“No, Mr. Bond, I expect you to die”

Last week, Bob expanded on a statement that appeared in RealClear Markets that “the new health coverage will be austere” - yet as Bob points out, that is a radical re-definition of “austere” because ObamaCare will cost a bundle.

The writer at Real Clear Markets went on to point out that the new ObamaCare coverage could become even more expensive because of an insurance phenomenon called “adverse selection.” The article states "If this sort of adverse selection occurs, it will raise costs to insurers. To guard against this, insurers are likely to price the coverage at a premium."

I'm surprised RCM says this.  The statement suggests adverse selection is not likely - iffy - but, if it arises, no problem - the insurance companies will price "at a premium”.

On the contrary, I think adverse selection is very likely and that increasing premiums is no solution.  Pricing at a premium is likely to make adverse selection worse, not better.  I think the administration knows this; I’m certain that the insurance companies know this; I’m surprised that Real Clear Markets does not.

When the buyers have a choice  - as they will under ObamaCare - richer plans always face an adverse selection risk.  That's because the higher premium for the richer plans is an incentive to buy a lesser, less-expensive option, especially for people who believe they are in good health.  Raising the premium for a richer plan increases the incentive to buy a lesser plan.  Therefore raising premiums is likely to make adverse selection worse.  This can eventually produce the so-called death spiral.

Here’s how that could happen. As fewer of the healthiest people buy the richer ObamaCare plans (or as more of the healthiest people drop out) the average health of the remaining ObamaCare insurance pools gradually worsens.   This drives premiums further upward; that results fewer healthy buyers and an even less-healthy covered population; which drives premiums further upward; that results in an even less-healthy covered population; which drives premiums further upward . . . etc.   That's the death spiral.

Under ObamaCare, everyone will have choices to buy insurance (1) thru the exchanges; (2) in the remaining private market if any; or (3) not to buy insurance at all and pay the "tax" or "penalty" (or whatever the administration is calling it today).

Many of the presently-uninsured middle class are young & healthy and have chosen not to buy insurance because of its cost; many of the presently-uninsured poor have not even enrolled in Medicaid.  Will the ObamaCare premium subsidies significantly change those decisions?  At this time, no one really knows, but the underwriter in me says:

(1) Yes, many of the very poor will enroll in an ObamaCare option.  That’s because their premiums will be heavily subsidized.  But on average the poor are less healthy than the general population.  Becoming insured is a good thing for them, and is also likely to drive up the cost of the insurance for everyone in the ObamaCare pool.

(2) No, many who are middle class and on average healthier than the general population will not enroll in an ObamaCare option.  They will choose as they do today – i.e.,the lowest-cost non-ObamaCare option they can find, or remain uninsured and pay the tax or penalty, because that will cost them much less than the ObamaCare insurance premium.  There's little risk in not buying insurance until they need it, because coverage thru the ObamaCare Exchanges will be guaranteed-issue, and must cover all pre-existing conditions.   Covering them only when they have medical expenses also likely to drive up the cost of the insurance for everyone in the ObamaCare pool.

So ObamaCare stands to experience adverse selection either way.  For that reason, "pricing at a premium" is an invitation to the death spiral.

In designing ObamaCare, the administration consulted competent actuaries.  These actuaries fully understand the dynamics of adverse selection.  Why would the feds design a scheme so clearly vulnerable to adverse selection?  I think that question suggests a couple of better questions:  was it the administration’s ultimate aim from the beginning to adopt a scheme that must fail, thereby discrediting the private market and ushering in the remaining alternative – a national, single-payer plan?  Does the administration expect ObamaCare to live?

Percentages

Three questions:

1. Do you know how Obamacare funds the operation of insurance exchanges?
2. Do you know how the Obamacare tax on insurers is paid? 
3. Do you know how Obamacare "limits" the profits of insurers?

The answer is the title of this post - percentages. 

Next question. Do you know what is wrong with percentages in Obamacare? 

