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It’s the sound of money being sucked into the healthcare system.

Here Come The Penalties

Penalties for individuals not having health insurance were small in 2014, increased in 2015, and take full effect in 2016. You pay the maximum of the two penalties.

Healthcare spending is draining disposable income from the economy.

For some historical perspective, here is the growth in healthcare spending expressed as a percentage of Gross Domestic Product

1960 5%
1982-1986 10%
1993-2000 13%
2009-2014 17%

A number of factors account for the increase in healthcare spending.

  • The aging of the population
  • Development of sophisticated medical technologies
  • Development of new drugs
  • The enactment of Medicare in 1965
  • Growth in private insurance
  • An entitlement mentality

Here we have an aging population with a propensity to consume medical services, an industry that works to develop new products, and third-party payer systems that disconnect the recipient of services from the obligation to pay from personal assets.

Purchase of health care services is disconnected from the ability to pay, increasing utilization.

The entitlement mentality exacerbates the effect of the factors promoting growth in spending on medical services. To get a sense for how disconnected the delivery of healthcare service has become from the ability to pay, here are figures for the covered population from the Center for Medicare and Medicaid. The purpose of indexing Social Security benefits was to preserve the purchasing power of retirees, the wrong inflation index is used. Younger working people have far lower medical costs than retirees.

The figures for private insurance include coverage that is tax subsidized via payment in pretax dollars as an employee benefit. It also includes coverage that is subsidized by tax credits under the Affordable Care Act. Medicare coverage is also highly subsidized, with premiums bearing only 30% of the total cost.

The big increase in healthcare coverage has occurred in the segment of the population that has no ability to pay and is given Medicaid. A similar group is waiting the wings for increased subsidies before purchasing coverage.

“A study by ADP, the payroll processing giant, found a tipping point at which most employees who are eligible for health insurance will buy it: $45,000 a year.”

“Workers making $15,000 to $20,000 a year buy employer-sponsored individual insurance when it is offered only 37% of the time. That rate raises at every income increment ADP studied until $45,000, when it reaches 82% and levels off. Further income gains have virtually no effect on the rate, ADP found.”

“The study was conducted in 2013, before many of the Affordable Care Act’s provisions took effect, but ADP’s recent figures do not indicate significant changes in that pattern…” (Many Low-Income Workers Say “No” to Health Insurance, NY Times, Stacey Cowley, October 19, 2015)

Lower income workers either can’t afford the coverage, or question the value in policies with high deductibles. It’s clear that future coverage gains will only come at the cost of more subsidies. If subsidies are increased for the portion of the population that is not buying insurance now, the expenditure to GDP ratio will get even worse.

Expanding healthcare coverage to non-payers and uninsurable risks has stressed the system and the payers.

  • Uninsurable risks surface… and understand how to game the system.

How would you like to be part of this risk pool?

“Wellmark of Iowa reported that its ACA members are using substantially more services and receiving care for more chronic and critical diseases than anticipated.” According to Wellmark, “135 members who signed up for coverage, received several million dollars in health care services and then terminated their coverage.” Wellmark also said that many people purchased the most generous coverage, used a large amount of services, and then used the special enrollment period to downgrade plans.” (Will there be an Obamacare Bailout of Insurers?, Brian Blase, Forbes.com, November 30, 2015)

The Risk Corridor – Bailout or Not?

The government attempted to promote participation in ACA insurance funds by behind the scenes subsidization and risk shifting. This is example of poor financial control over an entitlement program.

When the Affordable Care Act was passed, it provided for the losses from ACA insurance pools would be entitled to the surplus from pools with better results. This offsetting mechanism was termed the Risk Corridor. The Risk Corridor would only work if: 1) operating losses and gains offset, or 2) the U.S. Government indemnified the insurance companies against losses.

Subsequent federal budget cuts required that the arrangement be budget neutral, meaning that losses would only be subsidized to the extent of offsetting surpluses. Standard & Poors has estimated that for 2014 there would be $362 million of surplus paid into the Risk Corridor against $2.87 billion in losses. (The ACA Risk Corridor will not stabilize the U.S. Health Insurance Marketplace in 2001, S&P Capital IQ, Deep Banerjee, November 5, 2015)

S&P quantified the degree of financial stress in ACA insurance pools by comparing the Risk Corridor receivables to the capital of the insurer. Seven of the top 20 insurers in the ACA market had receivables in excess of 100% of capital. The operation of these insurance pools is dependent on the government changing its reimbursement policy.

Direct subsidization of these risk pools masks the true cost of care. Budget neutrality forces the cost of coverage to come into line with premium charges. Then again, the cost might prove to be unaffordable at the level of service that is being promoted.

