Based on the contours established over the last four months we now have enough information on the ambitious launch of the Affordable Care Act to begin to understand the shape of things to come. The intended objective of the Act (The practical elimination of uninsured Americans) is highly unlikely to be met in the next three years.
Insurance Market Place Enrollment
The enrollment numbers reported by the Federal and State run insurance market places are pathetically low and must be a crushing disappointment to the ardent supporters of the law who invested so much emotional capital, time and energy in the Act’s success. While open enrollment for 2014 will not end until March 30, there are no indicators that the rate of enrollment has changed for the better since the end of December nor have the demographics of the enrollees. The Obama Administration is banking on a final surge of young people enrolling in March which I believe is unlikely to occur, the Massachusetts experience notwithstanding.
I have strong concerns regarding the enrollment numbers. First, youth enrollment at 24% remains significantly below the 35% needed to provide actuarial soundness to the model. Caution is needed even with this number as youth is being treated as a proxy for good health condition when this is not uniformly so. Clearly there are youth in poor health condition and elderly in relative good health condition. A better hedge would by 39% youth enrollment which is even more unsurmountable at this point. Second, the female enrollment is running around 10% higher than males. This puts even greater pressure on the model as females generate higher medical expenses than males at the aggregate level. Third, the remaining balance of older enrollees is too high and is set to grow significantly in the next twelve months as cash strapped cites (e.g. Detroit) and states (e.g. Illinois) with insufficient reserves to fund retiree health and pension obligations start dumping them onto the market places.
One thing the government did that worked was rule making that resulted in the practical elimination of private individual insurance plans. This class of policy holders was highly prized by HHS as they had demonstrated not only the desire to have health insurance, but most importantly the discipline and means to pay insurance premiums month after month without fail. HHS was skeptical that the uninsured have either of these characteristics; it remains to be seen if they are correct. Analysis performed by the McKinsey Group of enrollment data from insurers (the Administration has not yet released these numbers) estimates that only 11% of enrollees were previously uninsured. Priority Health (a Michigan based research firm) found only 25% of enrollees from the Wolverine State had been previously uninsured. Even if we take a very high side number of 35% of new enrollees who had not been previously insured, we are still left with 65% of enrollees who were previously insured. The net result is a grand cups and balls scheme that disrupted millions of lives and the insurance as well as medical industries for the sole purpose of moving a majority of people from one insurance plan to another by administrative force. I expect this fact to not go well for the Administration once it is forced to admit it.
Government Support of the Insurance Industry
Barely discussed during the legislative phase of the Affordable Care Act, and therefore poorly understood by the average citizen, are the backstops in the Act designed to shield insurance companies from loss during the first few years of the plan and thereby induce their participation. The two most critical to the survival of the Act are the Reinsurance Program and the Risk Corridor Program.
The Reinsurance Program is funded by a special premium tax on all insurers (whether participating in insurance market places or not) as well as self-insured plans but NOT on union based Taft-Hartley plans (the Administration tossed this bone to organized labor). This tax revenue, if short of demand, will be supplemented by funds from the U.S. Treasury. In total, the reinsurance sums expected for the three year life of the program are: $12 billion for 2014, $8 billion for 2015, and $5 billion for 2016. Insurance companies may receive these funds from the government in the case of excess claims on the individual enrollee basis. HHS has set the 2014 attachment points at $60,000, with a co-insurance rate of 80%, capped at $250,000. This means that if an insurance company had an enrollee generating $100,000 in claims in 2014 the insurance company would receive $32,000 ($100,000-$60,000 x .80) from the federal government in excess of any premiums collected. HHS should announce the 2015 attachment points in March.
The Risk Corridor Program compensates insurers in the exchanges for medical costs in excess of 103% of the target costs for each plan. The Treasury is on the hook for 50% of the excess loss suffered by insurers for costs between 103% and 108% of target. Once the loss eclipses 108% of target, the Treasury will compensate plans 2.5% of the target medical cost plus 80% of the excess over 108%. This is an unlimited taxpayer liability and the program will also run for three years.
One half of States (plus the District of Columbia) have expanded Medicaid under the ACA and half have not. The main concern of the half that did not was that the ACA’s focus on enrolling the uninsured would spark significant enrollment in Medicaid, and since the federal subsidy for Medicaid expansion would apply ONLY to enrollees meeting expansion thresholds in 2014, they would be stuck with a larger Medicaid enrollment with no enhanced federal support (roughly 30% of Medicaid eligible persons do not sign up for benefits). The critical point here is that the Federal government absorbs 100% of the costs of expansion eligible enrollees (which later drops to 90%) whereas any previously eligible enrollees are covered at the current 50/50 split.
So what do we know about Medicaid enrollment now? The administration has stated that 4.2 million Medicaid enrollees signed up between October and December of last year due to Medicaid expansion. This statement earned three “Pinocchio’s” from the Washington Post for misrepresentation. It’s probably true the Medicaid enrollment grew by the amount stated. What we don’t know (because the Administration has not yet disclosed it and says it won’t until March) is what portion of that volume is attributable to Medicaid expansion and what is not? We do know that the number released includes both Medicaid and CHIP enrollments, as well as renewing existing enrollees. Absent hard data, a number of analysts from the Wall Street Journal, Forbes and others have used data from the state based market places to back into the number. One thing we have learned from the state based market places is that their data is a fair proxy for federal market places and can therefore be reasonably extrapolated. Sean Trende has done the best job of analysis on this issue in my estimation, and he believes only 190 thousand of the 4.2 million are new enrollees as a result of expansion.
The shallow enrollment numbers in market place plans and the likely health status mix in them will have implications before the end of the year (Humana has already announced a defacto profit warning based on “adverse” market place enrollment in its plans). The first implication is that there appears to be no compelling reason for insurers who did not participate in health insurance marketplaces to jump in next year. Indeed, Aetna’s CEO has stated the numbers are so poor that his company may choose to abandon the market places. The second implication is that insurers in the marketplace probably underpriced their policies relative to the enrollees they ended up with which will likely translate to steep price increases, increases to deductibles, or both in 2014 and likely 2015 as well.
A byproduct of the above will be the massive distributions to insurance companies the Federal government will make as it pays the claims made under the Reinsurance and Risk Corridor programs. Once these are forecasted Congress will leap into action. Many Republicans in the House view these as bailouts (they are not), and will work to block or trim payments. Most Tea Party Republicans view these programs as evidence of the Faustian pact the insurance industry made with the government to ensure its support for the Act and a stark example of the crony capitalism they so detest. Add to their numbers Democrats who won’t be able to stomach handing over billions of dollars to an industry they have been decrying for decades and the numbers will probably be sufficient to pass something out of the House that Harry Reid can’t keep from the floor of the Senate. The President would veto any bill put before him to trim obligations to insurers under the Act, but the battle would be politically bruising for Democrats. And ANY attempt by the House to trim either program would have a further chilling effect on any insurer not currently in insurance market places.
Should market place enrollment numbers not substantially improve by the end of March, and/or small businesses start experiencing insurance plan cancellations or prices so high that they drop their plans, Congress will pressure the Administration to suspend the individual mandate for 2014. And if that happens there will also be pressure to postpone the employer mandate for an additional year.
Finally, if Sean Trende is right, and I suspect he is far more right than wrong, there will be less pressure on governors who did not expand Medicaid in their state, and they may indeed look prescient for having held off.
I do not have a crystal ball that allows me to see into the future. But I have learned this since October 1, 2013: The one sure bet on the Affordable Care Act so far is that the worst case scenario is the most likely to materialize.