Percentages in Obamacare hit the pocketbooks of consumers. What I mean is because of percentages you pay more for insurance - and you will continue to do so under the way Obamacare is set up. It's a sleight of hand used by government to make you think you are getting favorable treatment when reality is you are actually getting royally screwed.

Here's how the percentages work. Under Obamacare's exchanges there is a 3.5% user fee on premiums for all plans. This user fee is to help keep up a robust, easy to navigate website where you can compare plans and purchase insurance. Obamacare's Health Insurer Tax (HIT) is paid by insurers and ranges from 3% to 5% of premiums based on an insurance company market share. Obamacare's Minimum Loss Ratio limits insurance companies by a rule that they have to pay 80% (85% in large employer market) of their premiums on medical costs and can only retain 20% for whatever they want which theoretically minimizes profits.

If all you had read was the previous paragraph you would likely believe that Obamacare protects consumers from greedy insurance companies. But, when you peel back the layers of the onion what you will find will make you want to cry. The tears come because of premiums.

Think about your premiums. How much have they gone up since Obamacare passed? Throw aside the feel good subsidies. The true premiums are still paid to insurers. It's this layer of the onion that matters most. 

Rising costs of insurance in a percentage world are problematic. Especially when the percentage side has no increase in costs of doing business. Look at it this way, the website for Obamacare is set. The number of people using the site has been slightly up (close to flat) the last couple of years. Insurer costs aren't increasing. They aren't adding employees or increasing wages to existing employees at a high rate. In fact, many insurers have downsized. As for the Health Insurance Tax, we all know companies don't pay taxes, consumers do. 

The point is, as costs increase and these percentages stay the same, more of your premiums go to insurers and the government. 

Take this data from an eHealth report on average Obamacare premiums. Every year costs have gone up. Since 2013 what is paid by consumers for the user fee, HIT, and retained by insurance companies has jumped by 99%. The average amount of premium per consumer to fund these three things has gone from $650 per year up to $1297 per year.

Numbers don't lie. You are paying big time to the government and health insurers for taxes, fees, and margins. None of these things pay a dime for your actual health care. That is what I consider one bad raw onion.

Some Very Strange Bedfellows

The New York Post reports today (June 12, 2013) that the Freelancers’ Union is seeking relief from Obamacare, and the State of New York may be about to help them.

It seems the Freelancers’ Union – which in 2012 was granted $341 million in Federal loans to set up an insurance CO-OP under Obamacare - has run into a big problem. It’s figured out that Obamacare will seriously damage its insurance business.

Will this damage come from “unexpected” problems encountered by an expert insurance organization blindsided by completely unpredictable insurance requirements?    You can believe that if you like, but I think you would be wrong.

According to the Post, the Freelancers’ Union says that Obamacare’s “onerous regulations and taxes will burden its innovative health insurance model for the self-employed with enormous added costs.”  In other words, Freelancers’ problems are the same Obamacare problems that businesses and other insurance companies have been warning about for the past four years.   They were neither unpredictable nor unexpected.

So what does Freelancers’ want?  It wants authority from the State of New York to convert its health insurance model to a self-funded model.  If it provides self-funded coverage rather than insurance it becomes an issuer of “ERISA Plans” that won’t be subject to Obamacare.

Freelancers’ Union states that Obamacare will cost its members “$38 million a year” which translates into “a per-person premium load of $178 a month”.  That’s the additional amount that would be needed just to pay for the Obamacare load.

Is that devastating?  Well if it is, wouldn't Obamacare be equally devastating to the other insured small group plans in New York – and all across America?

Yet Freelancers’ Union asks the State of New York to step in and spare their successful small-group insurance plan from the devastating effects of the President’s ‘affordable’ health law - but not to spare any OTHER insurance plan from that law.

And say, isn’t it ironic that the Freelancers Union has taken up the conservative cry that Obamacare will hurt more than it can help?  Obamacare is creating some very strange bedfellows.

Is there a future for private insurance exchanges?

