Yes, Obamacare Is Here to Stay -- and Yes, It's Probably Going to Fail

By Sean Williams Markets Fool.com

Those Affordable Care Act (ACA) eulogies (one from yours truly included) appear to have been written a tad prematurely.

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The inglorious failure of the America Health Care Act

Last week was expected to be a long-awaited victory for the Republicans with the passage of the American Health Care Act (AHCA) in the House. The AHCA, which had also been dubbed as "Trumpcare," was designed to repeal and replace the ACA, which is more commonly known as Obamacare. It would have eliminated all of the ACA's mandates, penalties, and subsidies, and replaced them with age-based tax credits, as well as eliminated Medicaid expansion and modified Medicaid payments made to states to a per-capita basis.

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

The passage of this bill seemed almost certain before it was even crafted. President Trump won the November election for the presidency, and Republicans kept control of both houses of Congress. With a clear majority, Obamacare's days looked numbered. Plus, House Republicans had attempted to repeal Obamacare more than 60 times while former President Barack Obama was in office. The table was clearly set for Obamacare to fade off into the sunset.

However, that's not how things worked out. Trump was met with resistance from certain Republicans who felt the bill went too far in removing health insurance pathways for low-income individuals and families, while another group of Republicans felt the AHCA didn't go far enough. In other words, they wanted to see every last Title 1 component of Obamacare (Title 1 covers the mandates and penalties that covered people, businesses, and insurers) rolled back. With little compromise achieved, Republicans pulled the AHCA from the docket before any votes were cast.

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Yes, Obamacare is here to stay

The failure of the AHCA to gain the desired support means two things. For starters, it means President Trump is going to ask Congress to focus on bigger fish namely, comprehensive individual and corporate tax reform. Not having Obamacare repealed certainly eliminates a reduction in spending that Republicans were probably counting on to bolster other categories (perhaps infrastructure or defense spending), but it won't stop Trump from moving to the next item on his list.

Secondly, it means that Obamacare is here to stay for the foreseeable future. It doesn't mean Republicans aren't going to revisit a new healthcare bill in the future, but it does mean that there's too much of a divide within the party at the moment to get the votes necessary to repeal and replace Obamacare.

Image source: Obama White House, Flickr.

This means the individual and employer mandates will remain firmly in place, the Shared Responsibility Payment that applies a monetary penalty on individuals who fail to purchase health insurance stays in effect, and health insurance subsidies will continue to be paid out on the basis of income rather than age.

Despite the many criticisms Obamacare has faced, one of its greatest successes has been in lowering the uninsured rate. According to data from the Centers for Disease Control and Prevention, the U.S. insured rate has fallen from 16% in the year preceding Obamacare's launch to below 9% at one point, the lowest reading ever. With Obamacare sticking around, the possibility of millions of lower-income Americans suddenly losing coverage has now seemingly been put on the backburner.

Obamacare is still on track to fail

However, having Trumpcare fail to pass and Obamacare stick around even longer doesn't mean the program is on solid footing. The same issues that were plaguing Obamacare prior to the November election are still present, and they're only going to be made worse by President Trump being in the Oval Office.

For example, the Shared Responsibility Payment (SRP) is the penalty that people pay for not purchasing health insurance, and it was designed to encourage young, healthy adults to enroll. In 2016, it was the greater of $695 or 2.5% of household modified adjusted gross income. In 2017 and beyond, it'll grow in-step with the inflation rate.

Image source: Getty Images.

Though no one liked the prospect of paying a penalty for not buying health insurance, it often made sense to take the penalty since the cost of buying even the cheapest health plan was often multiple times more expensive than just paying the penalty for healthier young adults. According to HealthPocket, the average bronze-level and silver-level monthly premium for an ACA plan in 2017 is $311.17 and $364.91, respectively. Over the course of the year, this works out to around $3,700 and almost $4,400 in unsubsidized costs, and this doesn't include deductible expenses for actually going to see the doctor. Comparatively, the Kaiser Family Foundation pegged the average SRP in 2016 at $969 per household for the entire year.

Collecting a penalty might help curtail some of the costs of Obamacare, but it does nothing to help spread the risks that insurers face when enrolling sicker adults. Insurers need healthy young adults to enroll in order for the program to be sustainable.

Now here's the issue: Trump's executive order issued on his first day in the Oval Office eased some of the financial burdens tied to Obamacare. One of these burdens included allowing the Internal Revenue Service to accept tax returns without line 61 filled in. This is the line that tells the IRS how much you paid in SRP, or how much you paid in premiums for the year. Without this information, the IRS isn't going to have sufficient information to confirm whether someone was insured or not, effectively making the SRP even more of a non-factor than it was prior to the election.

If young adult enrollment doesn't pick up, insurer costs will continue to rise, as will premiums.

Image source: Pixabay

Insurers have less skin in the game

This brings us to the next point: insurers have very little skin in the Obamacare game anymore, and that's just fine by them. National insurers like UnitedHealth Group (NYSE: UNH), Humana (NYSE: HUM), and Aetna (NYSE: AET) have all significantly pulled back on their coverage in recent months. UnitedHealth is now operating in three states compared to 34 in 2016;meanwhile, Humana cut back on its county-based coverage by nearly 90%. Humana also announced recently that it won't be participating in Obamacare's exchanges at all in 2018. Fewer choices for the consumer beget less competition, and less competition often leads to higher premiums.

You might be wondering, "But, what about all the customers they gained and the revenue generated by Obamacare?" Most national insurers have been losing money hand-over-fist with their ACA plans. Cutting the cord on Obamacare means losing a small percentage of revenue, but having a much larger and positive impact on margins and profitability. For all three of the aforementioned national insurers, Medicaid Advantage plans or employer-based coverage are much bigger revenue components than ACA individual-market plans.

Medicaid expansion could be a problem

Even one of the most successful components of Obamacare, Medicaid expansion, could wind up resulting in fewer enrollees in the years to come.

Medicaid expansion allowed any of the 50 states to take federal money to expand their Medicaid program for individuals and couples earning up to 138% of the federal poverty level (the traditional income cutoff is 100%). Some 31 states and Washington, D.C., jumped at the chance to expand their programs, and approximately 15.7 million people were enrolled (this figure includes Children's Health Insurance Program enrollments since the Oct. 2013 expansion, too).

Image source: Getty Images.

However, beginning in 2017 and extending through 2020, federal funds used to cover Medicaid expansion are set to be lowered from 100% of the cost to 90%, placing more onus of the cost on states. Can states handle this added burden? No one exactly knows yet.

Furthermore, in 2014 House Republicans sued then-Secretary of Health and Human Services Sylvia Burwell over cost-sharing reductions (CSRs). CSRs are what help lower the cost of copays, coinsurance, and deductibles for low-income folks who also purchased silver-level plans.

The assertion of Republicans was that any funds used for CSRs needed to be apportioned by Congress, but it never was. A federal judge agreed in May 2016, but stayed the order with the expectation of an appeal from the Obama administration, which happened shortly thereafter. The case is still ongoing, but Republicans are essentially fighting against themselves now with Tom Price appointed as the new HHS Secretary. It's possible that Republicans could choose to drop the appeal and pull CSR funding based on the judge's finding at some point in the future, which would hurt the ability of low-income people to see their doctor.

Yes, Obamacare is sticking around as the health law of the land, but that doesn't mean it still won't fail.

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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.