Is This CMS Decision a Death Blow to Obamacare's Individual Mandate?

We're nearly three months into the live launch of Obamacare's state and federally run health exchanges, and things have been nothing short of a roller-coaster ride for supporters and opponents of this law.

Since its launch on Oct. 1, Obamacare's federal exchange, Healthcare.gov, has been hit with a myriad of technical glitches that all but halted signups across the 36 states that it covers throughout much of the first two months. Inclusive of state-run signups, Obamacare's paying enrollees totaled fewer than 365,000 through Nov. 30, with close to two-thirds of those signups coming from just 14 state-run health exchanges. Furthermore, a tad more than 800,000 of those who've signed up are eligible for government assistance through Medicaid or CHIP. In other words, more than twice as many people who will be covered via government assistance have signed up than paying customers -- and we have to assume that at least some of those paying customers are the sickest and most in need of care.

Simply put, it's not been a banner start for Obamacare.

Not all hope is lost
On the bright side, though, things have improved with Healthcare.gov thanks to the help of a tech surge led by Oracle, Red Hat, and Google, which now have the Obamacare website working for the vast majority of people and is now capable of handling up to 800,000 applicants per day. Also, more than 1.9 million people have completed the lengthy and arduous application and identification process. While these individuals haven't picked out a plan yet, a vast majority of them probably will before the coverage cutoff date in March, meaning Obamacare's enrollment figures may not be as horrible as the top-line number suggests.

The key to Obamacare's success lies with signing up healthy young adults to counteract the higher costs associated with treating elderly and terminally ill patients. The drive to help in the signup of these adults and the remaining uninsured people in this country is the actionable piece of the Patient Protection and Affordable Care Act known as the individual mandate.

The individual mandate requires Americans to purchase health insurance by Jan. 1 or face a year-end tax penalty for going without insurance that equals the greater of $95 or 1% of your annual income. This penalty will then increase in each of the next two years to the greater of $695, or 2.5% of your annual income, by 2016 and move higher by the rate of inflation thereafter. The goal of the individual mandate is to either push young adults into the health-care system or collect tax funds to help pay for the nationwide Medicaid expansion.

The CMS drops a bombshell
On Thursday night, however, the Centers for Medicare and Medicaid Services, or CMS, dropped a bombshell on insurers and supporters of Obamacare by subverting some of the basic premises of the individual mandate and throwing its enforceability into serious question.

Specifically, the CMS' press release (links opens PDF) addressed what options were available for the millions of Americans who are on the verge of having their health insurance cancelled in the next 10 days because it doesn't meet the beefed-up benefit requirements of the PPACA.

One of the more obvious solutions is for these individuals to purchase health insurance on Healthcare.gov or their respective state health exchange. The CMS goes on to note that some people who've had their coverage cancelled may find themselves eligible for a full or partial subsidy on the health exchange marketplaces.

Another option available to consumers is to pursue health insurance through a private-party platform like eHealth (NASDAQ: EHTH  ) or through individual insurers. eHealth's membership growth has been phenomenal throughout this entire process, as it's one of the only true alternatives that allows individuals to bypass Healthcare.gov or their state exchange altogether and view a side-by-side comparison of policies from health insurers.

However, the CMS also left another option open to Americans who are about to see their health insurance cancelled -- a potentially crippling option to the individual mandate.

Is this a death blow to the individual mandate?
The CMS announced that Americans who've received notice of an insurance policy cancellation that will not be extended beyond Jan. 1, and who find the new policies to be unaffordable, are eligible to file for a hardship exemption with the CMS and instead purchase a catastrophic insurance policy (essentially a bare-bones plan) through their insurer without facing the individual mandate tax penalty.

Source: StockMonkeys.com, Flickr.

This news is crushing for insurers, hospitals, and supporters of this transformative health law for a number of reasons.

First, it supports the notion that Obamacare isn't an affordable health alternative for every American. We obviously know it's impossible to please all the people all the time, but this is essentially a first admission from the government that Obamacare may not be an affordable alternative for some citizens.

According to statistics from Forbes, it's also a stark reminder that by the time the coverage cutoff period hits this coming Monday for coverage by Jan. 1, some 6 million people will have lost their policies, while a combined 1.2 million (including government-sponsored plan members) will have netted insurance through the end of November. In other words, more people have lost their health insurance under Obamacare, thus far, than have signed up through its exchanges!

Most importantly, though, this move provides an out-clause of hardship for individuals who are having their policies cancelled. The CMS will require these individuals to provide proof that their policy is being cancelled and that the existing marketplace policies truly are "unaffordable." But for all intents and purposes, it's a loose-fitting definition that could allow a large chunk of the population to escape falling under the regulation of the individual mandate in 2014.

While it's not a death blow to the individual mandate, I would classify this as the worst delay and/or defeat that Obamacare has suffered to date.

Who suffers?
From an enterprise perspective, this could be particularly bad news for insurers such as UnitedHealth Group (NYSE: UNH  ) and Aetna (NYSE: AET  ) and hospital operators such as Tenet Healthcare (NYSE: THC  ) .

This announcement is troublesome for insurers because it now forces them to scramble to rewrite, and price, catastrophic policies for up to 6 million individuals when they had previously been told that these policies could no longer be sold. Insurers can't simply whip up policies and prices in a matter of a day, so we're talking about the potential for serious delays and possible policy mispricing here. To top it off, with UnitedHealth and Aetna bowing out of some of the few states that are seeing a decent number of signups, they could actually see a reduction in members by the end of the fourth quarter.

Hospital operators such as Tenet may get the short end of the stick as well, because catastrophic policies could leave individuals exposed to high medical costs that they simply won't be able to pay. Hospital stocks such as Tenet rose on the assumption that a higher number of insured individuals would reduce the number of revenue write-offs each year from uninsured and underinsured patients treated. This move by the CMS may negate that expected benefit.

I also feel this could be a loss for the country as a whole. The individual mandate is the one piece of this law that required young adults to purchase health insurance. With many now eligible to continue their catastrophic coverage through October 2014, the mandate will be subverted altogether and premium costs for health insurance next year for nearly all Americans is likely to rise, as insurers attempt to recoup losses from treating the nation's sickest patients, which likely make up a good portion of current enrollees.

Let's be clear that the ideal of Obamacare -- the want for affordable access to health care -- is still alive and well, but the actionable part of the law, the individual mandate, just took a big right hook from the opposition this week.

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