Signed into law in 2010 by President Obama, the Patient Protection and Affordable Care Act, or as it's more affably known, Obamacare, laid out a number of goals in its attempt to completely transform the way Americans purchase and receive healthcare.
Gone are the days of being denied coverage by an insurer simply because you have a pre-existing condition. Also gone is the choice of not purchasing health insurance -- at least not without a penalty.
Primarily, Obamacare looks to reduce the number of uninsured citizens in the United States. Uninsured individuals drive up costs at hospitals and doctors' offices because of inability to pay, which translates into higher rates for everyone else down the line. By making healthcare accessible to millions of additional Americans, the idea is that insurers would be able to spread their medical expenses over a greater swath of the U.S. population, resulting in more modest medical cost inflation -- especially when it comes to insurance premiums.
Secondarily, and building on the prior point, Obamacare aims to create a healthier America where medical cost inflation is under control. Arguably, the last five years post-Great Recession have been the best five-year period for medical cost inflation in five decades. The pressure put on health insurance premium prices from the recession has kept rising costs at bay. Over the long term, the goal/hope of Obamacare is that it'll encourage the insured to visit their doctor regularly, such that chronic conditions can be caught and monitored early instead of turning into costly, later-in-life complications. Catching these problems early is critical to keeping insurers' expenses under control.
Initial enrollment through two years for Obamacare of nearly 12 million easily surpassed the 9.1 million that the Department of Health and Human Services anticipated the program would have by the end of 2015. In other words, things are going pretty well.
Problems with Obamacare that could prove difficult to fix
However, this initial success may prove short-lived, as there are problems with Obamacare that could prove difficult to fix. While the technical glitches that plagued the health reform law in 2013 were a nuisance, they were a relatively straightforward fix. The following three problems are far more deep-rooted -- and far from an easy fix.
1. No universal Medicaid expansion
One of the critical puzzle pieces designed to really put a dent into the uninsured rate in the United States is the expansion of the Medicaid program.
Prior to Obamacare's official implementation on Jan. 1, 2014, Medicaid covered those individuals who made 100% or less of the federal poverty level in income per year. For added context, this works out to $11,770 in income (or less) in 2015 for an individual, with $4,160 added to the $11,770 for each additional family member. If your income was below this level, you received fully subsidized health insurance via Medicaid.
Under the Affordable Care Act, all 50 states were offered billions of dollars in federal financial aid to expand their Medicaid program to cover individuals making up to 138% of the federal poverty level. Beginning in 2016 and running through 2022, the federal government would then begin to scale back its federal aid to the point where it was covering 90% of its original commitment, thus putting more of the onus of covering Medicaid-eligible Americans on the states.
As you might imagine, with a number of state governors not agreeing with the politics behind Obamacare, or with President Obama in general, 21 states chose not to accept federal funding or expand their Medicaid program. Their reasoning was that the cost of rolling back federal aid, even slightly, between 2016 and 2022 would put too high a burden on the states to come up with the additional revenue to cover these individuals.
The problem, here, is that individuals who make more than the FPL but less than the subsidy cutoff fall into what's known as the "Coverage Gap." They don't receive any subsidy for their health insurance, and even if they did, they probably couldn't afford to pay very much per month for health insurance.
These 21 states could ensure that millions of Americans continue to remain uninsured, and there's next to nothing the federal government can do to change the opinions of these states.
2. Individual mandate penalty may not be high enough to encourage enrollment
Another problem with Obamacare is the need to get younger, healthier adults to enroll, which may not be happening as quickly or successfully as once planned.
The individual mandate is the actionable component of the PPACA that essentially states individuals need to purchase health insurance during the calendar year or face a penalty. This penalty is enforced when they prepare their taxes, and in 2014, it was the greater of $95 or 1% of their modified adjusted gross income, or modified AGI. In 2015, this penalty will rise to the greater of $325 or 2% of modified AGI, and in 2016, it'll jump once more to the greater of $695 or 2.5% of modified AGI. In 2017 and beyond, it'll simply rise by the rate of inflation.
The penalty is there is to encourage young adults who'd otherwise not sign up for health insurance to join. By joining, they'd avoid the penalty when filing their taxes, and they'd be covered should a health issue arise. For insurers, premium payments from younger adults are critical to offsetting the higher costs they're exposed to when accepting people with pre-existing conditions.
What if the individual mandate penalty simply wasn't enough to encourage young adults to enroll?
This could be the case, as H&R Block pointed out in a recent report that the average penalty for noncompliance in 2014 was just $178. That doesn't even equal the cost of a single month's premium across the nation for a bronze plan. With the typical bronze plan running $307 per month across the country, even if the individual mandate penalty is $1,000 or $1,500, consumers who are decisively against buying health insurance, and/or won't go to the doctor, could be saving thousands of dollars by simply not purchasing health insurance.
There's also the fact that the IRS, which is in charge of collecting the penalty, has no recourse to garnish wages or seize property to collect an individual mandate noncompliance penalty. All it can do is merely ask taxpayers nicely for the money, or withhold it from their tax refund if they are owed one.
3. Personalized medicine could drive up inflationary pressures
Finally, among problems with Obamacare that have most recently come to the forefront is the rise of personalized medicine.
On one hand, personalized medicine, which is merely the idea of using targeted drugs, devices, and diagnostics to better diagnose and treat a patient, should help improve patients' quality of life and longevity. We're witnessing a number of new gene-oriented drugs directed at cancer that have resulted in substantial response improvements, and often increases in overall survival.
Unfortunately, personalized medicine also comes with a hefty price tag. Both Bristol-Myers Squibb (NYSE:BMY) and Merck (NYSE:MRK) have checkpoint inhibitors designed to boost a patient's immune system to fight cancer on pharmacy shelves (Opdivo for Bristol and Keytruda for Merck) at an annual cost of $143,000 and $150,000, respectively. Gilead Sciences (NASDAQ:GILD), which developed an effective cure known as Harvoni for genotype 1 hepatitis C, the toughest form of the disease to treat, and comprising about 70% of all HCV cases, markets the drug for $94,500 wholesale for a standard 12-week treatment.
The cost of these drugs makes it difficult for insurers and pharmacy-benefits managers not to pass along higher costs that eventually work their way down to consumers. Rising pharmaceutical costs aren't easy to control short of government-backed regulation, which means these costs could threaten what Obamacare brings to the table in terms of medical cost inflation controls.
To be clear, these problems with Obamacare don't mean the program is necessarily going to fail. However, in my opinion, it does imply that Obamacare is in an ongoing state of transition, during which many speedbumps should be expected, and isn't, on the contrary, a flip-of-a-switch change to our healthcare system.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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