The Economic Realities of Obamacare

Obamacare and health care are political hot-button topics, and can very quickly strike up an intense dinner conversation (which I personally experienced earlier in the week). The state of healthcare in the U.S. remains as unsettled as ever, especially with the results of the recent presidential and congressional elections. Healthcare policy remains a hot, messy and complex topic that most people have some opinion on.

My business operates in the healthcare and health insurance space as a facilitator, but I don’t have an agenda or financial motivation in this post. I want what’s best for all, while minimizing the negative impact that will disproportionately hit some. I’m not a healthcare policy expert, just a private citizen with a vested interest who has probably spent a little more time than most on this topic. In terms of biases, I’m a person who generally leans right, believes in market-driven solutions and a limited role of government. But I also believe government can step in with a safety net to support those that that private sector would leave behind. I like Obama personally, and have a mostly positive view of his presidency. Personally, I think it was a mistake to push the Affordable Care Act so early in his presidency, but that’s more a commentary on politics than on healthcare. But enough about me.

Obamacare — Expectations vs. Reality

The goals of Obamacare were noble. The architects sought to extend coverage forall Americans — including those that would have previously been denied coverage because of pre-existing, chronic conditions, and to those who would have been priced out of that coverage because of them. Obamacare also was intended to standardize plans to make them easier to buy (Bronze, Silver, Gold, Platinum), while adding mandated features to protect consumers from what they don’t know (no medical underwriting, capping out-of-pocket maximums, no lifetime caps, no charge for preventative care). The third major cog provided financial support to increase the number of covered individuals, either through health insurance subsidies or the expansion of state-based Medicaid. Lastly, the health insurance mandate, which was demonized by Obamacare opponents, served the necessary to diversify the pool of health insurance consumers.

On the bright side, the Affordable Care Act has helped millions of Americans find coverage who wouldn’t have had it pre-Obamacare. This is a fact that is inarguable. It achieved its primary objective.

However, the secondary benefits that the Affordable Care Act was poised to achieve haven’t come through, and unintended consequences have destabilized the market. Insurance premiums have risen faster in the individual market than anyone expected, and the losses suffered by insurance companies have caused many to exit the market. Several state-based co-ops were started, and ultimately the majority have gone out of business. Co-ops (for example, Health Republic Insurance of NJ) were privately-managed, non-profit health insurance companies, that received collectively $2.4 billion in start-up funding from the ACA that were intended to increase competition and presumably lower prices for consumers. Of the 23 that were created, only 7 of the Obamacare co-ops remain. With traditional carriers like UHC and Aetna exiting the exchanges in 2016, the competition for consumers is almost non-existent. Indeed, why would any company actively compete for an unprofitable line of business? This has resulted in high-cost plans with limited coverage options for consumers.

Why is it out of balance? Insurance premiums from healthier populations off-set some of the costs of covering the sicker populations. So the system needs more healthy people, those who buy insurance as protection in case bad things happen but generally are not heavy users of healthcare. The aforementioned mandate wasn’t strong enough, and the anticipated costs of care were more than expected, and the entire market got unbalanced.

The individual market for health insurance (i.e., those who don’t receive insurance from Medicare or an employer, and thus buy coverage themselves) is not healthy. We’re talking about 15 million people in the U.S. (So if you’re mad about your company’s health insurance rates going up, I’m not talking about you.)

While there are many reasons, I boil them down into two economic drivers:

• Cost Distribution: Not enough healthy people are enrolling to off-set the increased costs introduced into the system by covering less-healthy populations.
• Cost Containment: Costs of health care are still high — and Obamacare hasn’t done enough to stem the tide

Healthcare Cost Distribution

Before understanding the ways that Obamacare redistributed healthcare costs, there’s a fundamental truth about how healthcare costs are incurred. Here’s a data point showing how healthcare spending is concentrated within the population. 50% of US healthcare spending can be attributed to the top 5% of healthcare users (attributed to a government study released in 2012, which is summarized by The Atlantic here). The top 1% of healthcare spenders accounted for 20% of overall healthcare spending. According to that same report, of the top 5% of healthcare spenders, one-third of them are part of the top 5% the next year as well. This is because many patients have chronic conditions, and those patients are inherently more costly to cover. So that’s one of the economic realities of healthcare. Those most in need of healthcare are a disproportionate driver of overall costs.

As mentioned at the beginning, Obamacare’s primary object was to provide coverage to all consumers regardless of medical condition. As my Economics 101 professor used to say all the time, there are not free lunches. To provide healthcare coverage to those with pre-existing conditions, someone else will need to inject the system with dollars. Under Obamacare, some parts would come from government funding and some from cost-sharing between carriers. But the majority was anticipated to come from new pockets of healthy individuals, many supported by subsidies. That hasn’t been happening in the numbers required to make it work.

The result of Affordable Care Act was a redistribution of healthcare costs between players in the individual health insurance market. I’m probably oversimplifying, but there are health insurance payers (i.e., insurance companies), healthcare providers, and health insurance consumers (i.e., patients). Within the consumer base, there are heavy-utilizers and everyone else. This web of payments between parties was turned around as a result of Obamacare.

