The Affordable Care Act, or Obamacare as it's best known, has had a bumpy ride since Jan. 1, 2014, when it became the official health law of the land.
On the one hand, Obamacare has worked to lower the rate of uninsured adults in this country to the lowest levels on record. According to first quarter data from Gallup, just 11% of respondents were uninsured, compared to 17.1% in the fourth quarter of 2013, the quarter preceding Obamacare's full implementation. Recently released data from the Centers for Disease Control and Prevention, which also includes Medicare enrollees, shows an uninsured rate of only 9.1%, a new low.
Furthermore, millions of lower-income consumers and families have gained access to medical care through the Affordable Care Act, with 31 states choosing to take federal funds and expand their Medicaid programs. Provisions excluding insurers from rejecting people with pre-existing conditions have also allowed the previously uninsured to get the care and coverage they need.
Conversely, Obamacare has arguably made life miserable for other consumers, kicking millions off their non-Obamacare-compliant health plans and potentially forcing them to seek out new primary care physicians. Consumers are also facing what look to be steep premium increases in 2017 as health insurers large and small attempt to cope with higher medical utilization rates and a generally sicker group of enrollees in the Obamacare exchanges.
But Obamacare was dealt another bump in the road this past week: a lawsuit from a surprising source.
Guess who just sued the federal government over Obamacare
As reported by The Wall Street Journal on Tuesday, Highmark, a health insurance provider under the Blue Cross Blue Shield brand in Delaware, Pennsylvania, and West Virginia, is suing the federal government over Obamacare. "Why?" you ask? Highmark claims that it didn't receive its promised allocation via the risk corridor.
The risk corridor has been a largely unsuccessful component of the Affordable Care Act that sought to encourage new entrants into the individual marketplace by providing a financial foundation if they were to lose excessive amounts of money. The idea was to have overly profitable insurers contribute their excessive profits to the risk corridor pool, which would then be distributed to insurers losing excessive amounts of money on Obamacare's exchanges. The program was only designed to be in place for three years (2014-2016), since that was deemed more than enough time for insurers to correct premium pricing mistakes.
What actually happened was few insurers were excessively profitable in 2015 -- mainly on account of the aforementioned higher medical utilization rates -- leading to the risk corridor program disseminating only $362 million (12.6%) of the $2.87 billion that had been requested by money-losing insurers. The lack of adequate reimbursement is what caused 12 of Obamacare's 23 approved healthcare cooperatives to shutter their doors.
However, it's Highmark's contention that the federal government had pledged to initially cover the difference in the risk corridor program even if excessive insurer profits didn't cover the amount requested by money-losing insurers. Eventually, the federal government backed off this stance and went with a budget-neutral approach to the risk corridor, essentially meaning only the funds pooled from profitable insurers would be dispersed to struggling insurers.
Highmark is requesting the federal government pay it the $223 million that it was promised via the risk corridor, as well as cover interest on the $223 million and its legal fees for the lawsuit. Highmark has received just $27 million via the program to date. According to Highmark's CEO, David Holmberg, "All we're asking is for the federal government to do what they promised."
If Highmark were to win its case, it could open the floodgates for a class action suit against the federal government for the remainder of unpaid risk corridor funds.
An array of concerns
Unfortunately for Obamacare, this latest lawsuit represents just one in a string of concerns for the program. While the headline enrollment numbers look good, a number of internal components of Obamacare aren't up to par.
Aside from the risk corridor failing to live up to expectations, young adult enrollment has been subpar, even with year-over-year improvement in 2016. I suspect the biggest deterrent to getting younger and healthier people to enroll in Obamacare is that the shared responsibility payment (SRP) -- the penalty paid by consumers for not purchasing health insurance -- is simply too low.
I'm sure there are those out there who would argue that this is far from the case, with the average SRP in 2016 expected to be nearly $970 according to the Kaiser Family Foundation. However, an SRP of $970 pales in comparison to the annual costs of purchasing even the cheapest healthcare plan in the bronze category, which can often run $2,500+ for a full year. Even accounting for the potential tax breaks associated with paying healthcare premiums, it's a night-and-day cost difference that's keeping healthier young adults out of the program.
The other issue, which works somewhat hand-in-hand with the risk corridor's shortcomings, is insurers' ongoing losses. Health-benefit providers need to be able to turn a profit, and in order to make that happen insurers could need to enact some very large premium price hikes in 2017. Though the reports are still coming in, insurers in a number of states have requested double-digit percentage increases in premiums in order to make their Obamacare plans make ends meet. While this probably isn't too big a problem for the roughly 85% of Americans receiving partial subsidies for the premium, it could be a big concern for the remaining Obamacare enrollees and those who are still uninsured. Obamacare was expected to entice competition and transparency, using both to keep cost inflation under control; however, it looks as if premium inflation may rise faster than it has in a decade in 2017.
There are also no guarantees Obamacare will survive much past the 2016 presidential election. Though Democratic Party front-runner Hillary Clinton wants to build upon Obamacare's success, presumptive Republican nominee Donald Trump is itching to repeal it and start anew.
Obamacare has some serious questions to answer in the coming months, and both consumers and investors would be wise to pay close attention to what happens next.