Category Archives: State exchanges

Why Gruber matters, at least a little bit

Let’s start with some facts we can all presumably agree on.  MIT Professor Jonathan Gruber was involved in the development of the Affordable Care Act. He attended numerous meetings with the executive branch officials while the ACA was being formulated, met with President Obama once, and stayed as a member of a Congressional Budget Office Advisory Council on Long Term Modeling for a decade, including the years when the ACA was designed. Although perhaps he exaggerated in an effort to draw attention to himself, he referred to himself, as others did, as the architect of Obamacare.  Although he is hardly President Obama himself or Senators Harry Reid, Max Baucus or then Speaker of the House of Representatives Nancy Pelosi, Professor Gruber was not a mere technocrat crunching numbers.  He is more intimately connected with the bill, more of an insider, than many other academic proponents of the legislation. And so he has described himself.

The back cover of Gruber's graphic book, which, by the way, even if you don't like the ACA, is a fun read.
The back cover of Gruber’s graphic book, which, by the way, even if you don’t like the ACA, is a fun read.


So, when we are looking to understand a challenging provision of the ACA, and if we accept that the provision is sufficiently ambiguous (in context) to be subject to broader interpretive methods, and if there isn’t much other contemporaneous evidence on the subject, it does not become crazy to look at Professor Gruber’s statements about the provision.

The provision of which I speak is, of course, is section 36B of the Internal Revenue Code (section 1421 of the ACA) in which, to the untrained eye, Congress appeared to limit advance premium tax credits (subsidies) to those “enrolled in through an Exchange established by the State under section 1311.” Only 16 or so states established such an Exchange. The remaining 34 in one form or another have let the work be done by the Federally Facilitated Marketplace established in section 1321 of the ACA as a fallback precisely when the States did not, as anticipated, establish an exchange.  But the IRS has interpreted “established by the State under section 1311” to include exchanges “established” by State non-establishment, i.e. their not establishing an Exchange knowing that the federal government would do so for them.  This latter interpretation means that, just because people live in states with entrenched opposition to the ACA, like Texas, or states which have recognized their apparent incompetence in running an Exchange, like Oregon, or other states, which perhaps didn’t want the trouble, they will not be denied thousands of dollars of subsidies in a program which, at least according to the rhetoric of its proponents, was intended to reduce the rank of uninsured nationwide.

This provision, section 36B, is one that  presumably the Supreme Court will interpret this term  in King v. Burwell — unless of course it “DIGs” the case and  decides to withdraw review for now.  Although Burwell is not a constitutional case, and although it may have few jurisprudential ramifications, from a practical perspective, it is an extremely important decision. Because of the way section 36B reads, it is likely to determine whether many millions of Americans who have purchased health insurance on the “Federally Facilitated Marketplace” (FFM) pursuant to Obamacare in reliance on an advance of federal tax credits are in fact entitled to those advances or tax credits at all.  It is about whether insurers will continue to sell health insurance policies in states now served by the FFM or seek to withdraw for fear of unsubsidized policies being bought predominantly by those with high projected medical expenses. And it is about whether some states will be induced by a decision in King v. Burwell to mitigate the damage to many of its citizens that would otherwise occur, by now establishing Exchanges whose creation they previously opposed. Oh, and if subsidies end up being unavailable, the employer mandate (26 USC 4980H) could be diluted because few employees will actually purchase policies on an Exchange.

It’s also about politics.  The Democrats may look bad for having misused executive power to stretch the interpretation of an arguably clear law beyond recognition.  And, of course the collateral political consequences of a “win” by mostly Republican opponents of Obamacare at the Supreme Court may provide that party with the credibility that comes from having a litigation position vindicated by the nation’s highest court. But all will not end there.  At least some of this perceived political advantage to the GOP may be offset by the political harm likely to occur if the “victory” rips health insurance from their constituents. And it augurs a delightful spectacle: Republicans joining Democrats in the aftermath of the former’s victory in King v. Burwell to amend the ACA to actually say what the Obama administration now says it means. One can hear now Republicans claiming that it was all a matter of principles, of defending separation of powers and the Rule of Law. One could also perhaps see some Republicans wanting to take such a victory as  a hostage and seeking concession from Democrats on a variety of matters, including a renegotiation of many provisions of Obamacare,  as a condition of restoring coverage to millions of Americans.

Did Gruber lie?

But back to Gruber.  The problem for those who support the IRS’ interpretation of section 36B is that it takes a heroic stretch of statutory language to get there. And Gruber — on videotape — twice — offered what purported to be a knowledgeable account of at least a plausible reason why the drafters of the ACA might have indeed threatened to punish the uninsured in states unwilling to “get with the program” and establish Exchanges.  You can watch him below starting at about 31:25. Here’s a transcript.

Question: You mentioned the health information exchanges through the states and it’s my understanding that if states don’t provide them the federal government will provide them.

Gruber : Yes so these health insurance exchanges  … will be these new shopping places and they’ll be the place that people go to get their subsidies for health insurance. In the law it says that if the states don’t provide them the federal backstop will. The federal government has been kind of slow in putting in the backstop I think partly because they want to sort of squeeze the states to do it.  I think what’s important to remember politically about this is that if you’re a state and you don’t set up an exchange that means your citizens don’t get their tax credits. But your citizens still pay the taxes for this bill. So you’re essentially saying to your citizens, you’re going to pay all this taxes to help all the other states in the country.  I hope that that’s a blatant enough political reality that states will get their act together and realize there are billions of dollars at stake here in setting up these exchanges and that they’ll do it.  But, you know, once again the politics can get ugly around this.

Or here. It’s an audio from January 10, 2012 at the Jewish Community Center of San Francisco. Again, here’s a transcript

I guess I’m enough of a believer in democracy to think that when the voters in states see that by not setting up an exchange the politicians of the state are costing state residents hundreds of millions and billions of dollars, that they’ll eventually throw the guys out. But I don’t know that for sure. And that is really the ultimate threat and that is will people understand that, gee, if your government doesn’t set up an exchange you’re losing hundreds of millions of dollars in tax credits to be delivered to your citizens. So that’s the other threat: will states do what they need to do to set it up.


Per Gruber, it was all a bluff.  It was a stick to get the states to establish their own Exchanges.  It’s not all that much different from lots of conditional spending decisions, such as tying federal highway funds to state raising of the drinking age, except this was a conditional taxing decision.  It’s a not-so-unusual way of nicely inducing the states to do something they might otherwise be reluctant to do because, now, not doing so, hurts their citizens.  As careful health law scholar and Obamacare advocate Tim Jost pointed out in a 2009 article (see figure below), conditioning subsidies on the state’s creation of an exchange is a way around a potential constitutional impediment to simply directing that the states do so. And if the states call the bluff, well, so be it, that’s a matter for internal state politics and does not undercut the federal desire that the states behave in conformity with the incentives.  The limitation on subsidies set forth by the text of section 36B was a stick so big and so bad that resistance was thought to have been futile.  Indeed, that may well have been why Professor Gruber, as he stated under oath in his testimony this week before the House Oversight Committee, always assumed in his modeling that subsidies would be available in all states.

An excerpt from Health Insurance Exchanges: Legal Issues by Timothy  Stolzfus Jost
An excerpt from Health Insurance Exchanges: Legal Issues by Timothy Stolzfus Jost

There was only one problem. Many of the states called the statute’s bluff. They refused to establish their own Exchanges, either seeking to avoid the financial obligation or, at least in the Red Zone,  complicity with the evils of the Affordable Care Act.  And so, having seen the bluff called, the IRS, under this theory, pretended that the statute had never conditioned subsidies on state creation of an Exchange.  In order that the benefits of Obamacare extend from sea to shining sea, the IRS interpreted “established by a state under section 1311” to include inaction by a state under section 1311 that led, under section 1321, for the federal government to come to the rescue.

Now, in ordinary circumstances, the musings, even recorded musings, of a lone professor at an academic conference or a community group on why Congress might have written a statute which, if one believes in many of the ideas of the ACA, is rather cruel, would not be particularly relevant to a Supreme Court case on its interpretation. After all, even careful law review articles by scholars are frequently ignored in statutory debate.  And there is even a respectable argument that Gruber’s remarks are not relevant now to King v Burwell.

But interpretation disdains a vacuum. And the problem is that none of the legislators apparently explicitly focused on the purported cruelty of a literal interpretation of section 36B at the time the ACA was pushed through. And their silence could be interpreted several ways: that most people who cared understood it was a bluff that likely would not be called, that most people who cared understood that “established by a state under section 1311” should be read broadly, or, perhaps most realistically, that most had no idea about the details of a 2,700 page bill, even one that had indeed been widely debated.

And so, if the executive branch is to prevail in its reading of section 36B, it would sure help if it could tamp down contemporaneous evidence some proponents, even non-legislative ones, thought that use of a bluff made any sense.  Professor Gruber’s comments, as an important proponent of the ACA, thus acquire  additional saliency.

To be sure, Professor Gruber at the same hearing before the House Oversight Committee had an explanation for his assertions on this point. It was one, I assume he and others hoped, that would further diminish  the force of what he had to say earlier on.   Its an argument based on allegedly omitted context. Here is what he had to say (go to about minute 34 of the CSPAN video):

About my January 2012 remarks concerning the availability of tax credits in states that did not set up their own health insurance exchanges: the portion of these remarks that has received so much attention lately omits a critical component of the context in which I was speaking. The point I believe I was making was about the possibility that the federal government for whatever reason might not create a federal exchange. If that were to occur and only in that context then the only way that states could guarantee that their citizens would receive tax credits would be to set up their own exchange.

