The Centers for Medicare and Medicaid Services has released the latest report on the state of enrollment for the Affordable Care Act, better known as Obamacare, and it contained quite a surprise.
As a refresher, the CMS reported Obamacare enrollment as of the end of the 2016 enrollment period to be about 12.7 million. This included more than 9.6 million enrollees via HealthCare.gov, the federally run marketplace exchange covering 38 states, and roughly 3.1 million enrollees coming from the one dozen states, such as California, New York, and Washington, that operate their own exchanges. Seeing as how Obamacare ended 2015 with 9.1 million enrollees, this jump of 3.6 million people, equal to about 40%, was viewed as a big win for the program.
Obamacare's 2016 enrollment isn't as robust as initially thought
But looks can be deceiving. Last week's CMS report, which used insurer and marketplace data through March 31, 2016, just two months following the 2016 enrollment deadline, found that only 11.1 million consumers were still enrolled and paying. In just two months, 1.6 million people had stopped paying their premiums or lost coverage.
To be clear, consumer attrition has been somewhat common since Obamacare became the health law of the land on Jan. 1, 2014. Approximately 8 million people enrolled in Obamacare in 2014, but this figure dipped to 7.3 million by mid-year. The following year saw a big jump to 11.7 million enrollees during the initial enrollment period, but by mid-year this figure had dropped to 10.2 million paying customers. By year's end Obamacare had only 9.1 million paying customers left. Things could be on the same trajectory once again, with initial enrollment falling by 1.6 million in two months, and expectations calling for a drop of another roughly 1.1 million to 10 million by year's end.
Those "expert" predictions, however, could prove optimistic. Robert Laszewski, the president of Health Policy and Strategy Associates, recently told CNBC in an interview that:
"The [insurance] carriers tell me they have a lapse rate of about 2 percent per month. A 2 percent per month lapse rate for the remaining 9 months on 11.1 million now would take us to 9.1 million -- right where they finished last year."
What's really interesting is that earlier this year the CMS told the public that improvements in the automation process between insurers and states meant it would take insurer-initiated cancellations into account earlier in the process. Thus, the 12.7 million enrollment figure was expected to drop less than in previous years. That, unfortunately, turned out to be incorrect.
Why consumers are dumping Obamacare
You might be wondering what it is, exactly, that's causing 10% or more of enrollees each year to dump their Obamacare plans. There are likely three answers.
First, we have insurer-initiated cancellations. If an insurer can't verify information for a member, or can't determine the eligibility of that member for a subsidy, the insurer can drop coverage. Every year we see a low single-digit percentage of total initial Obamacare enrollees lost to insufficient paperwork or documentation.
Secondly, and this isn't necessarily a bad thing, we see consumers dropping out because they either gain health coverage through a spouse or they get hired at a job that offers an employer-sponsored health plan. Switching from Obamacare to either scenario means the consumer still stays insured, and in many instances commercial group plans can actually be cheaper.
The more worrisome reason why consumers might be abandoning Obamacare is affordability. After years of health insurance premium inflation trending well below its historical average, premium inflation is beginning to climb rapidly once again.
A recent analysis of 2017 insurer rate requests in 14 major cities by the Kaiser Family Foundation found that the lowest-cost silver plans could rise by an average of 11% next year. For Obamacare enrollees not receiving subsidies, this could be a crushing increase. For what it's worth, we may already be seeing attrition from middle-class consumers who make too much to receive subsidies.
It's worth noting that 9.4 million, or about 85% of the remaining paying customers in Obamacare, are receiving the Advanced Premium Tax Credit, which works out to an average of $291 per month. Without this credit there's no telling what sort of attrition we'd be seeing.
This is a worrisome development for insurers
Once more, some attrition is to be expected with Obamacare enrollment. But the fact that we're seeing year-over-year enrollment growth slowing implies that we could be nearing Obamacare's enrollment apex. That's bad news for insurers, who'd originally been counting on 20+ million people to enroll back when the Congressional Budget Office made its original enrollment projections three years ago.
Most insurers operating on Obamacare's marketplace exchanges still haven't figured out how to turn a profit. This includes the nation's largest health insurer, UnitedHealth Group (NYSE:UNH), which could lose around $500 million from its Obamacare plans in 2016 and has chosen to withdraw from many of the 34 states it's operating in this year by 2017. In the states it's remaining in, UnitedHealth has requested some hefty price increases. In New York, for example, UnitedHealth has requested a 45.6% premium increase.
A lack of young adult enrollment is also plaguing Obamacare. Although we saw an uptick in young adult enrollment in 2016, likely as a result of increasing shared responsibility payments (aka, the Obamacare penalty for not being insured), young adults are still underrepresented in Obamacare. The cost of paying the SRP is, in most cases, considerably cheaper than buying even the lowest-cost bronze plan for a full year. That's bad news for insurers, which had been counting on relatively healthy younger people to help counteract the higher costs of treating sicker Obamacare enrollees.
If there is some solace here for investors, it's that Obamacare tends to make up only a low-to-mid single-digit percentage of revenue for the nation's largest insurers, and attrition could actually lead to better margins since many are losing money on Obamacare enrollees.
It's certainly going to be interesting to see what direction Obamacare heads once President Obama leaves office in January. One thing is for sure: consumers and investors should know a lot more in four months' time when we know who the next president of the United States will be.