Obamacare Was Destined to Fail, Even Without Trump

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In case you missed it, open enrollment for the Affordable Care Act's (ACA) fifth year is underway, through Dec. 15, 2017, or perhaps a bit longer in select states. The upcoming year of enrollment for Obamacare, which is what the ACA is more commonly called, is expected to be its most challenging to date.

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President Trump aims to put Obamacare through the gauntlet

President Trump, who campaigned vigorously to repeal and replace Obamacare, has failed to do so through more than nine months in the Oval Office. But that certainly is not for lack of trying.

On his first day in office, the president signed an executive order that eased the economic burdens of Obamacare on consumers. More recently, he axed the all-important cost-sharing reductions subsidy. Cost-sharing reductions are what allow folks earning less than 250% of the federal poverty level who purchase a silver level plan to receive subsidies that reduce their copays, deductibles, and coinsurance tied to medical visits. Without these subsidies, more than 6 million people could struggle to afford receiving medical care. Trump even slashed the ACA marketing budget for the upcoming year by 90%, from $100 million to just $10 million.

Some have pointed their fingers at Donald Trump as the destroyer of a healthcare law that appeared to be working. After all, Obamacare did wind up lowering the uninsured rate from 16% in the quarter preceding its launch in individual markets to around 9% a little over two years later, which represents an all-time low.

Obamacare was destined to fail, Trump or no Trump

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But the fact remains, at least in this writer's view, that Obamacare was destined to fail, regardless of whether Donald Trump expedited the process or not. The ACA's shortcomings can be traced to the implementation and parameters of its Shared Responsibility Payment (SRP).

The SRP is Obamacare's "penalty" for not purchasing health insurance, and it was put in place by lawmakers in order to coerce healthier young adults to enroll. These young adults are a vital component to the ACA's success because of the other mandates attached to the law's passage -- namely, that insurers are required to accept all applicants, regardless of whether they have pre-existing conditions, and are not able to charge them more because of their pre-existing conditions. This pushed medical expenses for health-benefit providers way up. Therefore, the monthly premiums of healthier young adults who were unlikely to head to the doctor much were needed to offset this adverse selection (i.e., the initial uptick in sicker-patient enrollment).

Unfortunately, young enrollment hasn't been anywhere near sufficient for insurers to consider Obamacare a sustainable law. Big losses pushed the nation's largest health insurer, UnitedHealth Group (NYSE: UNH), to cut the number of states it operates in by more than 90% in 2017. Likewise, Aetna (NYSE: AET) and Humana (NYSE: HUM), which had proposed to merge and expand coverage, but were denied by regulators, slashed their county-based coverage in 2017 and announced their complete exits from the ACA marketplace exchanges in the upcoming year.

The Shared Responsibility Payment is to blame for the Affordable Care Act's downfall

The crux of the matter is that Obamacare's SRP doesn't even come close to representing real-world health insurance costs. For the upcoming year, the Department of Health and Human Services recently announced that benchmark plans -- the second-lowest-cost silver plan -- will average $411 a month, up 37% from the $300 a month they averaged in 2017. That's over $4,900 a year just in premiums for the average American. By comparison, the penalty for the SRP is the greater of $695 or 2.5% of modified adjusted gross income. Since the median American makes about $30,000 annually, according to Social Security Administration data, we're talking about an SRP of roughly $750.

In other words, if you're a healthy adult, you could probably save thousands of dollars by remaining on the sidelines and taking your chances with the penalty. In fact, an individual with $195,000 in earned income would pay less in ACA penalties than the average American would if he or she purchased a benchmark plan at $411 a month for a full year. That's insane, but also the precise reason why Obamacare is failing. There's no real incentive to coerce healthy people to enroll, so they're sticking to the sidelines and leaving insurers with no choice but to raise premiums by 30%, 40%, 50%, or more, just to be sustainable.

But that's not all.

The Internal Revenue Service has been given very little power to collect the SRP if consumers don't buy health insurance. In the most recent tax season, Trump's executive order allowed tax forms to be submitted without line 61 filled in -- this is the line where you indicate if you had health insurance and, if not, how much you paid in SRP. Though the IRS is getting stricter in the upcoming tax season and refusing to accept tax filings that leave this line blank, it doesn't mean SRP enforcement will necessarily get any better. 

For example, the IRS can deduct what you owe for the SRP should the federal government owe you a tax refund. However, if you owe Uncle Sam, they can't coerce you to pay, short of taking you to court. With presumably hundreds of thousands of taxpayers in a similar situation, it seems highly unlikely that the IRS would take taxpayers to court for failing to pay the SRP. With no ability to garnish wages or seize property to collect the SRP, the IRS pretty much has its hands tied.

So there you have it. The only shot Obamacare had of being sustainable and coercing healthy adults to enroll has been tossed out the window because the SRP isn't anywhere near the actual cost of purchasing health insurance. Donald Trump may have expedited the rate of premium hikes with his recent actions that eliminated cost-sharing reductions, but the wheels of Obamacare's likely failure were put in motion years ago when the SRP was created, and long before Trump became president.

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