Recently, I was honored to speak before the PIAA, a group of insurance professionals, at the organization’s annual conference in Las Vegas. The idea was that I would speak on the problems with the ACA and Ardis Hoven, M.D., past president of the the AMA, would speak on positives about the ACA. I thought the format worked well and I appreciated the high level of discussion and civility of Dr. Hoven.
Here’s what I had to say. Since you can’t use footnotes or hyperlinks in a speech, I’ve provided a few additional annotations here to show the source of some of the information.
I’m here to talk about the architecture of the ACA and its problems.
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.
Let us now talk about how the ACA flies. It uses a variety of mechanisms to keep it aloft. The problem is that almost every one of them has the potential for being undermined.
The ACA depends desperately and in perpetuity on taxpayer funded policy subsidies provided directly to the insured. There is a premium subsidy based on household income. And there is another effective premium subsidy achieved through what is termed a “cost sharing reduction program” but this really amounts to people getting gold, platinum or diamond — my term — policies but only having to pay the silver price. These subsidies have been crucial to the touted success of the ACA. They have brought low risk individuals into the pool. Without the subsidies, the insurance market would need to depend solely on risk aversion to achieve price stability and escape the death spiral. Prior experiments relying only on risk aversion alone have been notoriously unsuccessful.
For better or worse, the subsidy has had an immense effect. A recent study conducting by Avalere shows that 83% of Exchange enrollees have incomes at 250% or less of the federal poverty level for their households. The take up rate among those eligible for ACA exchange policies falls from 76% for those earning 100-150% of FPL down to just 16% for those earning 300-400% of FPL. Take up then plummets to 2% for those earning more than 400% of FPL and who are thus ineligible for subsidies.
This elasticity in the demand for health insurance is precisely why the forthcoming Supreme Court decision in King v. Burwell is of such great importance. If the Supreme Court issues a square holding that the federal government lacks authority to pay the premiums where the state itself has not directly established an Exchange, and neither Congress nor the states does anything to fix the matter, expect insurers in those states rapidly to stop offering individual health insurance on the Exchanges. Indeed, clause IVB in the contracts those insurers negotiated with the federal government precisely in anticipation of King v. Burwell would permit those insurers not just to exit the market next year but to cancel existing policies midstream.
A side point, but one that might trouble this audience. 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? There is a 1938 Supreme Court decision saying the Government can recover funds paid illegally and a 1990 Supreme Court decision saying that a claim of estoppel can not lie against the federal government. So, before insurers become accessories or before they count as money on their balance sheets that they might have to pay back, they might want to look at these cases.
There are also less visible features of the ACA that are designed to improve the probability of the airplane staying aloft. The ability of the ACA to fly also depends substantially for 2014, 2015 and 2016 on premiums subsidized by free specific stop loss reinsurance given to insurers who agree to risk their capital in untested Exchange markets. It is, however, a form of support that is going to flame out after 2016.
How much support does it provide? If you use the data from the 2016 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.
I would not expect Congress to do any sort of mid-flight refueling of reinsurance subsidies, to continue my airplane metaphor. The policy justification for specific reinsurance subsidies seems rather thin. If reducing the overall risk to insurers was the issue, aggregate stop loss, perhaps available at an actuarially fair price, rather than free specific stop loss reinsurance would make more sense. And if the government, and, derivatively, the insurance industry, was fearful of there being no market for reinsurance where the risk involved was so untested, Congress could have made a guess and established a fair price and reinsurance facility itself. Moreover, if uncoupling household income from the ability to obtain medical care was a primary goal of the ACA, why would Congress not just increase individual premium subsidies instead of sending that money to enrich, sorry guys, insurance companies? This form of corporate welfare helps people at 350% of federal poverty level or even people at 1000% of FPL buying unsubsidized policies on the Exchange as much as it helps the person earning 150% of FPL who might desperately need more assistance. If one accepts major premises of the ACA, one might seriously question why such is the case.
Risk Corridors: The Free Derivative
The ACA depends somewhat for 2014, 2015 and 2016 on another form of subsidies for the insurance industry. It indirectly subsidizes premiums by providing insurers with a free financial derivative: risk corridors that reduce the amount of capital prudent insurers might otherwise need to stockpile or aggressive state regulators might require them to stockpile. This reduction occurs because Risk Corridors reduces the probability of insurers losing substantial amounts of money via participation in the Exchanges. To use a finance term, Risk Corridors reduces Value at Risk, which is a decent estimate of the amount of money participating insurers need to keep in more liquid and probably less lucrative investments.
