers from the individual mandate, far too many people are exempted from the requirement to buy insurance who cannot afford to buy Obamacare–even with the subsidies.

Alternatively, eliminate $3,000 from the person’s income. Now, because the premium the individual would have to pay is more than 8% of household income, the individual is exempt from the individual mandate. There are a significant number of uninsured people thus exempted from the mandate on grounds that they are simply too poor to purchase Obamacare.

But there’s more to make sure, as the CBO recently confirmed, that only one in six of the uninsured will actually be subject to the mandate.  There is the absurdly expanded hardship exemption. There’s the health sharing ministry exception mostly for evangelical Christians. And there’s the peculiar 3 months off exemption (26 USC § 5000A(e)(4)).

Fifth, the employer mandate is “stupid” and in fact dangerous.

Another key component of the ACA has been the employer mandate.  Or, at least it was supposed to be a key component.  In fact, in what a lot of people, including me, think is a very dangerous precedent that will, one day, bite ACA proponents in the proverbial behind, the Obama administration simply decided, without any apparent discretion, to delay enforcement of the law for one year and, for the current year, to apply the statute only to employers with more than 100 employees, even though the number the statute picks is 50. If a change to the tax code is so complicated that it takes mid sized businesses with financial advisors 5 years to understand it,perhaps that’s a sign there is something more fundamentally wrong.

Chandler concludes that the measure of the ACA’s success is not only how many people gain insurance, or even whether it increases care, but what is the cost of accomplishing this goal.

One’s perspective on the ACA can’t be whether it helps insurers or whether it helps the medical profession.  In fact it shouldn’t even be on whether more people have health insurance.  The positive factor to be considered is whether it has improved health.  I will concede that, on balance, it probably has — slightly. Many medical interactions are beneficial and, although supply of medical practitioners has not increased much, there are 2-4% more such interactions thanks to the ACA.   In any event, whether the ACA marginally improves health is not the exclusive test.  These programs have to be paid for and they come at a heavy price.  TheCBO now estimates the ACA will increase our budget deficit by $849 billion dollars through 2026. It is not, contrary to prior representations, paid for.

As I’ve noted many times (and will develop in my book), the President spiked the proverbial football way too early on the ACA, by extolling how many new insured Americans there are. All of the benefits, and subsidies to fund those benefits are front-loaded. But in order to be scored budget neutral by CBO (a farcical process in light of all the myriad delays and waivers), the costs of the law are backloaded towards 2020. Key among these, which Seth didn’t mention here, was the dreaded “Cadillac Tax.” We will feel the pain of this law well past the expiration date of the Obama Presidency.

A question that has been on my mind quite a lot, of late, is whether the pain of 8 million losing their subsidies this year by a decision in King v. Burwell will be greater or less than the pain felt by two-hundred million Americans in 2018 when the full force of this law comes into effect. As Jeffrey Toobin, the WSJ editorial board, and Christopher Flavelle have noted recently, it is not abundantly clear that Republicans will be the losers on this decision if people understand what is coming down the pike, and how that future may be averted.