Since it was first signed into law in March 2010, the Affordable Care Act has been highly controversial.
The ACA, which you likely know better as "Obamacare," wound up completely revamping how consumers shop for health insurance, making the process more transparent than ever. Obamacare also removed insurers' ability to pick and choose who they'd accept and required that health-benefit providers offer compliant plans that provided 10 minimum benefits.
On the flip side, Obamacare introduced a widely disliked component known as the individual mandate. This mandate requires that consumers purchase health insurance or pay a penalty come tax time, known as the Shared Responsibility Payment. Never before had the government told consumers they needed to buy something or face a penalty. In fact, a motion to invalidate the mandate went all the way to the Supreme Court and was eventually upheld.
Despite its controversy, Obamacare still managed to enroll about 12.7 million people via its federal and state marketplace exchanges by the end of the 2016 enrollment period. This figure doesn't even count the nearly equal number of low-income individuals and families who've qualified under the expansion of Medicaid in 31 states. All told, Obamacare sliced the rate of uninsured adults in this U.S. to the lowest levels on record, according to Gallup and the Centers for Disease Control and Prevention.
The headline numbers for Obamacare look pretty good. But the big question nearly everyone is asking is whether the program is sustainable.
Obamacare faces a big problem in 2017
Forget for a moment that President Barack Obama is set to leave office in just over seven months and that his program could be subject to change once a new president is in the Oval Office, because there's a much more immediate problem to contend with: rate requests.
Every year since Obamacare's full implementation, May is typically the month when health insurance companies submit their premium rate requests to the Office of the Insurance Commissioner (OIC). Every state has an OIC that's responsible for reviewing requests for double-digit percentage premium changes, whether they're for increases or decreases in price. Thus far, more than a dozen states have made their average rate requests public, and the vast majority of requests have been for double-digit percentage hikes.
A few weeks ago we looked at Oregon and Virginia, which were among the first to publish their insurers' rate requests. The average weighted increase for these states, courtesy of data aggregation from ACASignUps.net, was nearly 18% in Virginia and 27% in Oregon. The following week didn't get any better, with Washington, Florida, Maryland, Maine, and New York insurers all requesting average or weighted-average increases that were firmly in the double-digits. Now that another week has passed, the increases are compounding further. Insurers in Pennsylvania, New Mexico, Iowa, California, and Indiana can be added to the mix, having requested double-digit weighted increases in premium prices for 2017.
If premium prices get out of hand, it could directly impact consumers, causing them to forgo a health insurance policy or drop their coverage.
Why Obamacare premiums are expected to soar in 2017
You might be wondering why insurers are requesting such hefty increases from OICs in 2017. It essentially boils down to three key factors.
First, Obamacare enrollees are generally a sicker group of individuals, at least according to a huge study conducted by the Blue Cross Blue Shield Association (BCBSA). A BCBSA analysis of 4.7 million medical claims of individual members and 25 million employer-based group members found that Obamacare enrollees cost an average of $559 per month through the first nine months of 2015. Comparatively, clients with employer-based coverage cost insurers an average of $457 per month over the same timeframe. This 22% difference takes into account the fact that people who'd previously been excluded from enrolling for health insurance can no longer be turned away. Put simply, these sicker individuals are costing insurers a pretty penny.
Secondly, young adult enrollment isn't up to par. Even though young adult enrollment improved in 2016, perhaps directly as a result of increased penalties for not having insurance, the figures still aren't enough to make Obamacare plans sustainable for most insurers. Young adults are often healthier and less likely to go to the doctor, thus their premiums are needed to help offset the high costs of treating older and/or sicker patients.
The final issue ties into the failure of the risk corridor. In easy-to-understand terms, the risk corridor was a financial fail-safe for insurers, providing a cash payment if they suffered excessive losses on Obamacare's marketplace exchanges. The money was to be provided by excessively profitable insurers. Unfortunately, few insurers made enough to fund the program, causing just 12.6% of the $2.9 billion in requested funds to be paid. In total, more than half of Obamacare's healthcare cooperatives closed their doors due to excessive losses, and major players like UnitedHealth Group (NYSE:UNH) raised the white flag after big losses -- UnitedHealth Group announced it'd leave most of the 34 states it was operating in as of 2016. Adding salt to the wound, the risk corridor won't be around in 2017, potentially discouraging new competition from entering Obamacare's marketplace exchanges.
Will Obamacare unravel in 2017?
Given this laundry list of concerns with Obamacare, it's understandable why so many people view Obamacare as running on borrowed time. However, there's one aspect of Obamacare that I suspect will save it from implosion in 2017 regardless of how high premiums go -- namely, the Advanced Premium Tax Credit, or APTC.
The APTC, or subsidy as you might know it, provides a partial reduction in premium costs, funded by the federal government to encourage lower-income and middle-income individuals and families to enroll in Obamacare. Anyone whose income is between 100% and 400% of the federal poverty level can potentially qualify for the APTC, which can substantially lower some enrollees' monthly premium payments.
In 2016, the average national premium without subsidies was a whopping $407 per month, compared to $113 per month with the APTC. Because about 85% of Obamacare enrollees qualify for the APTC, and most see only a minimal uptick in monthly premium prices due to their subsidies, there's a good chance that nearly all of these enrollees will be able to withstand double-digit percentage increases in premiums.
Of course, the remaining 15% of non-subsidized enrollees, as well as uninsured folks who don't qualify for the APTC, could find themselves in a world of hurt if premiums jump by a double-digit percentage. Although there's a very real possibility that enrollment could head in reverse, I doubt that it would be enough to unravel Obamacare in 2017.
Obamacare is certainly not out of the woods, especially with the presidential elections around the corner, but it's not going anywhere soon.