The collapse of most Obamacare exchanges has captured the attention of the media in recent months.  This may explain the lack of news about private exchanges.  Private exchanges have not exactly caught fire, but they have not disappeared either.  The failure of Obamacare exchanges may increase calls for a national medical welfare program.  Ironically that same failure increases the future potential for private exchanges.  So even as Obamacare exchanges continue to collapse, work to develop and market private exchanges continues and the future of those private exchanges remains hazy.  Some factors:

(1)  The Massachusetts insurance reform enacted in 2006 is widely considered the model for Obamacare.  This legislation established a state-run insurance exchange called “the Connector”.  Just this August, The Society of Actuaries released an extensive report on the impact of the Massachusetts legislation on insurance markets, pricing and profitability.  This report finds in part that:

“Despite its success in the subsidized market, the Connector, managed by the Massachusetts Health Insurance Connector Authority, enrolled few insureds in the unsubsidized nongroup and small group markets and was unable to exercise much influence on the merged market.”

https://www.soa.org/.../research-2016-ma-health-insurance-reform.pdf  (Copy & past the link to your browser)

 Apparently a different, more effective tactic is needed to reach the “unsubsidized markets”.  That is consistent with the experience of the failed Obamacare exchanges.  Do privately-run exchanges offer a more effective tactic for the unsubsidized markets?  Perhaps – provided the federales will allow a private-sector solution.    

(2)  National consulting firms such as Mercer, AonHewitt, and Willis Towers Watson are investing in their own private exchanges.

This move appears a good fit with their existing business strategy of expanding admin support to employers – e.g., member service functions, 401(k) administration, annual enrollments, etc.  These firms clearly see a future in private exchanges.

(3) Large insurance companies, e.g., Aetna, United, and Anthem, that initially expressed interest in building their own private exchanges, seem to have become less enthusiastic.   I’m guessing they’ve lost appetite for gearing up to administer multiple other companies’ coverage.  Isn’t it much simpler for the insurer to participate in one or more third-party private exchanges and sell its own individual policies there?  I wonder if they aren’t asking themselves, what’s the point of building a proprietary private exchange?

So questions remain following the Obamacare failures – which, don’t forget, go beyond financial.  Their implementation and operational failures have been painfully documented.  Most states declined to set up their own tax-eating, money-losing, hard-to-run, over-regulated, politicized Obamacare exchanges.  The federales have proved they don’t have the resources to operate exchanges even as they proved ignorant of insurance management and eager to over-regulate.  Can private exchanges ever overcome the Obamacare record, and become attractive for the majority of middle-income Americans? More specifically 

        (a)  Will large employers gravitate toward private exchanges?

        (b)  Will employers that subsidize their employees’ group coverage today, continue to do so in private exchanges?   

            (c)  Will insurers decide to participate in private exchanges?

         (d)  Provided employer subsidies continue, will middle-income employees prefer coverage available thru a private exchange, vs. the choices available to them now?      

         (e)  Will the federales expand Obamacare subsidies to include private exchanges, not just Obamacare exchanges (if any)?

I think the best answer for now is “Reply hazy, ask again later.”

 

Fool me once, shame on you. Fool me twice . . .

One of the reasons Bernie Sanders’ sun is rising - and Hillary Clinton’s is setting – is their difference over government-paid generic medical insurance.  (Which, of course, they still call “healthcare”).

Bernie favors a single-payer arrangement he calls Medicare for All. This is popular among the self-described progressives in the Democrat Party, and among the American left. It’s popular because its leading advocates – e.g., Bernie – promise it will give everyone better coverage, will cost less, and will be easy to use. What’s not to like?

Contrast Hillary who favors fixing Obamacare, or at least she says she favors fixing Obamacare.  Her major objection to Bernie’s plan is that Medicare for All would cost too much, and therefore require even higher taxes to pay for it. That’s less popular among progressives/leftists, partly because Obamacare has become so unpopular, and partly because Hillary does not promise wonderful things for free.  It’s also less popular outside Hillary’s orbit because of the growing recognition that Obamacare already costs too much and is probably not fixable.  Anyway, for the first time in almost 25 years, Hillary does not hold high ground on medical insurance - and the polls reflect that.

