Will the Obamacare Website Woes Defang the Obamacare Penalties?

Oh, what a tangled Obamacare website they weave.

The more Americans find out about the Obamacare website woes, the more of a mess the situation seems to be. Now the possibility seems quite real that the financial penalties connected with the individual mandate, a linchpin of the Affordable Care Act, could be essentially defanged as a result of the website troubles. Here's how -- and why the implications are enormous.  

Source: HealthCare.gov

Showing their fangs
A recent survey illustrates how things are going so far for the Obamacare website. Gallup reported this week that only 21% of uninsured Americans had even visited a health exchange. Of those individuals, 63% said their experience was either negative or very negative.

Federal authorities maintain that HealthCare.gov will be ready to support the "vast majority" of customers by Nov. 30. What constitutes a vast majority? The White House said this week that the Obamacare website will work for 80% of insurance shoppers by the deadline. Russian roulette gives better odds for a pleasant outcome.

To make matters worse, security experts who testified before Congress recently warned that the website isn't secure. Three of the four cyber-security gurus said that HealthCare.gov should be shut down, with one estimating that at least seven to 12 months would be required to fix the security problems.

What about the one expert who didn't say the Obamacare website should be shut down? Avi Rubin, director of Johns Hopkins University's Information Security Institute, said he didn't have enough information to make a call. However, Rubin added that he wouldn't personally use the site as it stands now because of the security flaws. 

White House officials have stated that the website is improving. And the experts responsible for HealthCare.gov security told a Congressional committee that the site meets all federal cyber-security standards. At the same time, though, the Obama administration appears to be scrambling to allow Americans to enroll directly with health insurers as an alternative.

Gumming things up
If Nov. 30 arrives and the Obamacare website proves to still not be ready for prime time -- or, worse, a major security breach occurs -- everything related to the health reform legislation could be gummed up. And it will likely start with the individual mandate penalties.

Public support for a delay of the Obamacare penalties is growing. Pressure will intensify should problems persist with HealthCare.gov. So what happens if the website still isn't fixed by the end of the month and politicians ultimately acknowledge that a delay in the penalties is needed?

First, expect howling from insurance companies. WellPoint (ELV 1.19%), the nation's second-largest health insurer, chose to jump aboard the Obamacare individual insurance train in a more significant way than its peers by participating in the exchange websites in every state where the company operates.

A delay in the penalties means that WellPoint's actuarial calculations used to set rates are completely blown. The Affordable Care Act cushions insurers to some extent through the use of "risk corridors," but that probably won't be enough to offset the losses that would be incurred.

Hospital chains won't be happy campers, either. Tenet Healthcare (THC 2.32%) has been in an acquisition mode as it positioned to take advantage of the highly anticipated swelling in the rolls of the insured -- and corresponding decrease in the ranks of the uninsured. A delay in the penalties could very well translate to a delay in those hoped-for benefits.

Not everyone in health care will be rattled quite as much, though. Aetna (AET) and UnitedHealth Group (UNH 1.61%) took more cautious approaches with the Obamacare exchange websites. Both insurers also, like WellPoint, stand to gain from Medicaid expansion resulting from the health reform legislation.

All bark and no bite?
The perception of the impact of a delay in the Obamacare penalties just might be worse than the reality of a pushback. Some observers have been skeptical about how effective the penalties would be in the first place. The Affordable Care Act didn't bestow much authority to the IRS to enforce the penalties, anyway.

While it's quite possible that the Obamacare website woes will defang the individual mandate penalties, those fangs were really never all that sharp in the first place. Does that mean that the negative consequences described above won't happen if the HealthCare.gov problems lead to a penalty delay? Not necessarily. Even a dog that's all bark and no bite can prove to be quite effective at causing a scare.