The 2014-2015 health insurance enrollment period for Obamacare, known officially as the Patient Protection and Affordable Care Act, has been relatively quiet -- and that's a good thing!
Obamacare's topsy-turvy history
During the 2013-2014 enrollment period, just about everything that could go wrong went wrong. Regulators had to simultaneously deal with educating millions of people about a brand new health reform law that few understood, while also figuring out a way to patch what seemed like an immeasurable number of website architecture holes in the federally run marketplace exchange, Healthcare.gov. During the first two months of the 2013-2014 enrollment period, less than 400,000 total people enrolled via Obamacare's exchanges, primarily due to technical barriers.
Although enrollment figures soared in 2013-2014 once software fixes were put into place, other challenges have since arisen. For example, the Department of Health and Human Services reported in May last year that more than 8 million people had enrolled for Obamacare. Yet, between May and mid-October, some 1 million people failed to pay their bill and the HHS admitted to its own accounting goof that incorrectly inflated enrollment figures by approximately 380,000. The end result was a final enrollment figure of just 6.7 million, below the original 7 million enrollees projected by the Congressional Budget Office.
To little surprise, this year's projections offered up in mid-November by the HHS were for a much more tempered 9.1 million people to be enrolled by the end of 2015. The HHS prognostication took into account an 83% retention rate for prior members and the enrollment of 3 million to 4 million new members.
Obamacare crushes lowered enrollment targets
Although the limbo bar was set pretty high considering the Congressional Budget Office was looking for 13 million enrollees based on a Sept. 2013 forecast, Obamacare has cleanly passed the 9.1 million mark with ease -- and best of all with a few more weeks of open enrollment to go.
According to the latest enrollment statistics issued by the HHS for week nine (Jan. 10 - Jan. 16) 7,156,691 people have selected plans utilizing Healthcare.gov. Another nearly 2.3 million people have submitted an application but not firmly selected a plan. The January update from the 13 states running their own exchanges showed substantial gains from last month's update as well, with the tally reaching 2.4 million enrollees. Combined, just shy of 9.6 million people have enrolled for Obamacare thus far, more than 500,000 higher than the HHS' initial target.
Is this good news? Absolutely, if you're an insurer, hospital operator, medical device maker, drug developer, or an investor in the healthcare sector. It's always encouraging to see people not waiting until the last possible minute to enroll. It could even suggest that the individual mandate penalties, which were hiked in a big way to the greater of $325 or 2% of a person's modified adjusted gross income in 2015, are coercing stronger enrollment this year. Or, it might even signal consumers' desire to be insured!
But, celebrating too early that Obamacare is a resounding success in 2015 could leave proponents of the law disappointed. The truth of the matter is Obamacare still has three major questions that need to be answered before we can go so far as to proclaim 2015's enrollment figures as a victory.
"Will people pay?"
As I noted above, one of the biggest concerns with enrollment figures is they can be misleading. The larger issue for insurers and Obamacare as a whole is whether or not enrollees actually make their payment. Last year around 1 million people that had signed up for Obamacare wound up dropping out or having their coverage cancelled due to nonpayment.
Based on the HHS' retention rate predictions for recurring enrollees of 83%, it's not out of the question to assume that Obamacare may need to enroll closer to 11 million if it expects to stay above the 9.1 million person estimate offered up by the HHS earlier this year. This will be a figure worth closely monitoring as the year progresses.
"Did Obamacare attract enough of the right new enrollees?"
Secondly, we have to find out if Obamacare merely reenrolled a substantial number of last year's enrollees or if it managed to reach the projected 3 million to 4 million new enrollees as forecasted.
New enrollees are critical to the success of Obamacare, as they help spread the cost of medical care across a greater swath of the U.S. population, which is a pivotal component to controlling medical cost inflation in future years.
The dynamic of 2014-2015's enrollees will certainly make things interesting. The assumption would be that the sickest individuals and those who would get the biggest subsidies enrolled last year, meaning this year's enrollees were going to be a considerably tougher crowd to sway to sign up. This implies that a good chunk of the remaining unenrolled are healthier individuals, which could make a big difference in controlling medical costs over the long run. Since we as of yet don't know the make-up of plan enrollees, this would be a figure worth eyeing by as early as March.
"Are federal subsidies here to stay?"
By far the biggest unanswered question is whether or not the subsidies divvied out to more than 6 million members enrolled through Healthcare.gov will stick beyond June.
In June, the U.S. Supreme Court is scheduled to review King vs. Burwell. This case hedges on the plaintiffs' allegations that the Affordable Care Act's language allows only states to divvy out subsidies to eligible citizens. Because 37 states essentially handed over the reins of exchange control to the federal government, a ruling in favor of the plaintiffs could immediately invalidate any future subsidy payments for eligible people that enrolled via Healthcare.gov.
On average, these subsidies helped eligible enrollees save $264 per month and reduced their premium cost to just $82. Furthermore, 87% of enrollees via Healthcare.gov receive some form of healthcare subsidy.
If the Supreme Court finds against the plaintiffs then it's unlikely Obamacare will change much, if at all. However, an unfavorable ruling would coerce the 37 piggybacked states to quickly set up their own exchanges, which my gut feeling believes wouldn't happen fast (or at all in some states with deep political differences with President Obama's healthcare reform law).
Answers are coming
The good news for investors is that answers are coming sooner rather than later for all three questions. As an investor in the healthcare sector, I'd continue to approach things very cautiously, as the Supreme Court could completely alter the dynamics of Obamacare. In other words, I'd stick to companies that have minimal Obamacare exposure in the interim.
Want an example? How about a healthcare conglomerate like Johnson & Johnson (NYSE:JNJ). Johnson & Johnson is prone to medical device and diagnostic weakness as hospitals and consumers tighten their wallets due to uncertainty ahead of the June ruling. But, because the company offers such robust growth from its high-margin pharmaceuticals business and has plenty of access to emerging markets for its medical device and diagnostic segment, I'm hardly concerned about how it'll pull through if there's a potentially unfavorable ruling from the Supreme Court.
Another idea? How about private insurance exchange operator Aon (NYSE:AON). Aon runs exchange Aon Hewitt, which has garnered some gigantic corporations, including Walgreen Boots Alliance, over the past year and change. Even if the proponents of Obamacare get an unfavorable ruling come June, it's unlikely we'd see a move by businesses away from private health exchanges. In fact, the idea of giving employees an annual subsidy and letting them shop for health insurance on their own could save businesses big bucks over the long-term, making it an idea that I anticipate will gain steam regardless of the June ruling.