If you run the computations — ask me how — it looks as if Risk Corridors reduces the amount insurers need to charge for Exchange policies by a little less than 1%. Again, you might say, in what I suspect would be a deprecating tone, big deal. And, I agree that, taken by itself, the ACA is unlikely to crash based on a 1% increase standing alone. But it’s all cumulative and the problem with death spirals is that once you find yourself in their clutches they are a bit like a black hole, very difficult to escape.
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.
Might deficits in early years of Risk Corridors be funded out of profits in later years as the Obama administration has suggested? The omens aren’t good. According to a review of 2014 industry filings by Standard & Poors, Risk Corridors will likely collect less than 10 percent of what industry is expecting to be reimbursed. 14% of insurers will likely pay into Risk Corridors. 56% expect money out. The absence of Risk Corridor money will be fatal to some insurers.
Already, we are seeing the death and near death of some less well capitalized insurers, particularly the co-ops capitalized, I might add, not so much by private investors but by $2.4 billion from the taxpayers in a less well publicized cost of Obamacare. Low premiums are not of terribly great value if they end up bankrupting private insurers on whom the success of Obamacare depends.
Thus far, I have spoken of the carrots to get even people of low risk to participate in the Exchange marketplaces. Obamacare is fueled, however, not just by subsidies but by punishment. Obamacare chose a different punishment model than for programs such as Medicare Part B or Medigap. In those programs, and in some Republican proposals for Obamacare reform, if you don’t select insurance when you are first eligible, you just pay a lot more for insurance if you elect coverage later. No commerce clause problems, no tax. Obamacare, by contrast, increases administrative costs by potentially assessing a penalty each year if you don’t have coverage. The ability of this punishment to stem a death spiral depends on the size of the punishment and the number of people who are subject to it. And what I now wish to suggest is that even without its formal repeal, the Individual Mandate was weak to begin with and has been further enfeebled by administrative moves taken in response to political uproar.
Consider, for example, a slightly fictionalized version of one typical American. According to the Kaiser Foundation Calculator, a 45 year old non-smoking person making $48,000 per year would expect to pay $3,742 on average for a Silver Policy. Suppose, however, that the individual considers themselves to be only 30 in health years. The individual thus considers its average expenses that would be covered by insurance to be $2,941. Would the $746 difference in tax created by the mandate be sufficient to get that person to purchase an Exchange policy. Not if that person was risk neutral. $746 in tax is less than the $801 excess in medical expenses.
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)).
In short, one of the reasons Obamacare will have difficulty flying is that we are afraid of our inability accurately to determine whether people can really afford insurance and at what price. For now, though, if one wants to rely on sticks, the stick is actually too weak and hits too few people.
The Employer Mandate
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.
At any rate, the employer mandate is, for lack of a more sophisticated term, stupid. If it actually works, it keeps people off the individual exchanges, which is exactly what should not be happening. The employer mandate perpetuates both symbolically and literally the counterproductive tie between a poorly functioning and lumpy labor market and something as important as health. It puts the employers’ decision as to what sort of coverage best suits the employee ahead of the ability of the individual to choose. The tax deductibility of payments helps the wealthy more. The lack of portability between jobs decreases the sort of continuity of care that might improve health. It is everything a good liberal should hate. (Indeed, some have had the courage to note the many flaws with the current law.) And so I wonder if King v. Burwell comes out against the government, whether the employer mandate, which has barely made it on to the Obamacare Aircraft, might be abortively deplaned with eager Republicans and Democrats in need to save face actually coming together on this issue. Indeed, if I were a Limbaugh-style Republican who wanted Obama to fail, I would actually insist on the employer mandate continuing as a way of starving the individual exchanges of healthy people who might stabilize their prices and of helping high income voters more.
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. The CBO now estimates the ACA will increase our budget deficit by $849 billion dollars through 2026. It is not, contrary to prior representations, paid for.
If you forget about Medicaid expansion and take the net increase the uninsured as a result of the ACA and divide that by the cost of providing coverage to them, it turns over 10 years to average with premium subsidies, cost sharing reductions, the 3Rs, and administrative costs about $7,600 per person. And in addition to racking up our already bloated deficit, there will be be taxes, fees and subsidies that have their own perverse incentives. Some have estimated the cost of providing a currently uninsured person an additional year of a quality life at over $200,000 possibly over $1 million. That’s enough that we have to look hard at whether there might be some better and simpler alternatives.
As we move forward ought to be looking not at Obamacare vs. The Bad Old Days Where Evil Insurers Deprived Sick People of Coverage but rather to a variety of alternatives ranging from, yes, Bernie Sanders Single Payer plan to, better, libertarian plans to use market mechanisms more effectively to perhaps better yet, lots in between. Yes, Obamacare has gotten off into the air, but if they would honestly call “Mayday,” it is my hope that a variety of people would try to help out.