The past three-and-a-half months have been nothing short of a roller-coaster ride for Obamacare and its state and federally run health exchanges.
Opinions regarding the Patient Protection and Affordable Care Act have been bifurcated for years -- and enrollment results in October, November, and December have delivered in an equal, if not greater, bifurcation in their results.
October and November were absolutely marred by IT-source code glitches and overloaded servers, which caused the federally run website, Healthcare.gov, to be unusable for a majority of the citizens it services across 36 states. Through the first two months, federal sign-ups stood at just 137,204, placing them well short of initial sign-up estimates by the Department of Health and Human Services, which has been targeted 7 million paying enrollees by the March 31 coverage cutoff date for 2014.
In December, the tech surge, headed by the trio of Oracle, Red Hat, and Google, and overseen by UnitedHealth Group subsidiary, Quality Software Services, coupled with the Dec. 24 coverage cutoff deadline for Jan. 1, led to a surge in cumulative state and federal enrollments, from 364,682 through November to 2,153,421 people through Dec. 28. Other pertinent information from inception through Dec. 28 includes 53.2 million state and federal website visits and 11.3 million calls to state and federal call centers.
One pressing question finally answered
A little more than a month ago, I listed three pressing Obamacare questions that had yet to be answered. One one was the creme de la creme of questions: What percentage of paying enrollees are healthy young adults? On Monday, the HHS released this first bit of this "Holy Grail of data," and the initial results (links opens PDF) weren't too encouraging on the surface.
Despite enrollment surging to 2.15 million, just 24% of all enrollees (489,460) are in the 18 to 34 year age range, while a whopping 79% of enrollees received some form of financial assistance.
In addition, we discovered that 80% of enrollees selected one of the two lower-tiered plans, bronze (20%) or silver (60%), with few people opting for more expensive but lower deductible gold (13%) or platinum (7%) plans. Furthermore, the 20,224 catastrophic plan enrollments means very few people took advantage of the ability to extend catastrophic plan coverage in 2014 that would have otherwise been cancelled under the expanded benefits deemed necessary for insurers by the PPACA. If you recall, there were nearly 6 million people poised to lose their health insurance on Jan. 1 according to Forbes, so it appears that few people took advantage of the Obama Administration's attempt to extend coverage without these citizens having to face a significant increase in premium prices.
Does this mean Obamacare is destined to fail?
These results demonstrate a significant shortfall in the number of young adult signups, which the HHS had pegged at 38% of the 7 million enrollees before the health exchanges opened for business. This is a problem because healthier young adults are needed by insurers to help offset the costs of treating elderly and terminally ill patients, especially because a major new component of the PPACA is that insurers can't turn down people with preexisting conditions. As I've noted before, half of all health expenditures in this country are spent on just 5% of the population annually, so healthier adults are needed to help allay these disproportionate costs.
Monday's initial data would imply that this ongoing young adult enrollment shortfall will necessitate significant premium price hikes by insurers for 2015 to help offset the costs of treating sick patients, calling into question the whole premise that a more universal health reform, which brought more paying Americans into the fold, would help reduce long-term costs.
The addition of roughly 4 million Medicaid-approved members further complicates the burden of expanding health insurance under Obamacare relative to just 2.15 million paying sign-ups.
Not so fast...
While the data thus far would indeed portend bad news for future premium pricing, there isn't enough reason for consumers or investors to start running for the hills... yet!
The first factor to consider is that we still have two-and-a-half months of eligible enrollment left before Obamacare's 2014 coverage cutoff period ends. Americans are notorious procrastinators when it comes to paying their bills, so it would come as no surprise if we saw the bulk of enrollments on the back end of the coverage cutoff date.
With that being said, perhaps no age group procrastinates more than young adults. I should know – I am one, and I can tell you firsthand that quite a few of my friends in that age range are still pondering what they're going to do with regard to purchasing health insurance for themselves.
In addition, I wouldn't be too alarmed for insurers that a majority of Americans are choosing the cheaper path by purchasing bronze and silver plans relative to gold and platinum plans. In fact, insurers and the HHS were dead on in their estimation that silver plans would be the most popular choice among potential customers. Similar to a retail environment, lower priced products can often have the beefiest margin potential, especially for insurers, which will rely on consumers to kick in 30% to 40% of the medical costs as well as co-pays.
Specifically, I would say this benefits a company like WellPoint (NYSE: ANTM ) , which purchased Amerigroup for $4.5 billion to focus on government-sponsored individuals. WellPoint, which has a strong presence in California and New York, should see benefits from Medicaid enrollments, as well as some of the 2.15 million paying enrollees.
Worry about this instead
Instead of worrying about the shortfall in young adult signups that could very well be rectified by late March, I would instead be concerned for hospital providers and pricier medical device makers, which may have something to worry about with the number of bronze and silver plans coming in at 80% combined.
Whereas this figure works in the favor of insurers, hospitals run the risk of patients simply being unable to pay for services rendered. Although out-of-pocket costs are about the same for all insurance tiers, the percentage of payment due for services rendered is considerably higher for bronze and silver plans. Let's face it -- the reason consumers selected these plans likely had a lot to do with costs, so when they do eventually require medical care, it could be an adventure to see if these hospital providers can collect. An operator I worry about is Tenet Healthcare (NYSE: THC ) given that a number of its hospitals are in regions of the country where Medicaid isn't expanding, leaving an already disproportionate number of uninsured people still uninsured.
This is also a concern for medical device makers like Intuitive Surgical (NASDAQ: ISRG ) . In spite of Intuitive's solid preliminary revenue guidance for the fourth quarter, the uncertainties surrounding Obamacare's implementation have caused many health-sector companies to hold back on their spending. With Intuitive's soft tissue surgical system known as da Vinci costing roughly $1.5 million, it may find the sales environment difficult for the time being. Yesterday's preliminary report, though better than Wall Street expected, did show a marked 23% decline in surgical system sales, which I believe could be a direct result of Obamacare and hospital's cautionary spending habits.
We're almost there
With three-and-a-half months of enrollment in the books, we're more than halfway to the March 31 coverage cutoff date. While the initial data looks disappointing in terms of young adult sign-ups, I'd feign to call Obamacare a failure as of yet – though it will need to work hard to lure in young adults from this point forward. As we approach and pass March 31, we'll have a considerably better idea of how successful Obamacare was in luring young adults to purchase health insurance, and what the future might hold for insurance premiums in 2015.
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