There's little denying that the Affordable Care Act, better known as Obamacare, has had its share of ups and downs since it was signed into law by President Obama in March 2010 and became the official health law of the land on Jan. 1, 2014.
Looking at the top-line enrollment figures, Obamacare can be called something of a success. About 12.7 million people enrolled in 2016 -- about 1 million higher than where enrollment stood at the end of the 2015 enrollment period. Furthermore, according to the latest poll from Gallup, the uninsured rate in the first quarter dropped 0.9% from the sequential fourth quarter to 11% -- a record low, at least since 2008, when quarterly reports were initiated. In total, the uninsured rate is down 6.1% since the individual mandate -- the component of Obamacare requiring consumers to purchase health insurance or face a penalty come tax time -- went into effect.
Presumably, having more people insured means physicians and hospitals are more often getting paid for services rendered and less often getting stuck with unpaid bills. And having a larger patient pool, at least in theory, should allow insurers to spread their expenses across a greater number of people.
Is Obamacare in trouble?
But this is just surface data. If you dig a bit deeper, you'll see a far different story regarding Obamacare.
Behind the scenes, health-benefit providers are, when taken as a whole, struggling mightily. Insurers operating on Obamacare's exchanges showed operating profits in just nine states, according to a report released by McKinsey & Company in February. This means insurers are losing money in over 80% of states. That said, this report looked at insurer performance in 2014, and things may have improved since then -- but it's nonetheless worrisome.
To make matters worse, a recent Blue Cross Blue Shield Association report showed that Obamacare enrollees cost substantially more (22% more, to be specific) than consumers on employer-based health plans. BCBSA, after examining the medical clams of 4.7 million individual mmebers and 25 million employer-based group members, found that Obamacare enrollees cost insurers an average of $559 per month compared to $457 for employer-based clients. This suggests that Obamacare enrollees tend to be sicker more expensive to treat.
Why health insurers are struggling
What's at the heart of Obamacare insurers' struggles? It's probably a combination of factors.
To begin with, health insurers were counting on strong enrollment figures, as the ACA limits their margins and thus their profitability. If insurers fail to spend at least 80% of collected premiums on medical care for their members, they'll be required to issue refunds to members. Likewise, if they're too profitable, they're to share a percentage of their profits with struggling insurers on Obamacare exchanges to help prop them up. Original estimates from the Congressional Budget Office suggested that more than 20 million people would be enrolled by 2016. Unfortunately for insurers, the CBO overestimated how many people would drop out of their employer plans and opt for Obamacare. In other words, far fewer people have enrolled than expected.
Secondly, health-benefit providers need a fair amount of young adults to enroll, and that's not happening. Young adults are often healthier and less likely to go to the doctor, therefore their premiums can be used to help offset the high costs of care for sicker and/or older individuals. Threats of penalties in the form of the individual mandate were expected to prompt young adults to enroll, but paying the penalty is typically far less expensive than purchasing health insurance for a full year, even after two huge penalty hikes in 2015 and 2016.
Third, the "risk corridor" that overly profitable insurers were expected to pay into to help struggling insurers has been a disaster. This year, insurers requested $2.87 billion in assistance but received just $362 million -- almost a $2.5 billion shortfall. This lack of assistance led more than half of Obamacare's healthcare cooperative to shutter their doors, and it could seriously discourage new entrants.
Lastly, part of the problem comes down to the consumer. Americans could be denied coverage for pre-existing conditions prior to Obamacare's implementation. Under Obamacare, insurers can't deny coverage to anyone, meaning those sicker individuals on the sidelines have now rushed into the healthcare system.
By a similar token, the ease with which consumers can change plans every year and transparently compare plans is making it tougher for some insurance companies to compete with low-cost insurers, which in many cases may not be profitable.
Is a death spiral imminent? It'll likely depend on a single decision
Obamacare's many struggles have some pundits questioning whether Obamacare stands on the verge of going off a cliff.
The idea of an Obamacare death spiral is certainly plausible at the moment. Insurers need to be able to turn profits before their Obamacare plans can become sustainable. But in order for that to happen, many insurers may feel the need to enact some heavy-duty premium price increases. Big price increases should help counteract the adverse selection (i.e., sicker members) many insurers have been dealing with over the past couple of years; however, doing so could also make the Affordable Care Act quite "unaffordable" for some Americans.
On the other end, every state has an Office of the Insurance Commissioner that reviews insurers' proposals to increase or decrease rates by 10% or more. The goal of the OIC is to protect the consumer and ensure that health-benefit provides aren't overstepping their bounds with price hikes.
Obamacare's fate will likely depend on whether or not the many OICs around the country approve what are likely to be hefty premium increases from insurers. If OICs play hardball with insurers, then many insurers may simply walk away from Obamacare, rather than risk losing millions more.
For example, UnitedHealth Group cautioned its investors that its cumulative losses between 2015 and 2016 could approach $1 billion. CEO Stephen Hemsley didn't mince words during the company's annual presentation, suggesting that his company could completely leave Obamacare's exchanges by 2017. Keep in mind that UnitedHealth is the nation's largest insurer, and it sells Obamacare plans in about half of all states.
And UnitedHealth isn't alone. Humana (HUM -0.09%) cautioned its investors earlier this year that it expects to once again lose money on its Obamacare plans in 2016, noting that it's seriously contemplating exiting Obamacare's exchanges completely by 2017.
Should Humana and UnitedHealth drop out, we're probably talking about roughly 1 million cumulative individual members being displaced and needing to find new plans. But UnitedHealth and Humana may be just the beginning. Other insurers, including those in the private market -- Blue Cross Blue Shield of North Carolina, for example, has lost around $400 million on Obamacare plans -- could follow these national insurers to the exit.
This is when things get particularly dicey. If insurers head for the exit, it'll leave less in the way of competition, giving those few insurers who have thrived more leeway to hike their prices even more. But if insurers get their way with premium increases, then consumers may have more choice, but they'll still be paying higher, potentially unaffordable prices. It should be noted that the vast majority of Obamacare enrollees receive subsidies, which may help offset a large portion of any premium hike passed along to the public. But any hikes would likely keep many uninsured Americans on the sidelines.
Obamacare still needs to survive the election season (every remaining candidate, save for Hillary Clinton, wants to repeal and replace Obamacare), and even if it does, its future is looking increasingly uncertain.