In other words, Gruber now claims that the only circumstance under which citizens of states not setting up their own exchanges would be deprived of tax credits would be if the federal government did not set up an exchange either.  In that event, even under the broad definition of “established by a state under section 1311” that he embraces, there would be no exchange and the citizens would lose out.

The main problem with Gruber’s remarks is that the purportedly clarifying context is invisible except retrospectively and in Gruber’s own mind.  Nowhere in his answers — nowhere in the full recordings — does he indicate a belief that Washington would not set up an exchange at all – a reasonable omission given that Washington was very much in the throes of establishing a federal exchange at the time. Washington spent hundreds of millions on but was never going to get it up and running?

Want more evidence of the absurdity of the hypothetical scenario created by Gruber to reconcile his earlier comments with the desires of the Obama administration in King v. Burwell? You could read this May, 2012 report from CMS in which it discusses over 19 pages how the federally facilitated marketplace will work. You could read these July 2011 regulations and find the eight places in which the Department of Health and Human Services set forth how it is going to set up a federally facilitated marketplace, including the passage in the figure. Find me the warnings from CMS, from HHS, from the President from anyone that, in fact, the federal government was not going to establish a federally facilitated marketplace.

Not good enough?  How about contemporaneous words very close to Gruber himself. Take a look at the work in December 2011 of the Study Panel on Health Insurance Exchanges. It’s important not only because it was work mandated by Congress but because a member of that study panel was … Jonathan Gruber. (Look at the list of panel members on page ii.)  It writes a 34-page report on precisely how the federally facilitated exchange — the thing Gruber now says he doubted might exist — would come into being and the steps already being taken. The figure below is an excerpt from page 12 of that report.

Page 12 of the Study Panel on Health Insurance Exchanges; Professor Gruber was a member
Page 12 of the Study Panel on Health Insurance Exchanges; Professor Gruber was a member

It is thus no surprise that the report ends with the following statement: “Over the next 12 months, the federal government will continue to invest in and build a Federally-facilitated Exchange to operate in states that elect not to operate a State Exchange, or are unable to meet the certification and implementation schedule to stand up their Exchanges in 2014. ” In short the hypothetical scenario set forth by Professor Gruber in which the federal exchange does not exist looks like a fantastic reconstruction of events that simply did not occur.

And what are we to make of Gruber’s “squeezing the states” language?  Are we to believe that the federal government thought tax credits were so important for a nationwide program that they would squeeze the states by going slowly on establishing an exchange only then to not set up an exchange at all if some states failed to capitulate to the pressure?  How would that be consistent with a belief that the ACA was supposed to establish a nationwide program? And what are we to make of his language about state democracy: “I’m enough of a believer in democracy to think that when voters in states see that by not setting up an exchange the politicians of the state are costing state residents hundreds of millions and billions of dollars, that they’ll eventually throw the guys out.”  It wasn’t the federal officials, his Obama administration friends, that Gruber hoped the state voters would throw out for failure to establish a backstop exchange; it was the officials in the state that he hoped would be thrown out for failing to establish an exchange. The simplest explanation for this hope is that Gruber believed that  under the statute, even if the federal government established an exchange that let people buy policies without subsidies, states not establishing their own exchanges would thereby cause their citizens to lose hundreds of millions of dollars in tax credits.

I’m afraid he did

In short, and I say this with some sorrow as a fellow professor who has testified before the same committee, there is proof beyond most doubt that Professor Gruber deliberately lied under oath on at least this point.  He did so not in an off the cuff remark but with advice of counsel and after having apparently rehearsed and written out his testimony beforehand.

Now, to be complete, I suppose we order to consider one other make-weight explanation offered by Professor Gruber to diminish the import of his earlier recorded comments: it’s about his models.

Indeed, my microsimulation models for the ACA expressly modeled that the citizens of all states would be eligible for tax credits whether served directly by a state exchange or by federal exchange.

But this explanation about his behavior presumably prior to the enactment of the ACA is not inconsistent with a view that 36B conditions subsidies on a state creating an exchange. It’s consistent with a (mistaken, as it turned out) view that the carrot and stick contained in section 36B was too large for states to ignore.  It is also potentially inconsistent with his belief, expressed two sentences earlier, that he, unlike anyone else in the debate, harbored this suspicion that Washington would not set up an exchange for the states that failed to set up their own.  In that event, according to Gruber’s own reasoning, he should not have assumed in his model that all states would receive subsidies.

Why does it matter?

Ok, so some MIT professor interpreted section 36B of the ACA the way the plaintiffs in King v. Burwell do. OK, so he took liberties with the truth in his testimony before Congress. Is this an irrelevant tempest in a teapot brewed up by implacable Republican adversaries of Obamacare? I don’t want to speculate on motivation, but I actually think it is neither the most important event in the history of Obamacare — far from it — nor entirely irrelevant.  It may well be that the statute is so clear, though, that Professor Gruber (or anyone else’s thoughts) on its meaning are entirely beside the point.

Nonetheless, if for no other reason than to satisfy curiosity, I would like to see Professor Gruber, when he is hauled back before Congress pursuant to an additional subpoena, asked a more open ended question about how he, a mere (MIT) economics professor without legal training acquired his beliefs about the meaning of section 36B.  Did he really read the statute with care and come to that conclusion using the same somewhat — let us be fair — circuitous statutory reasoning now advanced by the defendants in King v. Burwell? Or might it have actually been based on comments he heard from the true legislative architects of the ACA during some of the many meetings he held on the subject?  If so, even such hearsay might be more relevant than Gruber’s own beliefs as to interpretation of a critical statute.

I am also old fashioned enough to be somewhat concerned about what sure looks to me like at least one calculated lie.  If, for example, Professor Gruber believes so strongly in the ACA — and one need only read his graphic book to realize the passion of his commitment — that he is willing to re-invent events in order to play a tiny role in its salvation, how non-instrumental was he in the modeling that led up to passage of the ACA and that,  I believe, may have some residual role in contemporary forecasts of its success?  I can understand that lies in order to provide, in his opinion, millions of people access to life-saving healthcare  may in his mind be a necessary evil. After all, although transparency may be important, it is crystal clear that Gruber would, as he said, rather have this law than not.

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Latest unlawful Obama administration “fix” may create standing for challenges

This past Thursday, the Obama administration issued its latest “fix” to the troubled roll out of the Affordable Care Act. The Center for Medicare & Medicaid Services issued a guidance that permits federal funds to go to insurers and insureds involved in sale of an individual health insurance outside of either a federally established or state-established Exchange. The premise of the guidance is that, in certain states such as Maryland, Massachusetts, Hawaii and Oregon, the complete dysfunctionality of the websites that were intended to determine eligibility for Obamacare subsidies may have led people to enroll in policies off the Exchanges; these purchasers, the guidance directs, should be treated the same as if the state Exchanges had made a timely determination and the individuals had enrolled in an Exchange policy. The guidance implements this concept by retroactively making such individuals eligible for premium tax credits the same as if they had purchased a policy on the Exchange and requires their insurers to readjudicate their claims both retroactively and for the remainder of the policy year as if they were eligible for the same cost sharing reductions that would have applied had they purchased a policy on the Exchange.

The Obama administration’s guidance calling for expenditures of taxpayer money plainly violates the Affordable Care Act. Unlike prior violations incurred in an effort to rescue the ACA from implementation and architectural infirmities, however, this one may actually hurt legal entities in a traceable and individualized fashion.  Some off-Exchange insurers may have standing to challenge the violation in court should they have the courage to pursue that option.

The illegality problem

Here’s why the Obama administration’s action is unlawful.

Premium Tax Credits

Under section 1401 of the ACA, which creates new section 36B of the Internal Revenue Code, the government may provide premium tax credits to the individual only for a “coverage month.”  The idea was that households with incomes less than 400% of the federal poverty level would ultimately see their federal income  taxes reduced to help compensate for the cost of purchasing health insurance.  But not any kind of health insurance purchase constitutes a “coverage month.”  Under section 36B(c)(2)(A), a coverage month is only one in which the taxpayer “is covered by a qualified health plan … that was enrolled in through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act.”  (emphasis mine) But the policies the Obama administration are now going to subsidize were not enrolled in through an Exchange established by a State (or the federal government); indeed, such is the entire “innovation” of this CMS guidance. And, thus, there is no statutory authorization for the federal government to be giving these taxpayers a credit.

Cost Sharing Reductions

Under section 1402 of the ACA (codified at 42 U.S.C. § 18071), the Secretary requires insurers to offer contracts with reduced cost sharing (deductibles, copays, out-of-pocket limits etc.) to individuals who purchase “Silver” plans. Purchasers are broken down into categories such that purchasers who fall into progressively lower income categories receive progressively more generous reductions. The program effectively converts “Silver” policies into “Silver-Plus”, “Gold Plus” and “Platinum Plus” policies. The government subsidizes insurers issuing these policies so that the cost sharing reductions should not cost them anything (providing the math is done properly). What the Obama administration is proposing is to extend these cost sharing reductions to insurance purchased off the Exchanges, at least where an application had been made to an Exchange.

