This Highly Unpopular Change Would Almost Certainly Fix Obamacare

By Sean Williams Markets Fool.com

Despite being given its last rites, it appears that the Affordable Care Act (ACA), the landmark health legislation signed into law by Barack Obama more than seven years ago, will remain the law of the land for the foreseeable future.

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The Republicans' failure to launch

During his campaign, President Trump had touted repealing and replacing the ACA, which is more commonly known as Obamacare, as his top priority. When Trump won the presidency in November, and Republicans maintained control of both houses of Congress, Obamacare's demise seemed assured.

Image source: U.S. Department of Homeland Security, Flickr.

Yet even though House Republicans passed legislation to repeal the ACA more than 60 times during the Obama presidency, Republican lawmakers were unable to come to a consensus regarding the Republican health bill, the American Health Care Act (AHCA). The bill, which would have repealed the mandates, penalties, and subsidies tied to the ACA, and instituted a system of age-based, not income-based, tax credits, simply couldn't muster a majority of the votes in the House. As a result, Republicans pulled the AHCA from voting, solidifying Obamacare as the law of the land at least for the near term.

Obamacare's shortcomings are back on the radar

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With Obamacare back on the radar, it brings the ACA's shortcomings back into light. It also puts the nation's largest insurers in the spotlight, many of which have reduced or pledged to eliminate their ACA coverage in the years that lie ahead.

In 2017, the nation's largest health insurer, UnitedHealth Group (NYSE: UNH), cut the number of states it's operating in to just three from 34 in the previous year. Aetna (NYSE: AET) and Humana (NYSE: HUM) followed suit as well, cutting their respective county-based coverage by close to 70% and nearly 90%. Even more recently, Humana announced that it would pull out of the ACA market entirely in 2018. Finally, Anthem's (NYSE: ANTM) management has suggested that it, too, could pare its marketplace offerings if margins don't improve in 2017. Some may see this pullback as a sign of insurer greed, but it can just as easily represent the unsustainability of Obamacare as we currently know it.

Image source: Getty Images.

The primary issues with the Affordable Care Act

There are certainly no shortage of issues with Obamacare.

To begin with, the ACA failed to attract an adequate number of young enrollees. Young adults are often healthier and less inclined to go to the doctor. This means their premium payments are very much needed to help balance the higher costs of treating older patients (50-64 years old). Plus, with insurers being required to accept all patients regardless of whether they have pre-existing conditions, insurers dealt with a lot of adverse selection (i.e., sicker people were enrolling immediately, while healthier people procrastinated with enrollment, sometimes for years).

There were inadequate protections for the insurers as well. The risk corridor -- a type of risk-pooling fund that was designed to receive money from overly profitable insurers and redistribute this capital to insurers who had priced their premiums too low and were losing excessive amounts of money -- was a monumental failure. Approximately 12% of the $2.5 billion in funds requested by insurers wound up being paid out. This left a majority of the 23 approved healthcare cooperatives to shut their doors, and it discouraged expansion into new states, counties, and cities for the remaining health-benefits providers.

Even estimates from the Congressional Budget Office were a major problem. Insurers leaped at Obamacare with open arms given the impression (as of March 2015) that 24 million people would be enrolled via the marketplace exchanges by 2017. According to the end of the 2017 enrollment period, just 12.2 million people signed up. Plus, this 12.2 million figure doesn't take into account the likely attrition that'll happen as people drop out because of non-payment, or shift to employer-based coverage. In other words, the CBO's estimates were way off, and it left insurers on the outside looking in.

Image source: Getty Images.

This unpopular fix could cure most of Obamacare's issues

Yet the irony is that Obamacare could be fixed with relative ease by modifying one of its most unpopular provisions: the Shared Responsibility Payment (SRP).

The SRP is the penalty consumers are required to pay for not purchasing health insurance, although there are well over a dozen exclusions, including low income, that allow certain people to be exempted from the penalty. The reason the SRP exists is to encourage people to buy health insurance. In 2016, the SRP was the greater of $695 or 2.5% of household modified adjusted gross income. The Kaiser Family Foundation estimated that the average household would owe $969 in 2016 if it didn't purchase insurance.

Here's the real problem with the SRP: The penalty doesn't come anywhere close to representing the true cost of health insurance under Obamacare. According to HealthPocket, the average unsubsidized bronze-level premiums in 2016 and 2017 were $257.68 and $311.17, respectively. Over the full year, this works out to almost $3,100 and more than $3,700, respectively. Compare these annual premium figures to an average SRP of $969 in 2016, and many consumers are going to choose the considerably cheaper route of remaining uninsured. Though the penalty does add revenue to help assuage the subsidy costs of Obamacare, it does nothing to help insurers spread their risk out among their pool of patients. Even in instances where consumers could receive a tax break, the difference between the lowest-cost health insurance and the SRP was still far too wide, and many remained uninsured.

The solution is simple (and probably very unpopular): dramatically increase the SRP. If the penalty for not being insured were nearly identical to the lowest-cost insurance plan in a state, far more young people would be enrolled, and insurers would have the favorable risk pool needed to maintain a sustainable plan on the ACA exchanges. It's really that simple.

Image source: Getty Images.

Trump has stopped this possible solution in its tracks

However, it's worth pointing out that even if an SRP increase was on the table (which it's not at this point), Donald Trump's executive order on day one in office essentially negates any positive effect it would have.

Trump's executive order allows government agencies, "to the maximum extent permitted by law ... to waive, defer, grant exemption from, or delay the implementation of any provision or requirement of the Act [ACA] that would impose a fiscal burden on any State or cast a fee, tax penalty, or regulatory burden on individuals, families, healthcare providers, health insurers, patients, recipients of healthcare services, purchasers of health insurance, or makers of medical devices, products, or medications."

In plainer English, Trump's executive order eased a requirement that would have allowed the Internal Revenue Service to deny tax returns that didn't have filled in Line 61 the line that states how much you paid in SRP or health premiums for the 2016 calendar year. With this requirement shelved, there's little the IRS can do to verify whether people had health insurance in the previous year. The IRS also can't garnish wages or seize property if you fail to pay your SRP. It could, in theory, come after you individually, but there are presumably hundreds of thousands of people, if not more, in a similar situation.

Trump's executive order essentially means Obamacare's easiest fix has been taken away.

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Sean Williams has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.