There’s an interesting back story here.  At least two states have already tried to design workable single-payer plans for their residents. Both gave up because of high cost. One of them is Connecticut, the other is Bernie’s own Vermont.

In 2007, Connecticut shut down its state single-payer project because it would have cost more than the entire state budget.

And in 2014, Vermont shut down its state single-payer project. With Bernie’s help, Vermont had received $45 million federal funding to design such a program for the Green Mountain People’s Republic.  Vermont hired Top Men for the design group, including the notorious Jonathan Gruber from MIT.   But Vermont shut down its project because it would have cost almost as much as the entire state budget.  Vermont supporters of single-payer didn’t like that because, they claimed, savings would far outweigh the costs.  Ever hear that before?

This backstory is not exactly secret, but hasn’t been much reported, either.  During 2016, the candidates’ differences over government-paid generic medical insurance will likely become much more prominent.  Superficially Medicare for All does look better than Obamacare, I think mainly because Obamacare is so dysfunctional.  Let’s not forget Obamacare was deceptively sold to America by the progressive/left wing of the Democrat party; the Democrat-majority Congress passed Obamacare without a single Republican yea in either the House or Senate; and then we found that all along, the progressive/leftists consider Americans “stupid”.

My opinion?  None of the promises progressive/leftists make about Medicare for All – more coverage, for less cost, and simpler administration - survive thoughtful analysis from experts other than the partisan progressive/leftists themselves.  Technically, there are huge flaws that cannot be ignored.  Politically, fancy promises about how great it’s gonna be, have been made before by the same people, and spectacularly failed to materialize.  Exhibit A:  Obamacare.  Fool me once . . . etc.

Cost Sharing Reductions: It's Not Sabotage. It's Not a Bailout: Part 1

Congress and the media are hyperventilating over the Trump Administration announcement that they will end Cost Sharing Reductions (CSR). The result is news feeds full of over-exaggeration, misrepresentation, blatant lies, and name calling. One side of the political aisle calls it sabotage. The other says it's an insurer bailout. Reality is, it's neither.

Before I explain, let's first start by answering what is the cost sharing reduction (CSR) and how does it work? It's quite simple when it's not used as a political football. But, like everything in our political world, the more the bureauweenie can confuse the consumer, the more reliant the consumer becomes on the bureauweenie.

Obamacare has two methods of "financial assistance" written in to the law to help low income individuals. The first method is premium tax credits to help pay health insurance premiums. Those have been funded and have nothing to do with the second method, CSR's.

Under Obamacare, insurance companies are required to offer people making between 100% and 250% of the Federal Poverty Level Silver level insurance plans that have lower deductibles, copays, coinsurance and out-of-pocket-maximums than the standard Silver level plans. Pricing for these plans are equal to Silver level plans that don't include the CSR's. In exchange for offering these better benefits to low income individuals, Obamacare made a promise that they would refund insurers for the claims they incur between the better benefit Silver CSR options and the standard Silver plans.

Here's an example: three 42-year old's who live in the same zip code that purchase insurance through the exchange. Each has a different income. The first has an income of $19,500, the second has an income of $30,250 and the third an income of $55,000. The actual monthly cost of the lowest priced Silver plan is $248.57. It includes a deductible of $6,100, an out-of-pocket limit of $7,000 and has an office visit copay at $30.

The first person has an income below 250% of the poverty level and the other two don't. So, under Obamacare the first person is eligible for a premium tax credit (subsidy) AND a Silver plan that has better benefits (CSR). His benefits include a $1,100 deductible, an out-of-pocket limit of $2,000 and an office visit copay of $15.

The second person has an income just above 250% but below 400% of the poverty level. Under Obamacare he is eligible for a premium tax credit (subsidy) but not a Silver plan with CSR. He will pay less than the full premium price but have the standard plan with a $6,100 deductible.

The third person is over 400% of the poverty level. He pays full price for the standard insurance plan.

Now that we understand CSR's let's explain why it's not a bailout or sabotage.