Where insurance companies used to take profits, they suffered significant losses. In the billions. Some went out of business. Some were sold. And others exited the individual market. The insurers are hurting because the market went quickly against them. Pre-Obamacare, insurance companies had several mechanisms to control their risk of large, high-probability claims: 1) They could deny coverage if you had a pre-existing condition, 2) They could issue a rider to exclude your pre-existing condition, while providing coverage on everything else, 3) They could cap coverage amounts, with annual benefit limits or lifetime limits, 4) They could institute a waiting period before they would cover certain events, 5) They priced premiums higher based on your medical history. (There are more than I listed.) These were many of the reasons that health insurance companies are despised. These provisions tilted the odds in their favor (too much, in my option), while lots of patients in need were left on the outside. Now the tables have turned, and the market-driven decision of many carriers was to exit the market.

On the provider side, an unintended or perhaps unforeseen impact of Obamacare is that Obamacare has been a boon to hospital groups. Here’s one example: According to the Department of Health and Human Services, uncompensated care at hospitals decreased by $7.4 billion in 2014 after Obamacare was put into place. By providing coverage to more people, costs that hospitals used to either write-off or claim as a charitable contribution now get to be booked as revenue and profit (Credit to the NY Times Opinion piece on 11/28/2016 for highlighting this data point.)

On the consumer side, premiums have gone up for the general population have risen. A large percentage of premiums are provided by Obamacare subsidies, which are provided to roughly half of the individual consumers. While consumers with Obamacare plans are shielded on the high-end from medical expenses (through mandated out-of-pocket maximums for plans), consumers are now responsible for more out-of-pocket costs on the low-end (i.e., amounts under the annual deductible, which are usually in the thousands).

Within the patient population, the heavy utilizers of healthcare have benefited with greater care at lower costs than it would have been for them pre-Obamacare. Pre-Obamacare, health insurance companies charged more for coverage based on what they believed your projected healthcare spending would be. Post-Obamacare, price-discrimination based on medical conditions is no longer allowed. Additionally, because healthcare plans have an annual out-of-pocket maximum, heavy users of healthcare have capped liabilities (which comes at the expense of insurers, and indirectly from healthy populations).

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There’s been a shock in the system because of the sheer volume and extent of cost redistributions in a short amount of time. The system is out of balance, and there needs to be a way to get it back into balance without leaving those most vulnerable out in the cold. This will be the challenge for those offering solutions. Here’s the not-so-good news: There’s not going to be a solution that’s fair to all sides. The challenge will be to find the least-bad solution, and then support those who will face the brunt of it (which will probably be patients with pre-existing conditions or economic hardships).

Healthcare Cost Containment

The preceding section suggests that it’s a zero-sum game. But the reality is that there is waste in our healthcare system, and we should be more focused on identifying it. There are also lots of opportunity where competition, which can occur only if there is price transparency and the removal of artificial barriers to competition, can lower prices.

Regardless of how you cut the pie, I think everyone will agree that health care costs in the U.S. are in need cost containment. We spend more per capita and more as a percentage of GDP than any other country. And it’s only accelerating, with healthcare spending rising more than 5% per year, much faster than GDP growth. The reasons why health care is so expensive are too many to count. Among those: Limited price transparency, excessive profit taking (for example, by some pharma companies or hospital groups), unnecessary procedures, lack of medical malpractice reform, rising drug prices (and the failure to negotiate those down, even with free-market measures), administrative waste, and an unwillingness for prudent cost rationing.

Obamacare was never the cure-all solution, but the Affordable Care Act did not do enough to stem the rapid increases in healthcare spending (which to be intellectually honest, Obamacare didn’t create — those issues were **pun intended** pre-existing).

And I’m not demonizing any particular group. Contrary to popular belief, most doctors don’t make as much as they used to. And the doctors who are in the 1% of earners are successful not as doctors, but as business people. (One exception: I would call out the doctors who engage in over-billing, which is a real issue.)

Finally, last point… for the life of me, I don’t understand how if healthcare spending is concentrated towards only 5% of the population, why we can’t do a better job of negotiating down costs, for drugs, hospitalizations, procedures, etc. on a volume discount. This would be the only argument for a government option. I know it’s not that simple, but boy our healthcare spending would come down if we could.

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Big Questions Ahead

Whatever changes come about in the Affordable Care Act as Obama leaves office, the new president and congress will have a lot to cover. These aren’t going to be easy. What is the best way to improve the system, while not leaving the most afflicted behind? How do we make the system affordable for everyone? How do we get full participation from the population, for the betterment of the collective whole?

Government can and should be part of the solution. But government, and politics, is not the only solution. Politicians can argue about whether the healthcare system has too much regulation, or not enough regulation, until the cows come home. There are inescapable economic realities that need to be addressed, either in making improvements in the current Affordable Care Act, or in enacting a new regulation. My bigger point of the post is that there aren’t easy solutions and the huge need for pragmatic approaches to this tough problem.

I hope my long and exhausting post is at least helpful in framing the conversation.

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Future Posts?

There are a ton of topics to unpack when discussing Obamacare, and so I’m not going to delve into all of this in this post. There are future posts on this topic that I’ll want to get to. If you have any suggestions, please let me know.

• Does selling health insurance across state lines (a Republican proposition) actually lower costs (and increase competition)?
• What are the alternatives to Obamacare?
• What incremental improvements can be made to Obamacare?
• How do we reduce overall healthcare spending?
• What is the impact of medical liability reform?