Again, the problem is that the statute does not authorize cost sharing reductions for all “qualified health plans” sold on or off an Exchange. Under section 1402(a), such payments are authorized only for an “eligible insured.”  And the definition of “eligible insured” is quite clear. Section 1402(b)(1) requires that an eligible insured “enroll in a qualified health plan in the silver level of coverage in the individual market offered through an Exchange …” (emphasis mine).  Again, that pesky “through an Exchange” language gets in the way of the administration’s goal.  The policies now being offered subsidization are precisely those not offered through an Exchange.” The payments to these insurers announced by the Obama administration are illegal. From a financial accountability standpoint, it is not much different than if the Obama administration just decided to give government money to those ineligible for Medicaid simply because it felt badly for some of them.

Why insurers may have standing to challenge the new regulations

The Obama administration has made a habit in its implementation of the Affordable Care Act to exploit the law of “standing.” This is the doctrine that usually denies individuals with generalized grievances about a law or its implementation from bringing suit. Standing usually requires, among other things, that the plaintiff in a legal action have suffered individualized injury from the statute. Thus, when the Obama administration simply declines to collect taxes (as with the refusal to enforce the employer mandate), it becomes challenging to find someone who can use the judicial system to overturn the action. A similar problem plagues efforts to challenge the Obama administration’s decision to permit insurers to continue to sell policies that do not conform to the requirements of the Affordable Care Act. It’s challenging to find an individual or business that is hurt in a particularized and traceable fashion.

With the latest lawless action, however, the Obama administration may have gone too far.  Insurers who sold off Exchange will be hurt by the cost sharing reductions.  The reason is “moral hazard.” The idea of moral hazard is that the more generous an insurance policy is the greater the frequency with which insureds encounter covered events. In the health insurance arena, people with lower co-pays and deductibles go to the doctor more.  Indeed, the major reason for co-pays and deductibles is precisely to induce insureds to be judicious in their use of expensive medical services.  Moral hazard is one of the major reasons that platinum policies cost more than bronze ones.

When cost sharing reductions imposed on off-Exchange insurers effectively convert their silver policies into silver-plus, gold-plus and platinum-plus policies, those insurers end up paying more in claims.  And, while insurers selling policies on the Exchanges could have taken the induced demand created by cost sharing reductions into account in pricing their policies, there may well be insurers who sold only off the Exchange who, of course, did not take this additional moral hazard into account. Those insurers never dreamed that the government would reduce the amount its insureds would owe in cost sharing. Such insurers should have a strong case for standing in bringing a declaratory judgments to challenge the new guidance or, perhaps, in refusing to honor the demand for cost sharing reductions. Such insurers will, of course, need to be willing to take the political heat that may come from taking on an Executive Branch that more than ever is regulating their products.

A practical problem with imposition of cost sharing reductions on off Exchange policies

There’s also a practical problem with retroactive imposition of cost sharing reductions on off-Exchange insurers.  The guidance issued last week does not seem to address it. There are a lot of ways of achieving cost sharing reductions.  Some insurers might choose to reduce a deductible for some benefits.  Other insurers might choose to reduce a different deductible.  Still others might choose to keep the deductible but reduce copays.  For this reason, insurers selling policies on the Exchanges needed to specify in advance how they were going to achieve cost sharing reductions for their policies. Hence the government’s “Actuarial Value Calculator.” But insurers selling policies off the Exchange may never have gone through such an exercise.  Since CMS is now going to tell these insurers to readjudicate claims once they find out the income level of their insureds, the insurers are somehow going to have to come up, retroactively, with a system of cost sharing reduction.  How the insurer chooses to do so will affect how much each insured gets rebated.

The demand for readjudication gives insurers a second basis for standing.  Claims adjudication is not free.  The insurer is now going to have to go back through claims and resolve them for a second time.  Programming computers to adjust claims on a new basis is not costless. Figuring out whether a given service qualifies for cost sharing reductions is not costless. Cutting checks is not costless. And, having an actuary figure out what forms of cost-sharing reductions actually qualify as appropriate under the ACA is hardly costless either.  In short, the CMS guidance places new and completely unanticipated burdens on insurers who may have chosen to sell off Exchange precisely to avoid some of the regulatory burden that comes with on-Exchange sales.

The possible abortion problem

The “fix” concocted by the Obama administration may also end up violating restrictions in the ACA on federal funds being used to fund elective abortions. I will admit this is a bit speculative, but here’s the issue.  The general problem is that the ACA is an extremely integrated federal statute in which various provisions were enacted on the assumption that the conditions set forth in other provisions would hold.  Once the administration starts lawlessly changing certain parts of the ACA, other sections of the act begin to unravel. With abortion, the problem is that section 1303 of the ACA  (42 U.S.C. § 18023) prohibits federal tax dollars from being used to pay insurers via advances on premium tax credits  to fund elective abortions. Nor may federal funds be used to reduce the amount of “cost sharing” (deductibles, copays) that certain poorer ACA policy purchasers would otherwise pay for services other than elective abortions. There’s an elaborate mechanism specified by the statute involving segregated accounts and allocations that keeps government out of the elective abortion business, almost as if the insured purchased two policies — one for elective abortion and one for everything else — only the latter of which was subsidized by the government.   As a result, to the extent that various plans sold on the Exchanges provided for elective abortions — and apparently plans in at least nine states do so — they were structured to avoid receipt of such payments through segregated accounts.

Policies sold off Exchange never anticipated being the recipient of federal taxpayer money via premium tax credits and cost sharing reductions.  To the extent they provided for elective abortion coverage — and probably some of them did — there would have been no reason to structure them with segregated accounts to avoid receipt of federal funds for abortion.  Thus, when the Obama administration now proposes paying these off-Exchange policies federal tax dollars, the mechanisms for addressing abortion will not exist. I suspect that insurers who chose to sell off Exchange will not be excited by the administrative costs of now establishing segregated accounts. And, of course, if these off-Exchange insurers are not required by the Obama administration to prevent use of federal funds to pay for elective abortions, expect a firestorm of protest from those who believe that the federal government should not be subsidizing elective abortion.


One can be sympathetic to the plight of individuals in states such as Oregon, Maryland and others that wanted subsidized and community rated health insurance and, through no fault of their own, could not get it due to dreadful implementation of database systems that many states managed to accomplish with far fewer problems.  In a world of cooperation, it might have been possible for the Executive branch and Congress to work together to hold these individuals harmless for these failings while preserving political and legal accountability for government officials and contractors who collaborated in the various debacles. Instead, however, we have an illegitimate attempt to use the Executive pen to write around the problem and bail out those responsible for embarrassing state implementations of the ACA.

This fix is not only lawless, it is very sloppy.  It fails to prescribe a method by which the retroactive cost sharing reductions are to be done.  It imposes costs on insurers who may have traded the opportunities of selling on the Exchanges in favor of the comparative regulatory freedom that came with selling off the Exchanges. If the guidance is not clarified, it  may enable strategic behavior by those who purchased off the Exchange without suffering through a dysfunctional Exchange first; it may permit those people to apply for Exchange coverage now, reject it, but still obtain retroactive premium tax credits and cost sharing reductions for their off Exchange policies.  And the guidance as it stands fails to take into account sensitivities concerning elective abortion funding. And, of course, this spending of taxpayer money appears to be proposed via a “guidance” and not even a full fledged regulation promulgated with at least minimal process.

For proponents of the “flexibility” the Obama administration has shown in implementing the ACA in the face of a hostile Congress, however, the main sloppiness with the latest guidance is that it enables the judicial branch to rule on the pattern of unilateral Executive action that has characterized recent implementation of the ACA. Insurers off the Exchange will be hurt by the cost sharing reductions imposed by the guidance and by the administrative costs it creates. The question is, will any of them have the guts to sue.

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Coverage on January 1, 2014 matters

Contrary to the views of some, the number of people who have insurance coverage through the Exchanges as of January 1, 2014, matters to everyone.  It matters because the pool that exists on that date will determine, at least for a while, whether the premiums charged by insurers in the Exchange are likely to be stable and the extent of the federal government’s multiple obligations to subsidize plans purchased on the various Exchanges. It is not as if insurers get a claims paying holiday simply because more and healthier people may enroll later in the year. It also matters because a major point of the Affordable Care Act was to increase in an efficient and relatively painless way the net number of people who have insurance or social protection against significant illness.  If the numbers in the Exchanges and in the expanded Medicaid program do not way more than offset the number of persons who lose their insurance as a result of the ACA, or if the cost of extending health protection in this fashion proves too high, the ACA will not have accomplished its goals.

Given the chaos that has erupted as procrastination strains Exchange infrastructure and deadlines are repeatedly extended, it is difficult to tell right now whether the ACA is performing as hoped. A few things are clear, however. The first thing is that the Obama administration is not releasing the sort of information from which an objective assessment could be made.  Platitudes such as “Millions of Americans, despite the problems with the website, are now poised to be covered by quality affordable health insurance come New Year’s Day,” from President Obama at his last press conference are just not a substitute for knowing how many people have enrolled in the plans in the various Exchanges, and more importantly, have paid for coverage. What are their ages? How about some real numbers as a Holiday present?