The idea of having non-for-profit health insurance co-ops has not worked. The idea was to fund non-profit companies to promote competition in the marketplaces. These companies are subject to the same underwriting risks as commercial insurers, but being non-profits, were unable raise capital. This made their existence tenuous at best.

11 of 24 ACA funded insurance Co-ops will wind down operations this year. Colorado HealthOP, the state’s largest nonprofit insurer is shutting down. The Vermont co-op never got off the ground when it proved to be unaffordable by the state.

Insurers are reluctant to bear the risk of insuring ACA pools without guarantees.

Public risk pools are a black hole until there is an operating history. The health care costs of participants simply either could not be estimated or were uninsurable at a reasonable cost. If the federal government is unwilling or unable to allocate money to make Risk Corridor payments, then the ACA pools will live or die based on underwriting results.

United Healthcare, the nation’s largest insurer, has threatened to withdraw from underwriting in insurance exchanges created under the Affordable Care Act in 2017. This is the kind of posturing that is done when insurers want higher premiums and government subsidies. When insurance companies posture, taxpayers and purchasers of policies lose.

The hold harmless provision in the Social Security Act is forcing a 16% increase in Medicare premiums on 30% of the Medicare population.

The government tries to set premiums to cover 25% of Medicare costs. Premiums are usually increased across the board for all participants, and reflect cost increases and increased utilization by the Medicare population. Unfortunately, the Social Security Act has a provision that prevents anyone’s benefit from being reduced.

A large percentage of Social Security recipients have Medicare premiums paid via withholding from Social Security Benefits. In 2015 the inflation index used to calculate benefits showed no inflation so there was no increase in Social Security benefits. Increasing Medicare charges would have resulted in a reduced benefit, so the hold harmless provision precluded any increase in Medicare premiums. Excluded from this protection are taxpayers with Modified Adjusted Gross Income above $85,000 ($170,000 for married taxpayers), and federal and state government employees not collecting Social Security.

It could have been worse. Initial projections had an increase of 52% for those not covered by the hold harmless provision. What these gyrations indicate is that Medicare premiums need to rise at a rate faster than inflation, and the Social Security Act as it currently exists does not allow for that. Loading premium increases onto 30% of the Medicare population is not a viable long-term strategy.

ACA premiums are increasing at a rate far in excess of inflation.

The average rate increase for the lowest cost silver plan in the 30 largest markets is 6.3%. (Healthcare.gov premiums have bigger increase for 2016, Jayne O’Donnell. USA Today, October 26, 2015). These rate increases will likely continue until the underwriting losses in the ACA insurance pools are eliminated, or until the policies become unaffordable.

High deductible policies don’t work for low to moderate income households because a majority can’t afford the deductible.

From the Report on the Economic Well-Being of U.S. Households in 2014 (Board of Governors of the Federal Reserve System, May 2015, page18):

“To determine individuals’ preparedness for a small-scale financial disruption, respondents are also asked how they would pay for a hypothetical emergency expense that would cost $400. Just over half (53%) report that they could fairly easily handle such an expense. The remaining 47% indicate that such an expense would be more challenging to handle. Specifically, respondents indicate that they simply could not cover the expense (10%); or would rely on one of more means of borrowing to pay for at least part of the expense, including paying with a credit card over time (18%), borrowing from friends or family (13%), or using a payday loan (2%).” People who don’t have the money to pay a $400 bill take a dim view of high deductible polices, viewing premium payments as money down the drain.

Healthcare provider choice is coming at a price… via network restrictions.

Illinois residents can peruse the BlueCross BlueShield Provider Finder to see this. The widely used Blue Choice PPO excludes the top Chicago hospitals (Northwestern Memorial, Rush University Medical Center, and the University of Chicago Medical Center). If you want the best provider choices, bring your wallet.

Recommendations for Consumers

  • Make sure you don’t have any gaps in coverage when losing existing coverage. Coverage is determined on a monthly basis, and penalties are prorated.
  • Stay with existing plans as long as possible. Policies in ACA risk pools are prone to price increases.
  • Be prepared to shop for alternatives. Rate increases are not confined to ACA plans.
  • When moving out of area, check out insurance options in advance. Check the financial strength of the entity underwriting the policy. If the company ceases to write policies in your state, you will be shopping for alternatives.
  • Don’t get blindsided by network restrictions. Identify the healthcare providers you want to use, and make sure they are included in the plan you purchase.
  • If high income, consider not electing Medicare Part B if you have alternative coverage. You don’t pay premium surcharges with private insurance.