It's Not a Bailout

When insurers price their plans they are based on the standard plan. This is where the $248.57 premium comes from. The insurance company math nerds (actuaries and underwriters) develop rates based off assumed risk. This risk does not include the difference between the standard plan benefits and the better plan benefits available to those between 100% and 250% of FPL. The Federal Government -through Obamacare - agreed to reimburse insurers for these claims that they have not financially accounted for.

The amount the insurer hasn't accounted for is the difference in deductible, copay, coinsurance, and maximum out-of-pocket the consumer is liable for. Let's assume all three guys from above have a claim for $25,000. The lowest income guy is only liable for a maximum of $2,000. The second and third guys would be liable for $7,000. Insurers priced for $7,000 out-of-pocket knowing that Obamacare promised to pay the difference in claims between the standard plan limit and the better benefit limit due to Cost Sharing Reductions. In this scenario the difference in the first guy's liability and the standard liability ($7,000-$2,000) would be submitted by the insurer to the Government for reimbursement. It's also important to note that if the first guy is healthy with no claims the Government doesn't pay the insurance company at all.

As you can see, this isn't a bailout to insurers. It's reimbursement for claims they incur that weren't factored in to insurer pricing. Under Obamacare the law states that CSR's are a financial obligation of the Federal Government to insurers. Failure to pay represents a default of our Government.

We explain how it's not "Sabotage" in Part 2.

Speak Softly and Carry a Big Stick

Elimination. This is what government is about when it comes to dealing with competition. The latest example comes via a new rule for Obamacare. If government speaks quietly enough you won't notice when they try and slip a fast one by you. If you do notice, they have that big stick ready to go so when competition doesn't fall in line they can smack the crap out of the competition with it.

That is what HHS did today when they issued a proposed new rule on short term medical insurance plans. The rule revises the definition of a short-term plan and will limit these plans to only three months and not be renewable.

On the surface this isn't a big deal to consumers. Primarily because short-term medical plans were never actually renewable. They are medically underwritten and don't meet the criteria of being Obamacare compliant. So when the policy ends it must be medically underwritten again before being issued. And, because they aren't Obamacare compliant people who purchase these plans are also subject to the individual mandate tax.

Therein lies the government's problem. Because these plans aren't compliant and include medical underwriting they are much less expensive than the Obamacare plans one is being coerced to buy through the marketplace. In some cases they are so much cheaper that a healthy person can pay the premiums plus the tax and it's still financially better for them than buying an Obamacare plan.

This leads us to the real reason government wants these plans gone. They see the death spiral of the individual market accelerating. Costs of insurance are exploding - including those cheap high deductible Bronze plans. Logically the only way government knows how to try and reverse this course is to force the healthy into the pool. By eliminating short-term plans and forcing consumers to the marketplace they believe they will strengthen the Obamacare risk pool.

Obamacare is a crap sandwich. Right now there are other sandwiches out there. Among them are limited benefit plan sandwiches, Christian Ministry sandwiches, and short-term medical sandwiches. One by one the government will eliminate your choices of sandwiches. Pretty soon all you will have left is the crap sandwich - and once you take a bite you'll find that it will leave a bad taste in your mouth.

Suspend. Delay. Postpone. Repeat

The cost of Obamacare just got bigger and since history is a strong indicator we should be prepared for huge deficits to cut into the President's signature disaster. The vote by Congress to pass the annual spending bill contained three items of interest tied to the revenues that were supposed to be coming in to pay for a large part of the Not So Affordable Care Act.

By postponing the Cadillac Tax from 2018 to 2020, pausing the Medical Device Tax for 2017 and 2018, and also pausing the Health Insurance Tax for 2017 the federal government is reducing revenues to fund Obamacare by $32.1 Billion. Some are saying so what, in government world that's pennies. This is correct in the short term, but given the track record of Congress pushing things off, the long term of not letting these expire or removing them altogether will be financially irresponsible.

How financially irresponsible? In reviewing the 10 year Obamacare costs based on the December 2nd release from the Office of Management and Budget regarding H.R. 3762 and the CBO's Budget and Economic outlook for 2015 we found a significant potential for lost revenue based on these three taxes being eliminated.