Second, the Obama administration is acting as if a large number of enrollees in the aggregate is the measure of success. This is simply not true. Putting aside the problem of it being paying customers rather than mere enrollment that ultimately matters, meeting or exceeding projections in some states does not compensate for deficiencies in many other states.  Because the pools are state-based, Texas insurers and insureds are not helped if enrollment in New York or Connecticut exchanges ultimately equals or exceeds targets. The insurance market in Texas and many other states will still be unstable with some insurers likely pressing for significant premium increases, contemplating withdrawal from the Exchanges, and demanding larger subsidies from the federal government via Risk Corridors and other programs.

Third, even those who have been on the more pessimistic side of matters, must acknowledge that there has indeed been a surge in many state Exchanges and in many states covered by the federal Exchange. On December 11, I wrote: “With a decent last minute kick, it is not unimaginable that California could make 1/3 of its total by the December 23, 2013 deadline and get closer to its ultimate goal by the end of March.” With enrollments at 17,000 per day, California may in fact be there. Colorado, which previously had dismal enrollment numbers, reports 33,356 enrolled as of Monday, which puts it at of the 136,000 projected enrollment for 2014 and 52% of the way towards the Obama administration’s projections for this time of the open enrollment season. (33356/(0.47 x 136000)). Other states such as New York and Connecticut, which previously were doing better than most, have also reported a high pace of enrollment.

Whether that surge has been as large in many other states remains to be seen. Proponents of the ACA like to cherry pick their states with at least as much zest as opponents do. Perhaps both sides share the belief that insurance enrollment is at least much a social phenomenon as a purely economic one. Numbers for large states (with large numbers of uninsureds) such as Texas, Florida, Georgia, Indiana,  Illinois, North Carolina and Florida have yet to report any numbers that I have seen.   And, as mentioned above, even if California and New York and some other states have enrollment sufficient to forestall premium instability and possible entrance into an adverse selection death spiral, that will not greatly help states in which enrollment ends up being less than half of that projected.

Finally, we need to look beyond the last minute holiday rush for health coverage and see what happens between now and March 31, 2014. The carrot of the ACA has basically been eaten for 2014.  If you wanted health care coverage and could afford the prices on the Exchange it made little sense to wait until after the December deadline to acquire it.  This is all the more true given that the President has permitted people to game the system by simply enrolling in a plan now and deciding until January 10, 2014, whether to pay.

Now, however, the first surge is likely over.  Will there be the needed second surge? All that really remains is the stick: the individual mandate tax penalty.  Many people, including me, believe that even before the events of last week, it was too small in 2014 to achieve its goal of inducing enrollment by those in good or average health.  The number of people for whom insurance would not be a good deal at, say, $2,000 a year net but for whom it would be a good deal at (effectively) $1,705 per year ($2,000 – the $295 per person tax penalty) is not likely to be enormous. This is so because ACA premiums often depart greatly from actuarial risk by their prohibition on medical underwriting, accurate age rating, gender rating and their — shall we say — loose enforcement of tobacco rating.

Moreover, with the administration exempting last week upwards of half a million people from the individual mandate, the number of people who need fear the stick got even smaller.  So, yes there are mega-procrastinators or people who have been stymied by the dysfunctionality of various Exchange website in obtaining coverage. There are former skeptics who see their neighbors helped by health insurance coverage under the ACA and who now enroll just as there may be some turned off by whatever problems emerge in administration of the plans.  On balance, I would not be surprised to see modest increases in enrollment between now and the middle of March.  I remain highly skeptical, however, that there will be a second surge equivalent to what has occurred this past week.  As they say, however, only time will tell.

Personal Note

I am enjoying a family vacation in the Colorado mountains this winter holiday.  It’s snowing outside my window as I write this and the beauty of a quiet snowfall can eclipse what may seem so important at other times. So please continue to read ACA Death Spiral periodically, but don’t expect a huge amount of activity for about the next week.  I’m confident we’ll be back exploring issues in the new year.


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Three questions for President Obama this afternoon

President Obama is holding a press conference this afternoon before he leaves on vacation.  Here are three questions I would put to him.

1. A number of small businesses will receive cancellation notices sometime this year because their plans no longer conform with the Affordable Care Act. There’s some controversy about how many such notices will go out, but clearly millions of people will be affected. Will the protections you have now afforded to individuals who had their plans cancelled this year such as exemption from the individual mandate and the ability to uncancel their policy likewise apply to small employers and those insured by them?

2. Your Solicitor General argued to the Supreme Court that the individual mandate, what you called the minimum coverage provision, was crucial to the Affordable Care Act, that it, unlike other provisions of the ACA were inseverable.  Here are quotes from pages 46 and 47 of the brief filed by your Solicitor General:

It is evident that Congress would not have intended the guaranteed-issue and community-rating reforms to stand if the minimum coverage provision that it twice described as essential to their success were held unconstitutional.

It is well known that community-rating and guaranteed issue coupled with voluntary insurance tends to lead to a death spiral of individual insurance.

Given the arguments made on your behalf, which may well have been correct, why are you not concerned that exempting more individuals from the individual mandate will not, as the insurance industry is complaining, destabilize the insurance markets and threaten the success of your legislation?

3. Are you concerned that while things are going better in some states such as New York, in many states such Oregon, Maryland, Texas there are a very low number of people enrolling in plans on the individual Exchanges so that even the most massive surge will not correct the situation before coverage begins January 1 or perhaps even before the end of March. Everyone agrees that low enrollment increases the risk that the markets in these states will become unstable?  If that risk materializes, what is Plan B?  What plans do you have to address the situation in those states?

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Rhode Island and Nevada data suggests many “enrollees” are not purchasing policies

Under intense pressure from the Obama administration to do so, the America’s Health Insurance Plans’ (AHIP) Board of Directors announced yesterday that health plans are “voluntarily” extending the deadline yet again for consumers to pay their first month’s premium. So long as the individual selects a plan by December 23, 2013, the individual will apparently have until January 10, 2014, to pay their first month premium and get coverage retroactive to January 1. Some states with their own Exchanges may impose different deadlines; the AHIP announcement is not binding on them.

The decision may boost the number of persons who end up with actual coverage in January but encourages people to play games with their insurance. It also further corrupts any meaning that might be accorded to the current metric of ACA success: the number of people putting a plan in their shopping cart.  With the extension of the deadline until past the coverage date and the potential for retroactive coverage, it now makes sense for virtually every American to enroll in the ACA.  This is true even of people who think the odds are extremely slim that they will ever actually purchase a policy. One just selects a plan free of charge before December 23  — personally I might pick a lavish Platinum one — but then decides whether to pay the premium and obtain retroactive coverage if and only if their health goes bad between January 1 and January 10 (or they would otherwise have purchased the policy).  Expect anecdotes of people paying their insurance premiums for retroactive coverage right after they get the bill from the doctor or hospital.

Why would the Obama administration facilitate games with health insurance purchases?

One reason the Obama administration may have taken the unusual step of permitting people to purchase health insurance retroactively is that it is concerned about its ability to handle large amounts of payments between now and the original deadline.  Recall that the back end of is not functioning ideally. Data from Nevada and Rhode Island hints, however, at another reason that the Obama administration might have made this unusual request of insurance companies. These are the only two states that I can find that have released information on both the number of people who have selected a plan and the number of people who have actually paid so far for coverage.

The conversion rate in Rhode Island is 61%; the conversion rate in Nevada is a miserable 23%.

If these two states are representative of others on which the Obama administration indeed has secret data, perhaps more than a third of those counted as “enrolled” by virtue of putting a plan in their shopping carts may not have actually committed to pay for them. That figure could easily be as low as one half. It would then be yet less surprising that (a) the Obama administration has selected shopping cart placement of the metric for success and (b) keeps repeatedly extending the deadline people have to pay their premium bills.

Rhode Island

The data released by Rhode Island on December 13, 2013, covering the period through the end of November, 2013, shows that of the 2,649 it reported as having selected a plan, just 1,611 had accompanied that selection with a premium payment, a 61% conversion ratio. In other words, 39% of the enrollments are provisional.


The data from Nevada from an earlier time is potentially worse.  November 12 Tweet shown below from Nevada HealthLink shows that at that time, when about 2,000 Nevadans had selected a plan, only 513 had paid for it. This is a conversion rate of roughly 26%, 74% would not have paid for the policy.

Data more recently reported in The Las Vegas Review Journal suggests that the low conversion rate may be getting even worse in Nevada. It reported today as follows:

The exchange didn’t release new sign-up numbers by press time, but it said on Dec. 10 that 6,629 consumers had selected qualified health plans, including 1,800 in the first week of December alone. It also told the Review-Journal on Friday that 1,537 people had actually paid for premiums.

If, so, even with the passage of time, the conversion rate is now just 23.2%.  This figure is consistent with reports from some inside the insurance industry. To be sure, this data is still early. And surely an additional number of those who selected after December 10  have now paid along with those who selected a plan after that date. But unless a lot of people are getting out their credit cards to pay health insurance premiums this holiday season, the conversion number in Nevada is rather frightening. Nevadans are likely experts in gaming, and the Obama administration’s pressuring of an acquiescing insurance industry to permit retroactive coverage gives them and gamblers everywhere an additional opportunity to beat the house.


Fun question for lawyers and law students

Why isn’t this collaborative extension of an offer to contract a violation of section 1 of the Sherman Antitrust Act? Hint is here.

