The wait is over. State and federally run health exchanges tied to the Affordable Care Act, better known as Obamacare, are open for business and actively looking to recruit uninsured individuals as well as encourage currently insured individuals to renew their insurance.
This is going to be a pivotal year for Obamacare for a number of reasons. First, the easy-to-enroll individuals are out of the way, which means insurers are going to have to work even harder this year to grow their membership. Secondly, it's a much shorter enrollment period, lasting just three months instead of the six month duration last year. This leaves little room for errors on the exchanges similar to the critical IT problems that crippled the federally run Healthcare.gov last year. Finally, Obamacare's health exchanges will be incorporating small businesses enrollment into the fold, meaning there's an added layer of complication that needs to be overseen.
The swing and the miss
Despite varying degrees of excitement and anger surrounding the kickoff of open enrollment, it would appear that Obamacare has already swung and missed before the first pitch was even thrown.
Last week the Department of Health and Human Services announced its estimates for total Obamacare enrollment by the end of 2015, and the forecast was markedly lower than what the Congressional Budget Office had previously projected. According to the CBO, Obamacare enrollment was expected to total 13 million by year's end. The new estimate from the HHS is that total enrollment will be just 9 million-9.9 million by the end of the year, up from the current 7.1 million paying customers as of mid-October – an increase of just 27% to 39% in its second year.
The new projections from the HHS assume that nearly 6 million people out of the current 7.1 million enrollees will renew their plan or change to another Obamacare exchange plan. Based on these estimates, the HHS anticipates 3 million-4 million new enrollees.
While these new enrollees should help push the overall uninsured rate lower, these significantly reduced estimates could be construed to be highly disappointing. It's especially worrisome for insurers like UnitedHealth Group (NYSE:UNH), CIGNA (NYSE:CI), and Assurant (NYSE:AIZ) which have made plans to expand into a number of additional states this year and are counting on new enrollees and plan-switchers to drive their Obamacare operations to profitability.
After operating in just four states last year, UnitedHealth will be offering plans in about two dozen states this year. CIGNA, for instance, will be offering health-benefit plans in eight states this year instead of the five states it serviced last year. Assurant, which completely stayed on the sidelines last year, has plans to enter the individual market in a handful of states.
Why Obamacare forecasts were slashed
Why were Obamacare's enrollment estimates slashed by a median of 27%? The HHS offered up a single hypothesis, but I believe there could be more to it than that.
One of the primary reasons the HHS offered reduced estimates has to do with the degree to which enrollment would ramp up in the online marketplace. As the HHS notes, CBO estimates were made before final 2014 enrollment data was available, and came with the assumption that there would be a significant shift from employer-sponsored insurance and off-exchange coverage to the Obamacare exchanges. The HHS cites mixed evidence to the degree of this shift so far and believes the existing ramp-up could take longer than originally projected by the CBO.
However, there's probably more to this enrollment reduction than the HHS is leading on. Here are some of the reasons I believe we're seeing enrollment expectations fall so dramatically.
First, I think it's wise of the HHS to have reasonable and achievable expectations. Last year's enrollment targets from the CBO were eventually hit, but the stress placed on prior Healthcare.gov architect CGI Group (NYSE:GIB), as well as on insurers to enroll at least 7 million people, was simply too much to bear. At one point enrollment figures were more than 1 million individuals behind schedule, which led to emotions rather than logic getting the best of investors. A tepid growth estimate this year should allow consumers and investors to think more logically and realistically about the success or failure of the healthcare law in enrolling new people.
Secondly, I believe the significant boost in Obamacare penalties for violating the individual mandate still won't be enough to encourage many of the remaining uninsured to sign up. Last year's penalty for not having health insurance was the greater of $95 or 1% of an individual's annual income. This year the penalty will jump to the greater of $325 or 2% of an individual's annual income. Even with this increase, the cost of paying the penalty is still likely to be lower than the cost to obtain health insurance through an online exchange.
Finally, insurers are dealing with a much tougher crowd of uninsured people this year. Last year the so-called "easy" enrollees jumped at the chance to sign up, leaving a sea of uninsured people who feel invincible and don't want insurance, or who don't believe they can afford health insurance, on the sidelines. It's going to be really tough for insurers to reach these uninsured individuals, and the HHS probably realizes this.
This projection could cascade
With enrollment estimates reduced, Obamacare certainly has the tools to outperform estimates relative to last year. However, I'd be lying if I said the dramatic enrollment estimate reduction wasn't a possible windfall for the entire healthcare sector.
On top of this being worrisome for insurers, lower enrollment could potentially trickle all the way down to hospital providers who could be helping more uninsured people in the emergency room than expected, as well as medical equipment makers which may see their orders shrink due to weaker-than-expected enrollment and doctor visits.
In about three months we'll have a more definitive answer as to whether the skeptics are right, but in the meantime it's probably in your best interest to temper your Obamacare growth expectations in 2015 if you own any healthcare companies in your stock portfolio -- especially insurers.