This coming March will mark the six-year anniversary since President Obama signed the Patient Protection and Affordable Care Act, better known as Obamacare, into law. Suffice it to say a lot has changed over those years.
Obamacare overhauls the healthcare system
Fully implemented on Jan. 1, 2014, Obamacare completely overhauled the way consumers shop for health insurance, and it changed the landscape of how insurers operate as well.
For the consumer, it offered transparent marketplace options that finally allowed for side-by-side comparisons of similar plans. The idea behind these online marketplaces was to make the process as informative and competitive as possible such that consumers could make educated and price-conscious decisions.
We also witnessed the implementation of the individual mandate that requires everyone to purchase health insurance or face the shared responsibility penalty. This penalty has skyrocketed in each of its first three years from the greater of $95 or 1% of a person's modified adjusted gross income (MAGI) in 2014 to the greater of $695 or 2.5% of MAGI in 2016. All told, the Kaiser Family Foundation estimates that the average penalty for remaining uninsured in 2016 without an SRP exemption could approach $1,000.
But, things are markedly different for insurers, too. Insurance companies are now required to spend a minimum of 80% of collected premium money on patient care and advancement; they can no longer turn away customers with pre-existing conditions; and they're required to submit premium rate increase requests to the Office of the Insurance Commissioner in each state where the request leads to an increase (or decrease) of 10% or more.
Despite its complexity, Obamacare has had some shining moments over its first two-plus years of being fully implemented. Based on data from the Centers for Disease Control and Prevention through Q1 2015, the uninsured rate in the U.S. inclusive of Medicare patients stood at just 9.2%, its lowest on record. Furthermore, through week nine (Nov. 1, 2015 - Jan. 2, 2016), some 8.61 million people have selected a plan using HealthCare.gov, which covers 38 states. With 15 days left in the current enrollment period, and the one dozen state-operated exchanges yet to be included in these figures, it looks as if Obamacare's enrollment tally will be its highest yet.
New data could signal trouble ahead
However, new Obamacare data brought to light by Forbes appears to signal that Obamacare may not be working as well as initially planned for the hospital industry.
Hospital giants HCA Holdings (NYSE:HCA) and Tenet Healthcare (NYSE:THC) have been counting on multiple facets of Obamacare to drive growth. First, having more insured people walking through their doors should result in lower unpaid bills. Secondly, the expansion of the Medicaid program was expected to result in more guaranteed payments. Medicaid margins may not be the highest for hospitals, but hospitals will typically take guaranteed pay any day. Lastly, gaining easier access to medical care was forecast to create demand for elective procedures, which is a potential high-margin area for hospitals.
Over the past two years there have been some hiccups regarding Obamacare spending with this latter expectation. But as a whole, hospitals have generally witnessed a drop in unpaid medical bills by patients and a rise in demand for medical services. Yet, a new report from Fitch Ratings suggests we may be seeing a reversal of this pattern.
According to the report, "[D]uring 3Q15, the group's [for-profit hospital companies] average operating EBITDA margin was up only 16 basis points versus 3Q14, and some companies reported a steep drop in same hospital margins. Higher labor and supplies expenses and relatively weaker growth in pricing played a role in these results."
In addition to sluggish third-quarter growth, some for-profit hospitals also noted a rise in uncompensated care which negatively affected their margins. In the third quarter, HCA Holdings announced a $1.16 billion provision for doubtful accounts, up from $758 million in the year-ago quarter, while at Tenet Healthcare, doubtful account provisions rose to $371 million in Q3 from $249 million in the year-ago period. Sluggish growth and a rise in unpaid bills is bad news for the hospital industry, and it could imply that Obamacare's success only runs as deep as the plan selections numbers found on the surface.
Why hospitals are suddenly struggling
You might be wondering why the number of uncompensated patients is suddenly on the rise at for-profit hospitals. Although there is no concrete answer we can point our finger toward, I'd likely place the blame on one or both of the following components.
First, there's the lack of universal Medicaid expansion across the United States. Initially, Obamacare had planned to require states to expand their Medicaid program such that consumers earning up to 138% of the federal poverty level could be included. However, a ruling by the Supreme Court gave the option of opting in or out to the states. As of now only 31 states (including Washington, D.C.) have chosen to take federal money and expand their Medicaid program.
The holdout states suggest that expanding their programs would cost too much, with their reasoning being that the federal government between 2017 and 2020 will pare back its support of these newly insured people from 100% to 90%, requiring states to come up with the remainder of the revenue. Some states simply viewed creating this additional revenue as not being feasible.
This decision leaves low-income residents in these 19 states with a problem on their hands. If they earn more than 100% of the federal poverty level they can't qualify for Medicaid, and millions more don't make enough to qualify for a subsidy under Obamacare. Known as the "Medicaid Gap," millions of Americans are simply unable to get affordable health insurance. If this group of individuals visited the hospital more often recently, it's possible insurers could have seen their unpaid bills rise.
The other issue here is that Obamacare's enrollment is slowing, so the data we're seeing from hospitals in terms of growth and unpaid bills is maturing. After tallying 6.7 million paying members in 2014, that number swelled to more than 9 million in 2015. However, the Congressional Budget Office forecast enrollment growth of roughly 10% in 2016 before the current open enrollment season kicked off. It's possible that enrollees (especially Medicaid-covered members) took advantage of being insured and getting much needed medical care in 2014 and early 2015, and now we're seeing levels of medical procedure demand fall to a more normalized level.
Regardless of the underlying reason, though, it's a pattern worth closely monitoring.
Two big Obamacare questions left unanswered
As the enrollment period moves on, there are two even more pressing Obamacare questions we want answered that'll help determine whether the health law has staying power over the long-term.
First, we'll want to pay close attention to young adult enrollment. Young adults are a critical component for Obamacare's success since they're often healthy and less likely to go to the doctor often. This means their premium payments are important to offset the high costs of treating sick and older individuals. The increase in the SRP could be just the tool needed to attract more young people to Obamacare, but we probably won't get a clearer picture on young adult enrollment totals until March at the earliest.
The other question we'd like answered is whether or not insurers can actually earn a reasonable profit on Obamacare's marketplace exchanges. UnitedHealth Group lowered its full-year earnings expectations during the fourth quarter solely because of losses tied to its Obamacare plans, and alluded to investors that it could pull out of Obamacare exchanges altogether by 2017. If the nation's largest insurer is struggling to make money, then it brings into question whether this is an isolated incident or an endemic issue with Obamacare.
As per the norm, we have plenty of data to look forward to in the coming months concerning Obamacare.
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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