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California provides a detailed look at enrollment in its Exchange

The State of California is doing neither the best nor the worst when it comes to enrolling people in individual healthcare plans on its Exchange (Covered California), but it is doing the best job I have seen in releasing detailed information.  In particular, it has released detailed information on the the age distribution of enrollees, “metal tiers” being selected by enrollees, subsidization rates, and the distribution of enrollees among insurance companies, and rates of enrollment among different language groups.  Let’s look at the data and see what can be learned. And, other states, would you please do what California is doing. You have the data. It’s not that hard to put out the numbers.

Age Distribution

As shown in the paired bar graph below, the distribution of enrollees in individual Exchange plans by age in California is weighted far more heavily towards those in the older age brackets.  There is, in particular, a dearth of children relative to the large numbers in the population and a disproportionately high number of those in the 55-64 age bracket.

Distribution of enrollees by age in California
Distribution of enrollees by age in California

The graphic here is less “bullish” on the enrollment of younger enrollees than Covered California would like to make it appear.  This is because in various press releases, Covered California has been comparing the proportion of younger people enrolled against the proportion of younger people in the population and suggesting that they are similar.  But this is highly misleading because the relevant statistic is the proportion of younger people in the eligible population. The elderly are not eligible to purchase policies on the Exchange.  Thankfully, however, California has released the raw data that lets people do their own analyses. When the results are examined properly, in my opinion, the distribution of the young is more problematic.

Metal Tier Distribution

As noted in an earlier blog entry, a high proportion of purchases of Gold and Platinum policies could be worrisome because those policies are likely to be disproportionately purchased by those in poorer health.  These policies generally have significantly less cost sharing than the Bronze and Silver policies. The chart below, taken from data provided by Covered California, shows that this concern has not materialized thus far in California.  “Sub.” in the graphic shows policies that are eligible for subsidy under 26 U.S.C. § 36B and possibly under 42 U.S.C. § 18071 whereas “Unsub.” shows policies that are not eligible for subsidy. Silver is by far and away the most popular plan selected. And, contrary to earlier information released by California, which initially got matters backwards, subsidized policies are significantly more prevalent than unsubsidized ones.

Distribution of California enrollees by metal tier
Distribution of California enrollees by metal tier

Insurer Distribution

The pie chart below shows the distribution of enrollees by insurer.  As one can see, enrollment in California has been dominated by large insurers. The top 4 insurers have 96.2% of the market.  No small insurers have broken into the top 4. Moreover, some insurers are likely to have problems with the small absolute size of their pool if it does not increase significantly: Valley Health Plan has just 122 people enrolled to date in its health plans; Contra Costa Health Plan has just 178.

Distribution of California enrollees by insurer
Distribution of California enrollees by insurer

Language Distribution

California has released information the primary language of enrollees. As shown in the paired bar graph below, the data demonstrates that English speaking individuals are enrolling at a rate significantly higher than those whose primary language is something else. People whose primary language is Spanish, for example, constitute 28.8% of the California population but only 4.6% of persons who have enrolled to date.


Distribution of California enrollees by primary language
Distribution of California enrollees by primary language

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A tale of two states: Delaware and Connecticut

Two states, Delaware and Connecticut released data today providing contrasting pictures of the rollout of the Affordable Care Act. The news from Delaware is bad for supporters of the ACA; the news from Connecticut is much brighter. Taken together, the news confirms a point I believe bears repeating.

It is a mistake to write a single narrative of the rollout of the Affordable Care Act. There are in fact at least 50 different rollouts of the individual Exchanges and many different narratives, each of which may have elements of truth. Based on what we have seen thus far, there are likely to be some states in which the Exchanges and the policies sold in them are relatively stable and at least the goal of greater access to healthcare is substantially met. Connecticut sure looks like the first poster child for success. There are a number of others, however, such as Delaware, in which, unless there is a massive surge, the individual Exchange based system of policies without medical underwriting will not be increasing access to medical care as hoped and in which insurers are likely to feel increasing discomfort in continuing to write policies under the existing regulatory regime.


As of last Thursday, December 12, 2013, only 793 people in Delaware had selected a plan on the individual Exchange and paid the first premium.  Since fewer than 431 had done so as of the end of November, this means that somewhere between about 25 and 62 people per day are selecting for a plan in Delaware and paying the premium.  This is better, of course, than when was not working, but it is still an inadequate rate of growth in the insurance pool.  If the pace of this “surge” continues for the rest of the year, including the holiday season when attention may be elsewhere,  it means that fewer than 2,000 people in Delaware will have insurance coverage when it begins on January 1, 2013.  Delaware was projected to have 13,898 enrolled through 2014.

The number in Delaware is particularly troublesome for a variety of reasons.  First,  about 265 people from Delaware were previously enrolled in the federal Pre-existing Condition Insurance Program (PCIP), which will end as of December 31, 2013. This means that the number of newly insured Delawareans may be less than the 2,000 discussed above.  Some will just be substituting expiring PCIP policies. Moreover, to the extent the individual policies purchased in Delaware on an Exchange are comprised significantly of people evicted from the PCIP, it means that a significant portion of the purchasers in Delaware will be those known to have high medical expenses.

Second, numbers such as 2,000 on the positive side are troubling due to estimates that 12,000 Delawareans saw their individual policies cancelled in 2013 presumably due to failure to provide Essential Health Benefits. And, even though Delaware is among those states that is permitting insurers to “uncancel,” unless almost all of the insurers do so and unless almost all of their insureds re-enroll, the result in Delaware could actually be an increase in the number of uninsured persons. Moreover, the greater the proportion of Delawareans who retreated back to their faux-grandfathered policies as a result of the Nov. 11, 2013 change of mind by President Obama, the fewer of those mostly healthy individuals likely to offset the more expensive persons enrolling via the Exchange.

Finally, if there end up being, say 2,000 people who purchase policies in Delaware by the time coverage starts, the economies of scale that insurers need to make the system work may not be present.  Some insurers who have, say, higher priced Gold policies may find that there are fewer than 20 people in their insurance pool. Numbers like that don’t work well for the insurance industry.


The news from Connecticut should be at least as encouraging for supporters of the ideas behind the ACA as the news from Delaware should be discouraging. According to information released today, 1,400 people per day are enrolling in individual policies in Connecticut’s own Exchange and the total enrollment is surging up to 20,000. Should the pace of 1,400 per day continue, Connecticut could have 40,000  enrollees by January 1, 2014. To be sure, there is likely to be some shrinkage between enrollment and the actual payment of premiums — a figure Connecticut does not appear to have yet released. Still, having even 35,000 true insureds by the start of 2014 would be a show of great strength and stability for the ACA; Connecticut was projected to have 58,637 enrolled through 2014.

Not only are the absolute numbers encouraging in Connecticut, so too are the characteristics of the enrollees. Nationwide, at last report, only 41% of the enrollees had incomes below 400% of the federal poverty level that entitled them to a subsidy; 59% came from wealthier Americans for whom, perhaps, programs simpler than the stunningly elaborate ACA might have been more sensible. (Note: these figures may be off slightly because, it was released today, California had released its information backwards!)  In Connecticut, however, 70% of the enrollees apparently qualify for a subsidy.  The middle class and the lower middle class are buying to a greater extent. Moreover, the types of policies being purchased in Connecticut, mostly Silver plans, are inconsistent with fears that policies are being purchased primarily by those with higher projected medical expenses.  As discussed earlier on this blog, disproportionate purchases of Gold and Platinum plans could be a harbinger of adverse selection problems.

In short, Connecticut is behaving pretty much as the models used by those who promoted the ACA, thought the rest of the nation would behave. The question now, however, is whether Connecticut and perhaps a few other states will be outliers that happen to conform to the behavior of its neighbor, Massachusetts, on which some of the modeling was predicated. Perhaps, proponents of the ACA should hope, people from Connecticut just procrastinate less and the rest of the nation will rapidly come around to behaving the way that the ACA requires if its projections and aspirations are to bear out.


Delaware is the first jurisdiction I have seen to publish the number of people who have both selected a plan and actually paid the first month’s premium.  Other figures tend to be the larger category of people who have selected a plan. As any electronic shopper knows, there is a big difference between putting something in one’s electronic shopping cart and actually getting the credit card out and hitting “Pay.” So, kudos to Delaware.  I would like to see other jurisdictions follow suit.

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The new Exchange enrollment numbers are bad

The federal government announced today that 137,204 people have selected a healthcare plan through the federal Exchange as of November 30, 2013. The number is an increase over the 29,794 who had done so by the end of October, a month during which the website portal for enrollment,, was in disarray. The government reports that 258,497 have now selected a plan through one of the state Exchanges, making a total of 364,682 enrolled. Asked by reporters whether the Obama administration stands by its estimate that 7 million will enroll in individual plans sold on the various Exchanges by March 31, 2013, the day necessary to do so in order to avoid a tax penalty,  Michael Hash, director of the office of health reform in the federal Health and Human Services Department, said that they were “on track, and we will reach the total that we thought.”

The pace of enrollment announced by the federal government today is inconsistent with the claim that its 7 million goal will be achieved. The claim rests on hopes of two surges, one taking place over the next 12 days before the December 23, 2013, deadline for coverage starting January 1, 2014 and a second surge taking place as we approach the end of March at which point, if coverage has not been obtained, many Americans will be hit with a tax penalty.