The smallest of the three is the Medical Devices Tax. The two year pause that has already passed will cost $4.1 billion. Should Congress repeal this tax - which has bipartisan support - would reduce revenues by $23.9 billion over ten years.

The Cadillac Tax is the one receiving the most attention. This tax will hit more employers over time and the primary revenue generator is new tax dollars on employee compensation. The CBO can only score on the garbage in, garbage out rules. Because Congress is full of garbage, they assumed that as the tax kicked in employers would reduce benefits and therefore lower premiums. In turn they assumed that employers would replace this lower premium with a dollar for dollar match in compensation. The end result is higher income tax revenue on taxpayers. The cost of delaying this for two years is $13 billion. Many in Congress want this tax fully repealed. Doing so would reduce Obamacare revenues by $149 billion over ten years.

The sneaky one is the Health Insurance Tax - or as we refer to it - The HIT. This tax bill is sent to health insurers based on their market share. It has flown under the radar because it was sold as a tax on insurance companies. Nobody likes insurance companies so taxing them would seem to be a good thing. But if you look at your insurance bill you will see that this tax is built in to your premium. This tax being paused for a year will lower revenues by an additional $13 billion. Continuing the delay for ten years will cost $159 billion - even more than the Cadillac Tax.

The total cost over ten years of eliminating these three taxes will decrease Obamacare revenues by $331,900,000,000. This makes up more than half of the revenues Obamacare is supposed to generate over that same time period.

We already knew that Obamacare was financially unsustainable. Adding these reductions in revenue to the fold will accelerate it's death. And that might be a good thing.

Obamacare CO-OPs - the NeverEnding Story?

News came last September of the collapse of Health Republic New York, the nation’s biggest nonprofit CO-OP health insurer created by the Affordable Care Act.  It was “ordered to shut down as is reels toward insolvency, disrupting coverage for more than 200,000 New York State residents.”  But the disruption in coverage is only part of the story.  Health Republic’s collapse has also created financial domino effects across the state, for hospitals and doctors - and for other insurers.

“Hospitals and doctors told New York Senators Wednesday [January 6th] they’ve got $200 million or more in unpaid bills because of last year’s financial failure of insurance cooperative Health Republic,  and they want the state to step in.”

"UnitedHealth Group Inc., the largest U.S. health insurer, said its rates for Obamacare plans in NewYork may be too low because the failure of a competing insurer last year might lead to shortfalls in payments designed to stabilize Obamacare markets – payments they counted on when setting their 2016 premiums. "

Additional serious losses in NY in 2016 increases the likelihood that United will pull out of the State Exchange for 2017. Of course United's participation in all other Exchanges for 2017 is in doubt and the doubt just got bigger.  United’s CEO Stephen Hemsley now says that participating in the Obamacare individual Insurance Exchanges “was for us a bad decision”

Most NY insurers, not just United, say that the New York State rate-review process failed.  The New York State Insurance Department disagrees.

UnitedHealth requested a 22 percent rate increase for individual Obamacare plans. Instead, state regulators allowed the company to boost rates by 1.65 percent. The company also sells business under the Oxford brand, which requested a 5.32 percent rate increase,and was forced instead to cut rates by 12.25 percent.

But Health Republic was able to lock in rates much lower than its competitors, NY's Depatment of Financial Services health insurance honcho Troy Oechsner claims that “we did the right thing at the time, given the uncertainty of the market.”

Was this simple regulatory failure?  Or could it have been deliberate political maneuvering of rate approvals to show that Obamacare really reduced medical insurance premiums?  And to help Health Republic capture significant membership so this leading Obamacare CO-OP would be hailed as a “success?”

If it turns out political maneuvering is even a little bit true, my guess is that there are political influence peddlers from Washington to New York (and insurance dept officials in New York, too) who should lawyer up and start worrying about significant prison time.

Note:  there are two other co-ops sharing the "HealthRepublic name" - in New Jersey and Oregon - but they're not affiliated with New York's version and aren't affected in this particular instance.

However: all three were set up by the Brooklyn-based Freelancers Union, about which we've written extensively - if not favorably - in the past.