Obamacare's Potentially Fatal Flaw

By Markets Fool.com


Image source: White House on Flickr.

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The Affordable Care Act has been a controversial law since the get-go, with Kaiser Family Foundation's near-monthly Health Tracking Poll showing that in far more months than not, respondents have a more "unfavorable" than "favorable" view of the program.

Despite its unpopularity and the criticism, there's little denying that the ACA, which is more commonly referred to as Obamacare, is the program responsible for pushing the uninsured rate in the U.S. to its lowest levels on record. Data from Gallup during the first quarter found that the uninsured rate had dipped to 11%, which is 6.1% lower than in the fourth quarter of 2013, the quarter just prior to Obamacare's individual market implementation. The latest figures from the Centers for Medicare and Medicaid Services found that 11.1 million people were enrolled paying customers as of March 31, 2016.

However, these gains could be short-lived with the long-term survival of Obamacare coming into question.


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Obamacare's long-term survival not assured?

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Recently, three national insurers have announced their intent to dramatically reduce coverage options in the upcoming enrollment period. UnitedHealth Group (NYSE: UNH), the nation's largest insurers, has chosen to remain in just three states in the upcoming year after offering individual plans in 34 states in 2016. ACA-related losses expected to total around $500 million this year pre-empted the move. Also following suit are Aetna (NYSE: AET) and Humana (NYSE: HUM), which had been set to merge until the Justice Department thwarted that idea. Humana is reducing its county-based coverage by close to 90%, while Aetna is paring back its county-based coverage by a little less than 70%.

A number of low-cost options have also been disappearing from the marketplace. More than two-thirds of Obamacare's 23 approved healthcare cooperatives closed their doors in 2016 or announced their intent to shutter operations by year's end due to excessive losses. Healthcare co-ops are low-cost options for consumers designed to run with minimal overhead. Unfortunately, they appear to have attracted a cost-conscious consumer who visit their physician often, resulting in steep losses. The risk corridor, which was a type of risk-pooling fund expected to save money-losing insurers on the ACA, simply didn't have the funds to pay out needy insurers, causing 16 co-ops to close up shop.

With competition shrinking, Obamacare rate hikes are soaring. A recent study from the Kaiser Family Foundation in 14 major cities estimated that the lowest- and second-lowest-cost silver plans could rise by an average of 9% next year, albeit weighted rate hikes in select counties and states could be much higher. In other words, Obamacare's "affordability" could be called into question.


Image source: Getty Images.

Obamacare's potentially fatal flaw

On the surface, there's a lot of finger-pointing as to what's wrong with Obamacare. As noted above, reduced competition and the failure of the risk corridor to provide a financial foundation for insurers are part of the problem.

It should also be mentioned that Obamacare's mandate that denies insurers the right to pick and choose their members is probably also partly to blame. Prior to Obamacare, insurers could deny coverage to persons with preexisting conditions, since they could be costly for insurers to cover. Now, insurers are required to accept applications regardless of their medical history, which means accepting an influx of potentially sicker people who'd been on the outside looking in prior to the implementation of Obamacare. These sicker members are hurting insurers' bottom line.

But none of these problems is likely to jeopardize Obamacare's long-term survival. Instead, the programs' potentially fatal flaw could be the Shared Responsibility Payment, or SRP.

The SRP is the penalty you pay for not purchasing health insurance as required by the individual mandate. When Obamacare was first implemented in 2014, the SRP was the greater of $95 or 1% of your modified adjusted gross income (MAGI). Data from H&R Block shows the average penalty for not having health insurance in 2014 was just $150. By 2015, the penalty jumped to the greater of $325 or 2% of MAGI, and in 2016 it's now the greater of $695 or 2.5% of MAGI. Forecasts from the Kaiser Family Foundation (KFF) anticipate that median SRP's for the uninsured in 2016 could be $969, or more than five times what they were two years prior.

The purpose of the SRP is to coerce consumers to buy health insurance. More importantly, it's a nudge to younger, healthier adults who may be reluctant to purchase health insurance. Young adults are far less likely to seek medical care, meaning their premium payments are usually pure profit for insurers. The premiums of young adults are typically used to offset the higher costs associated with treating older and/or sicker patients.


Image source: Getty Images.

Obamacare's potentially fatal flaw is that the SRP just doesn't work. Assuming KFF is correct in its estimation that SRPs hit $969 in 2016, this is a far cry from what it would cost a person to be fully insured with even the lowest-cost bronze plan. In 2015, the average bronze plan across the country cost $207 per month, or $2,484 a year. Taking the penalty for 2015, which KFF estimated at a median of $661, would have saved someone almost $1,800. Admittedly, healthcare premiums can be tax-deductible for some people, but even then, we'd still be looking at substantial savings by remaining uninsured and paying the SRP.

The logic is pretty simple: If not purchasing health insurance and paying a penalty is substantially cheaper than purchasing the lowest-cost bronze plan available in your state, then young, healthy adults are probably going to choose to remain on the sidelines. If they do, insurers will be forced to dramatically hike premiums to ensure their coverage is sustainable, which could reduce the affordability of the program and send Obamacare into a slow death spiral.

In theory, the SRP can be fixed pretty easily by lawmakers to bring the penalty closer to the cost of a bronze plan to coerce consumers to enroll. However, a resolution appears unlikely given the dislike for Obamacare from lawmakers in the House and Senate.

It's always possible that Obamacare could survive over the long term and that my thinking is short-sighted. But watching three national insurers wave the white flag and exit a market with more than 11 million enrollees reminds me that where there's smoke, there's usually fire.

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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.

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