The magnitude of the surge required strains credulity.  A scenario in which most of  those who wanted coverage have already applied and in which the pace of enrollment stays the same or even sags for lengthy periods as we go forward would appear almost as likely. Plus, it seems unlikely that there will be major enrollment between December 23, 2013, the first deadline, and March 23, 2014, the second deadline. If someone wanted coverage, they would try to get it earlier. What does applying in the middle of February accomplish? Moreover, if, given the unpredictability of human behavior, the surge actually materialized, it might well strain the government’s computer systems.


There are many disturbing aspects to today’s release of numbers. First, forget for the moment about the March 2014 projection date and the March deadline.  There are only 12 shopping days left before the pool will be closed for those who will have coverage as of January 1, 2014.  Even if the pace of enrollment surges by a factor of 10 over what it was for the last two weeks on which we have data and enrolls people at 45,000 per day, that would still put only about 668,000 persons enrolled through the federal Exchange as of that deadline.  Even this rather cheery estimate would result in only 14% of the 4.8 million the Obama administration has projected will be enrolling in the federal Exchanges in 2014.  The original projections for enrollment on opening day, January 1, 2014, were considerably higher, 3.3 million.

The number enrolled as of December 23, 2014, matters greatly. While of  course there could be a second surge, in the mean time insurers are having to pay claims for three months on those first 14% to enroll. The initial enrollees are very likely to be comprised disproportionately of people with above average health care expenses. The result will be that, until that prayed-for second surge occurs, insurers will likely be losing large sums of money in the Exchanges and, ultimately, seeking reimbursement pursuant to the Risk Corridors program from the federal government and, derivatively, taxpayers.

Moreover, the aggregate numbers mask the fact that there are 50 different sets of Exchanges. While numbers are better in some, there are many jurisdictions in which there are huge problems.  It is not “OK” if the Exchanges succeed in California, New York and a few other states if insurers and insureds in many other states suffer severe adverse selection problems that result in rapidly rising prices or reductions in availability.

Let’s look at a few states. I start with Texas. There, out of 780,959 projected to be enrolled, there are 14,038 as of the end of November.  This is fewer than 2% of the ultimate projected amount.  Even if one assumes that enrollments in Texas surge to go 20 times faster in December than they did in November, which is a pretty heroic assumption, this would still result in only 183,425 being enrolled as of the December 23 deadline. This would be  only 23% of what needs to occur. It would be as if a football team were down 35-3 in the 3rd quarter and hoping to make a comeback. It could, I suppose, happen, and you shouldn’t turn off the TV set, but the probabilities are remote.

One might argue that Texas is an exceptional case due to the degree of hostility prevailing among many here about “Obamacare.” Take another fairly large state using the federal Exchange, Pennsylvania. There, we see 11,788 enrolled out of 268,858 ultimately projected, just 4.4%.  To get to even 1/3 of the ultimate projected number being enrolled by December 23, the pace for December would have to be 6 times greater than it was in the last two weeks of November. Not impossible given procrastination, but again, a major challenge.

The figures when one looks to the various state Exchanges are a mixed bag. The poster child for the Obama administration would appear to be California. It has 107,087 of the 691,016 it ultimately hopes to enroll, over 15%.  With a decent last minute kick, it is not unimaginable that California could make 1/3 of its total by the December 23, 2013 deadline and get closer to its ultimate goal by the end of March.  But even with these better-than-average numbers, there is the risk of at least some adverse selection in a pool substantially smaller than projected. Also doing better than many is New York. There, we see 45,513 enrolled. But even this is but 11% of the 411,304 projected. It will again take a major surge over the next 12 days if New York were to get to even 1/4 of the ultimate projected enrollment by the December 23 first deadline.

But for every California or New York running its own show, there is an Oregon or a Maryland. These are large states in which enrollment is lagging. In Oregon, owing substantially to the collapse of its computer system, only 44 people have enrolled in plans on their Exchange. It will take an unimaginable surge there to make the system functional. Officials there and in Washington, D.C. will soon need to start contemplating what to do about a failed system; will, for example, tax penalties be imposed for those in Oregon who do not have health care coverage? In Maryland, where the director of the program recently quit, just 3,758 have enrolled out of 91,528 projected, just 4.1%. It goes beyond hope and into the realm of fantasy to believe that Maryland is not going to have a serious adverse selection problem starting January 1, 2014, when those 3,758 who penetrated the state’s application system start filing claims.

Finally, nowhere in the release do I see an age distribution of those enrolling. Unquestionably, the administration has this information. It is required in the enrollment process. And, perhaps this is a bit cynical, but I have to think that if those numbers looked good, if the hoped-for proportion of younger persons were enrolling, the Obama administration would release the information.  I believe we are entitled to draw a negative inference from the fact that the information was not released that the pool is disproportionately elderly. If this is correct, what we are seeing is a small pool composed disproportionately of the elderly. That does not augur well for those who want to see the promises of the Affordable Care Act fulfilled.

An Experiment

HHS was kind enough to include a graphic in their report. Here it is.

Cumulative enrollment in the federal Exchange for various states
Cumulative enrollment in the federal Exchange for various states

The graphic plots time on the x-axis and cumulative enrollment on the y-axis. Recognizing all the enormous problems with doing so, I thought it would still be interesting to try to fit a curve to the data and extrapolate it out to see where we might end up.

The short version is that if we extrapolate the curve using quadratic and cubic models, we end up at between 278,000 to 383,000 enrolled in the federal system by the December 23, 2013 first deadline. This would represent fewer than 10% of the ultimate projected enrollment and will create substantial adverse selection problems for at least the first three months of the program, particularly in the less enthusiastic states. This all assumes, of course, that all people who have selected a plan actually pay the premiums. The numbers could be worse. Regardless, insurers are going to be very concerned if these are the sort of numbers that materialize; the federal government better get out its Risk Corridors checkbook to help relieve the pain.

By March 23, 2013, however, the same models show we could be at 1.35 million to 3.94 million, depending on the model chosen.   This would represent 28% to 82% of that originally projected and would cause serious adverse selection problems at 28% or mild adverse selection problems at 82%.  I appreciate fully that these are large error bars but we just don’t have the data or an a priori model that permits me to extrapolate with any confidence this far into the future.

Here’s a graphic showing these results.  The Mathematica notebook that generated them has been placed here on Dropbox.

Extrapolation of enrollment data
Extrapolation of enrollment data


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Probably illegal and unquestionably stupid: Covered California’s release of personally identifiable information

Los Angeles Times article
Los Angeles Times article

The Los Angeles Times has reported that Covered California, the largest state’s health insurance exchange under the Affordable Care Act, has started releasing to insurance agents throughout the state the names and contact information of tens of thousands of persons who started an application using the state’s online system but failed to complete it. The Covered California director Peter Lee acknowledges the practice but says that the outreach program still complies with privacy laws and was reviewed by the exchange’s legal counsel. “I can see a lot of people will be comforted and relieved at getting the help they need to navigate a confusing process,” explained Lee.

I am hardly as confident as Covered California’s lawyers apparently were that this practice was legal. The law requires that disclosures to third parties be necessary and I do not see why Covered California could not have contacted non-completers directly and ask them if they wanted help from an insurance agent rather than disclosing their identify to insurance agents.  But even if the practice could be said to be borderline legal, it is difficult to imagine a practice more likely to sabotage enrollment efforts in California — and, since California’s interpretation could be precedent for other states — elsewhere.  For every person unable to complete their application online in California and who will, with the comforting help provided by insurance agents, now want to complete it, there are likely 10 who will be turned off by the cavalier attitude towards privacy exhibited by this government agency.  Beyond a violation of ACA privacy safeguards, the action is either a sign of desperation about enrollment figures, even in a state that boasts of its success such as Peter Lee’s California, or monumental stupidity.

If California wanted to create an adverse selection death spiral, it would be difficult to be more effective than, without notice or consent,  releasing personally identifiable information to insurance agents.

The Law

Let’s start with the Affordable Care Act itself. Section 1411(g)(2), codified at 42 U.S.C. § 18081(g)(2), reads



(2) RECEIPT OF INFORMATION.—Any person who receives information provided by an applicant under subsection (b) (whether directly or by another person at the request of the
applicant), or receives information from a Federal agency under subsection (c), (d), or (e), shall—
(A) use the information only for the purposes of, and to the extent necessary in, ensuring the efficient operation of the Exchange, including verifying the eligibility of an individual to enroll through an Exchange or to claim a premium tax credit or cost-sharing reduction or the amount of the credit or reduction; and

(B) not disclose the information to any other person except as provided in this section.


Health and Human Services, one of the key agencies in charge of administering the Affordable Care Act has implemented this statutory provision in  section 155.260 of Title 45 of the Code of Federal Regulations. It says:

§ 155.260 Privacy and security of personally identifiable information.

(a) Creation, collection, use and disclosure.
(1) Where the Exchange creates or collects personally identifiable information for the purposes of determining eligibility for enrollment in a qualified health plan; determining eligibility for other insurance affordability programs, as defined in 155.20; or determining eligibility for exemptions from the individual responsibility provisions in section 5000A of the Code, the Exchange may only use or disclose such personally identifiable information to the extent such information is necessary to carry out the functions described in § 155.200 of this subpart.
This regulation requires us to answer several questions: (1) was the information in question “personally identifiable information” ; (2) was it collected for one of the purposes set forth in subparagraph (a)(1); (3) and was its use or disclosure necessary to carry out a permitted function.

