The typical rosy Democrat narrative on Obamacare highlights the decline in uninsured Americans as evidence of its great “success” while conveniently ignoring the fact that most of the “newly insured” are actually coming from the expansion of Medicaid. The fact is that Obamacare is a debacle and is on the verge of collapse (see our previous post “Obamacare On “Verge Of Collapse” As Premiums Set To Soar Again In 2017“).
Our reasoning is quite simple and is the same reason Obamacare was doomed from the start. As we’ve pointed out numerous times in the past, the true downfall of Obamacare will be in its inherent “adverse selection bias.” “Sicker/older” people have every incentive to enroll while “younger/healthier” people, the ones that were supposed to subsidize everyone else by buying policies they didn’t need, are choosing to simply pay their penalties instead. So what you’re left with is a pool of “sicker/older” people who consume a massive amount of healthcare but whom don’t pay “their fair share” because Obamacare specifically caps the rates that can be charged to the “sicker/older” people at 3x the rates charged to “younger/healthier” people (who cares if they consume 20x more healthcare…3x just sounded about right).
And as a recent article from Bloomberg confirms, the negative impacts of “adverse selection bias” are playing out in insurers’ financials. Per Bloomberg, the major U.S. insurers are set to lose roughly $2BN on Obamacare in 2016. UnitedHealth has announced they lost $850mm on Obamacare in 2016 while Aetna, Anthem and Humana are expected to lose about $300mm each.
Obamacare advocates had hoped that big government subsidies to consumers would persuade healthy people to sign up for the ACA plans. But the policies have largely been taken out by older, less healthy people who are more expensive to insure. “What we are left with … is a highly subsidized program for relatively low-income people,” says Dan Mendelson, the CEO of consulting firm Avalere Health. “We’re not getting to the broader vision of a robust private market structure that enables a broad swath of Americans to purchase their insurance.”
In the end, the fate of Obamacare boils down to simple math. Each person that signs up for insurance has some expected present value of future healthcare consumption…believe it or not the insurers are pretty good at calculating these values. Insurers agree to post significant sums of capital to underwrite those future healthcare costs but expect a return on that capital. Now, in theory, the insurers don’t really care whether premium dollars come from the “sicker/older” people or the “younger/healthier” people so long as the aggregate dollars collected meet their minimum return on invested capital thresholds. That said, with rates capped on “sicker/older” people and the absence of “younger/healthier” people signing up, there simply aren’t enough dollars in aggregate being collected to provide that return to insurers.
So, insurers are left with 2 options: (1) pull out of Obamacare or (2) implement massive premium hikes. Well, turns out they’re actually doing both.
Per Bloomberg, UnitedHealth has announced plans to exit 31 of the 34 states where it currently offers ACA policies, Aetna is dropping 11 out of 15 states and Humana is reducing it’s offerings to just 156 counties down from 1,351 a year ago. Meanwhile, insurers are also hiking premiums by 24%, on average, for the remaining states in 2017 (see our previous post: “Obamacare Sticker Shock: Average 2017 Premium Surges 24%“). Despite Obama’s promise that Obamacare would increase options and lower costs, it is, in practice, doing the exact opposite as Cynthia Cox of the Kaiser Family Foundation points out that “as many as a quarter of all U.S. counties, mainly in rural areas, are at risk of having just a single insurer for next year.”
On Aug. 15, Aetna said it will stop selling Obamacare plans in 11 of the 15 states where it had participated in the program, reversing its plan to expand into five new state exchanges in 2017. “The exchanges are a mess as they exist today,” says Aetna Chief Executive Officer Mark Bertolini. “They’re losing a lot of money for a lot of people.”
Actually, there was also a 3rd option proposed by insurers to cut ACA losses. Insurers also attempted mergers as a way to reduce costs and alleviate some of the profitability pressures inflicted by Obamacare but Obama’s Justice Department isn’t too keen on the idea. Per Bloomberg:
Insurance companies were hoping that a wave of mergers would help them cope with ACA-related red ink. In July 2015, Aetna struck a deal to buy Humana and Anthem agreed to buy Cigna. But the U.S. Department of Justice sued to block both transactions, saying they’d harm competition. “The synergies from the two mergers would have subsidized a lot of losses,” says Ana Gupte, an analyst at Leerink Partners. “That could have helped them manage some of the pressure they’re seeing on the exchanges.”
Meanwhile, the media is now starting to spin a narrative that Aetna CEO, Mark Bertolini, effectively attempted to blackmail antitrust officials over the approval of his proposed merger with Humana. Per another report from Bloomberg:
Aetna Inc. warned antitrust officials more than a month ago that it would pull out of Obamacare’s government-run markets for health insurance if the U.S. attempted to block its $37 billion merger with Humana Inc.
In a July 5 letter to the Justice Department from Chief Executive Officer Mark Bertolini, Aetna said that challenging the merger “would have a negative financial impact on Aetna and would impair Aetna’s ability to continue its support” of plans sold under the Affordable Care Act. That would leave the insurer “with no choice but to take actions to steward its financial health.”
“If the DOJ sues to enjoin the transaction, we will immediately take action to reduce our 2017 exchange footprint,” Bertolini wrote. He said that the cost of litigation and debt taken on by Aetna, the need to plan for a breakup fee it would owe Humana, as well as cost savings from a successful deal, would all factor into Aetna’s need to pull back.
“By contrast, if the deal proceeds without the diverted time and energy associated with litigation, we would explore how to devote a portion of the additional synergies (which are larger than we had planned for when announcing the deal) to supporting even more public exchange coverage,” Bertolini said in the letter.
Since when did corporations taking actions to make money for shareholders become a crime in this country?
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