Did Covered California release personally identifiable information? Yes.

Section 155.260 of the Code of Federal Regulations does not appear to define personally identifiable information — although it is difficult to imagine anything that would fit it better than one’s name, address, phone number and email address. And, if one consults the Department of Labor, they say “PII” is:
Any representation of information that permits the identity of an individual to whom the information applies to be reasonably inferred by either direct or indirect means. Further, PII is defined as information: (i) that directly identifies an individual (e.g., name, address, social security number or other identifying number or code, telephone number, email address, etc.) or (ii) [omitted] Additionally, information permitting the physical or online contacting of a specific individual is the same as personally identifiable information. This information can be maintained in either paper, electronic or other media.
This definition fits what Covered California released to the letter.
Examples of personally identifiable information
Examples of personally identifiable information

Or, if Department of Labor regulations are not enough, consider HHS’s own privacy training materials.  They list name and email address — exactly what Covered California released — as emblematic personally identifiable information. HHS didn’t make this list up; they borrowed from footnote 1 of the White House’s Office of Management and Budget memorandum on Safeguarding Against and Responding to the Breach of Personally Identifiable Information

Was it personal information collected for the right purpose? Yes

Apparently it is not just any collection of PII that triggers obligations under 155.260. It is collection for certain purposes.  One of those purposes is “determining eligibility for enrollment in a qualified health plan.” It would surely appear that this was the purpose for which the information was provided. The individuals contacting the website were unlikely, except in peculiar cases, to be doing it for academic purposes or research. They wanted to find out whether they could get health insurance in an Exchange, what plans might be available, and what the price might be.  That’s what everyone has been advertising as the purpose of the Exchange. And, although one would think this goes without saying, that’s the reason Covered California wanted the person’s name and other personally identifiable information. Covered California wanted to determine whether that person — not some anonymous shopper — was eligible and what plans were available to that person. Covered California wanted very much to be able to link the determinations made by the back end of the web site to the identity of the person requesting that the determination be made.

Was this a necessary disclosure? Dubious

If I were representing Peter Lee or others involved with this privacy incident, this is where I might want to rest my defense. (But if I were running other health insurance exchanges or hoping for the success of the ACA, I think I’d try to stop him from doing so). The regulation does not prohibit all uses of personally identifiable information. Nor does it actually prohibit release of the information outside of the health insurance exchange. Rather — and this may be as disturbing to some as the news of what Covered California has done — it actually authorizes external disclosure and external use under some circumstances.

First, the Exchange may only use or disclose such personally identifiable information only “to the extent such information is necessary to carry out the functions described in § 155.200 of this subpart.” When we leaf to section 155.200, we find it says the legitimate functions are those in various subparts of the regulations.  The relevant parts, however, are determining eligibility for subsidies and actually enrolling in a plan. Since these two functions are, I believe, precisely what Covered California had in mind, it would not appear to violate these specific portions of the regulation to third parties so long as the purpose was eligibility determination and enrollment.

There are, however, at least three rebuttals to this argument that, standing alone, might suggest that Covered California’s actions were lawful.

Rebuttal 1: But surely this does not mean that Covered California could publish the names of incomplete enrollers in the Los Angeles Times or on some internet list and ask that the public help them out. The regulations also place limits on the persons to whom disclosure may be made. Read this part of section 155.260:

(b) Application to non-Exchange entities.  … [W]hen collection, use or disclosure is not otherwise required by law, an Exchange must require the same or more stringent privacy and security standards (as § 155.260(a)) as a condition of contract or agreement with individuals or entities, such as Navigators, agents, and brokers, that:
(1) Gain access to personally identifiable information submitted to an Exchange; or
(2) Collect, use or disclose personally identifiable information gathered directly from applicants, qualified individuals, or enrollees while that individual or entity is performing the functions outlined in the agreement with the Exchange.
Thus, if the third parties themselves agree to abide by the privacy regulations, perhaps they could use personally identifiable information the same way as the Exchanges themselves might. But I have doubts that all the parties to whom the information was released had entered into such “subect-to agreements.”  The Los Angeles Times article understandably leaves the issue a bit unclear, but it appears the disclosure of the information went in two stages, first to some agencies with whom California had pre-existing agreements and second to various insurance agents. While I would not be surprised if Covered California had “subject-to agreements” with the four agencies, I would be surprised if they had agreements with all to whom the second stage disclosure was met.  This is a factual issue that will need to be resolved should a formal dispute arise over the release of the information.
Rebuttal 2: Just because one could disclose the information to certain third parties does not mean it was “necessary” to do so. Section 155.260(b) does not authorize all disclosures to third parties that have entered into subject-to agreements. Rather, it authorizes only necessary disclosures. Was it really necessary for third parties to contact these individuals? Why could Covered California not keep the matter in house and do it itself? They had the information. They could inform those individuals that if they wanted to contact an insurance agent, there was a list of authorized agents who could help them.
Which brings me to …
Rebuttal #3:  There’s another provision in the regulations that needs to be considered: the idea of informed consent. Section 155.260(a)(3)(iv) states:
Individuals should be provided a reasonable opportunity and capability to make informed decisions about the collection, use, and disclosure of their personally identifiable information.
If the Los Angeles Times article is complete and accurate, this was not done here. There appears to have been no effort to ask enrollees whether, if they were unable to complete their enrollment, they wanted to be contacted by an insurance agent for help. Rather, contrary to the “informed decision” principle in (a)(3)(iv), Covered California just assumed that they would.  And, although some web site users might indeed have wanted such assistance, many others, I suspect, would not want third parties with potential commercial motives and who may not have been well vetted informed about personal medical insurance and financial matters. The whole point of (a)(3)(iv) is that the individuals should have some notice and say about the matter.  And it is that provision that appears to have been completely ignored here.

Legal conclusion

In the end, it appears to boil down to whether the disclosures to insurance agents was necessary and done in the right way. As to whether it was necessary, I have serious doubts. I don’t see why Covered California could not itself just have easily sent the incomplete enrollers a communication with a list of insurance agents. Moreover, even if many users would prefer that the communication flow go first to insurance agents and then to them, the language of the informed consent regulation indicates that notice of such a policy have been provided.

The stupidity

According to a recent poll published in the Christian Science Monitor, eighty percent of the American public say people should be concerned “about the security features of the Obamacare website.” Concerns about the security of the information inside the health care Exchanges has been fanned by many parties. The right wing (and sometimes the left wing) has repeatedly attacked the implementation of Affordable Care Act on grounds that  giving Big Brother all this information about one’s finances, health and identity is dangerous. It is, they have warned, hardly immune from hackers. The government’s abysmal track record in construction of the web site hardly gives one confidence.  

Moreover, whether exaggerated or not, fears about the security of the detailed financial and personal data that will ultimately lie inside the health care exchanges have some technological support. Sources that would ordinarily not be dismissed as kooky or overly politicized have repeated these warnings.  Here are some from the Mitre CorporationPopular Mechanics and Information Week. Mainstream media has noted the problem (CNBC, Fox News). Moreover, the fears have been amplified by commentators that, no matter what one may think of them, have large audiences that take what they say seriously. Here are some from Rush Limbaugh (“single biggest threat to individual security and identity security that we have in this country”), Sean Hannity (“we are hearing from security experts that the website is not safe”), Fox News (“it doesn’t look like anything was fixed from a security perspective”), Mother Jones (“According to several online security experts,, the portal where consumers in 35 states are being directed to obtain affordable health coverage, has a coding problem that could allow hackers to deploy a technique called “clickjacking,” where invisible links are planted on a legitimate web page.”).

Given the widespread concern and the dependency of the entire system on enough people risking their personally identifiable information in order to enroll in the health care exchanges under the Affordable Care Act, one would think government officials would be extraordinarily vigilant against hackers and others who would seek to take private information outside the Exchanges. One would think, all the more, that government itself would not be disclosing the information. 

And this is what makes Covered California’s actions so mind-bogglingly stupid. Yes, releasing one’s name and email address might not be the same as releasing information about sexually transmitted diseases or the size of one’s bank account, it is still precisely the sort of information that many Americans seek to block others from having and give up only as absolutely necessary.  And releasing information to insurance agents who promise to abide by privacy rules is not the same as posting names and addresses directly on the Internet. Even so, if government is to give this information out — to those whose bona fides may not always be known and who have a commercial motive to misuse the information —  there better be an awfully good reason. Otherwise, those borderline people thinking about enrolling in an Exchange and on whom the whole of the Affordable Care Act really depends for its full success are going to think that the government places very little weight on privacy.  It is that sort of thinking, perhaps as much as concerns about the economics of the Affordable Care Act, that risks driving the whole system into an adverse selection death spiral from which it will be unable to escape. It is hard to imagine the pressure Covered California must be under to meet enrollment goals that would cause it to lose sight of these central points.



Let’s end with a look at one final statutory provision: section 1411(h)(2) of the ACA. It says:

Any person who knowingly and willfully uses or discloses information in violation of subsection(g) shall be subject, in addition to any other penalties that may be prescribed by law, to a civil penalty of not more than $25,000.

I would suggest that Peter Lee of Covered California think very carefully about this provision. I would suggest that insurance agents like  Warner Pacific Insurance Services in Westlake Village, an identified recipient of this information, think very carefully about it too before using it to contact individuals. Perhaps the Obama administration will choose to excuse this apparent breach of the law due to what they may regard as the good motivations of the violators, but if you multiply $25,000 by each phone call or email, it can really add up. Those involved in this release of information better hope that Covered California lawyer did some really good legal research and analysis before apparently giving the practice a clean bill of health.

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The incredible increase in pace that will be needed to meet ACA enrollment projections appears to be working much better, at least in enabling individuals to select plans. And some of the state exchange web sites appear to be improving their functionality too. Some have heralded these advances as providing hope that the Exchanges will be able to meet the enrollment projections on which the economics of insurance without medical underwriting in part depend. But do these claims stand up to the cold light of mathematics?  Not very well.

Here’s the headline:

A close look at the numbers shows that the pace of enrollments from here to the close of open enrollment needed to meet projections is high in every state, even those touted as successful, and almost impossibly high in many.  Given the incredibly slow start in most jurisdictions, it will not just take a little pickup over the next few months to achieve the projected and needed number of persons in the Exchanges. It will take a miraculous last minute stampede. Since miracles seldom occur,  the result may be two different stories of the Affordable Care Act: a few states in which the Exchanges proved from the start to be a somewhat stable mechanism for providing health insurance without medical underwriting but a significant number of other states in which the results for at least the first year represent a large failure.

Today’s news

News appears to be breaking today that the federal exchanges enrolled about 100,000 in November.  This is being heralded as somewhat of a success compared to the 26,000 who enrolled in October. And, of course, enrollment figures from are difficult to assess due to the actual and feared dysfunctionality of the web site. But one way to look at this is to consider what has to happen between December 1, 2013, and March 23, 2014, the close of open enrollment to make projections. The states that are dependent on need about 4.84 million enrollees by the end of that period if the nation is to meet the goal of having 7 million enrolled in the Exchanges by the close of open enrollment.  If, right now, there are about 126,000 enrollees in those states, we are just 2.5% of the way there.  The pace of enrollment on will need to increase by a factor of about 20 in order to meet goal.  In absolute terms, needs to be enrolling about 42,000 people per day. And while perhaps not every single one of those people need to enroll for the system to succeed, the 7 million enrollment goal isn’t just a mere wish. There are, as I and many others have noted potentially serious consequences to the stability of insurance markets if the figures fall well short, even in several states.

Whether can score the needed come back, however, will basically depend on two related factors: (1) whether is truly fixed and can stand up to the increased pace that will be needed and (2) whether the requisite increase in pace is likely.  This latter factor depends in turn on where on the following spectrum the possibilities fall. On one end of the spectrum, there is the possibility that there is this pent up demand from procrastinators that will surge forward to access the web site in the coming weeks.  Perhaps March Madness for 2014 will constitute this huge surge — kind of like April 15 rushes to the post office to send in tax returns — as the March 23 “deadline” approaches. On the other end of the spectrum, there is the possibility that most people who wanted to and had the means to enroll — the wealthy sick — did so already and others have looked at the prices, the coverages and the penalties and decided that, for now, Exchange coverage is not for them.  The fact that a surprising 70% of current enrollees in the Exchange plans are unsubsidized gives some support to this gloomier hypothesis.

To get further insights, we can also take a closer look at some representative states.


First, let’s look at what has to happen in the most successful state, Connecticut. There, as of  November 14, 2013 (the date of the last report), 7,591 people had selected a plan.  That’s not all it will take finally to get coverage — among other things, people will have to start actually paying premiums — but it’s a solid start. This 7,591 figure represents 12.9% of the projected total of 58,637 for Connecticut.  A little math shows that in order to make projections, people in Connecticut will need to enroll at a pace 2.3 times faster than they had as of November 14 in order to make the projection by the March 23, 2014 date.

It hardly seems impossible that Connecticut could make the projections.  Whether they do so, however, will basically depend on the location of Connecticut on the spectrum discussed above.  We should have a better sense of where on the spectrum we are falling when Connecticut releases new numbers.


Connecticut is a small state.  The enrollment there was projected to constitute only about 1.4% of the total enrollment in the Exchanges.  Let’s take a look at a big state: my home state of Texas. With the largest uninsured population in the country and with no Medicaid expansion into which some Exchange eligible persons might otherwise “fudge into,” Texas was supposed to enroll 780,959. As of November 2, 2014, Texas had enrolled just 2,991. This means that Texas will have to enroll at a pace 59 times faster than it had as of that date in order to meet enrollment projections.  And, even if due to failure to the website, Texas has enrolled, say, just 10,000 as of November 30, 2013, it will still need to up its pace by a factor of 41 in order to meet projections. Viewed in absolute terms, Texas will need to enroll at a pace of over 6,800 per day. Again, we will have a better sense of the plausibility of this increase when the federal government releases newer data.

Another way of thinking about the issue is to consider what would happen if Texas’ future enrollment relative to its prior enrollment is the same as Connecticut needs to be in order to meet the Connecticut projection. If Texas enrolls at a pace 2.3 times faster than it has thus far, Texas enrollment will be something like 29,000. That would be just 4% of what was originally projected, a shortfall of 752,000.  Connecticut could double its projected enrollment and it would barely make a dent in compensating for a shortfall of this magnitude. Even if Texas celebrates the rebirth of by stepping up its enrollment by a factor of 10, that still gives it less than 150,000 enrollees, a shortfall of 630,000 over the projected value.

It would also help if the government could get the Spanish language version of its website,, to accept applications the same way that does.


A problem with projecting Texas numbers is that it has been hamstrung by its chosen dependency on, which has been completely dysfunctional until recently. So, what about a large state that shares some demographic characteristics of Texas but that has a mostly functional web site?  Let’s look at California.

In California, as of November 19, 2013, there were 78,891 counted as enrolled relative to a projected enrollment as of March 23, 2014 of 691,016. Viewed one way, California is going to need to step up the pace of its enrollment by a factor of 3.07 in order to meet its target. In absolute terms, California needs a pace of about 4,936 per day (including weekends and including the busy holiday season) in order to meet target.

Whether viewed in relative or absolute terms, the pace needed in California is ambitious. Covered California, which brags of a recent tripling in the pace of enrollment, still enrolled just 2,700 per day for Exchange plans in the most recent period for which data currently exists. (It is only by counting Medicaid/Medical enrollments that the numbers get higher).  If California were to persist at that pace for the remainder of the enrollment period, it would have something like 414,000 enrolled by the March 23, 2014 date. Depending on the precise composition of the pool of insureds, such a figure would likely be enough to stave off severe adverse selection but probably not enough to do so entirely. And, again, for those focusing on the 7 million nationwide figure, shortfalls of 277,000 in California or 700,000 in Texas are just difficult to compensate for even if other states are considerably more successful.

New York

Let’s pick one more big state.  And, again, let’s pick one where the Exchange is generally said to be doing well: New York.  In New York, as of November 24, 2013, 41,021 are claimed to have enrolled in plans out of the 411,304 originally projected.  This means New York will have to quadruple the pace of enrollments (4.09) in order to meet projections. In absolute terms, the state needs to be enrolling 3,111 per day every day until March 23, 2014.  It is thus in roughly the same position as California. Whether it meets its goals depends on why there has thus far been a shortfall.  If it’s massive procrastination, perhaps New York can get pretty close.  If, on the other hand, many New Yorkers are rejecting the product, and the pace of enrollment just doubles from what it has been, expect New York to fall short by about 190,000 people (46%). Again, smaller states that are more successful will have difficulty compensating for such a large absolute shortfall.


There is no state in which a significant uptick in the pace of enrollments will not be needed in order to meet enrollment projections.  This is true in states that have their own Exchanges and states that do not.  It is true in states touted as a success as well, of course, of those seen as failing.  It is most definitely true for states that depend on the federal website,

In a few states, the burden may be met. Many people do indeed procrastinate, even perhaps when it comes to subsidized health insurance that they now lack. To meet enrollment projections in many other states,however,  we need for Exchange applications to be far more the province of procrastinators than even income tax returns.  After all,  only 25% or so wait until the last two weeks to file those. In these other states, the appropriate analogy may not be tax procrastination but the miracle of The Heidi Game in which two touchdowns were scored in the closing 9 seconds after the mainstream media (NBC Sports) assumed the game was lost.  But it’s been 45 years since that turnaround occurred.  It just might happen again with applications for health insurance on the Exchanges, but it seems unlikely.

Could I add one more point?

People are focusing on March 23, 2014 (earlier March 15, 2014) as the measuring date.  The ACA will presumably be deemed a success if enrollment figures meet projections by that date.  But this strikes me as an awfully generous measure. The problem for insurers is that there will be a smaller pool during the first three months of the policy year. And smaller pools generally have higher claims per person.  So, if I ran the world, I’d be looking at two dates to examine enrollments: January 1, 2014 when the plans kick in and March 23, 2014 when open enrollment ends.  Yes, great enrollment by March 23 will ultimately go a long way to reassuring insurers if enrollment is problematic on New Years Day. But if enrollment is really bad come Rose Bowl time, expect insurers to lose a lot of money on claims filed between then and the close of open enrollment.  If they can’t make that money back on the late filers, expect insurers to figure out some way of getting even for 2015.

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