October 31, 2013 and the Perfect Storm of the Super Sick Swarm

There is a perfect sick storm forming in the ObamaCare exchanges, and like the devastation from Hurricane Katrina and super storm Sandy, the government will be asked to pick up the tab with a bailout for insurers.

There are many elements that make up this super sick swarm, but essentially is comes down to too many sick and too few healthy in the exchanges.

First, the states where exchanges are actually functioning are seeing a trend that is alarming the insurance industry widescreen, which is that the vast majority (between 64 to 96 percent) of those getting health insurance in those state exchanges are choosing Medicaid, not ObamaCare designed, mandated and overly expensive health insurance.

See this CBS News story, starting around the 45 second mark:

(Ed Morrissey of HOTAIR, also discusses the massive adverse selection and death spiral issues for the exchanges in this post, which is where I found the CBS News story above.)

For years, many have been predicting the demise of the ObamaCare exchanges due to adverse selection creating a death spiral.

The problem was simple, proving it.

Now that some state exchanges are operational, this Medicaid trend means that the relatively healthy uninsured are joining Medicaid in droves. (I say relatively healthy uninsured because it is an actuarial fact that the newly insured have pent up health demands and cost 20% to 30% more during their first year of being insured, than a person who has been insured and simply switches plans. Then, of course, the income levels of those signing up for Medicaid do usually mean more demand for health services.)

Put it this way, among the population that does not include the healthy who are now insured, what we know about the state exchanges that are working and signing up the uninsured, is that the most healthy of the uninsured population is signing up for Medicaid.

So, what is happening to the healthy insured who are losing their current plan? If they sign up for the ObamaCare exchange, all should be fine.

One young and healthy woman featured by CBS News in LA, Natalie Willes explained that the plan she liked was being cancelled and “replaced with ten new plans that were going to fall under the regulations of the Affordable Care Act.” (She is one of 500,000 in California who can’t keep her plan.)

As she explained, “the most similar plan that I would have available to me” is awful, and expensive.

Her old policy cost $199 a month, with a $1,500 deductible. That was cancelled by Kaiser Permanente.

Her new option that she said falls “under the regulations of the Affordable Care Act” costs $278 a month, her deductible is $6,500, and all of her care after that would be covered only 70%.

(Obviously, she is one of the young invincibles who cannot buy an HSA qualified plan. The plan she describes, despite the high deductible, is NOT an HSA. She can’t open an account to offset the new risk she is taking with a higher deductible, nor does the premium price allow her to use money that was going to the insurer, to fund the account instead.)

ObamaCare supporters like to think of the ObamaCare exchanges as the equivalent of health care heroin, once the subsidies start, the insured is hooked for life. In fact, I think the prices and plans available under the ObamaCare exchanges are more like financial itching powder, which will slowly drive the insureds to financial distraction, and likely to drop the plan, assuming they sign up in the first place.

This is a real-life example of what choices are being faced by the young and healthy and previously insured in California, and you can watch the CBS News interview below to hear Natalie Willes explain it herself:

But wait, there is more on the exchanges attracting the super sick swarm, this from Dr. John Goodman:

Death spirals can also happen in an unregulated insurance market. It can occur, for example, if insurers offer to renew coverage indefinitely without adjusting individual premiums for changes in health conditions, while the enrollees are free to leave and find cheaper insurance if their health condition is better than average. (See the description here and note that “change of health status insurance” would eliminate this problem.)

Why is this topic important? Because the ObamaCare exchanges are in danger of experiencing death spirals. The most obvious reason is the difficulty of enrolling. Unless things improve, only the sickest and most desperate customers will persist long enough and hard enough to successfully enroll, while the young and the healthy will find better things to do with their time. As Yuval Levin explains:

People who are highly motivated to get coverage in a community-rated insurance system are very likely to be in bad health. The healthy young man who sees an ad for his state exchange during a baseball game and loads up the site to get coverage — the dream consumer so essential to the design of the exchange system — will not keep trying 25 times over a week if the site is not working. The person with high health costs and no insurance will.

Even if the glitches get fixed and the exchanges operate as smoothly as originally envisioned (buying insurance was supposed to be as easy as buying an airline ticket at Travelocity), ObamaCare faces a triple whammy that almost no one is paying attention to.

Here are the problems:

  1. State risk pools and the ObamaCare risk pools are about to officially close and dump their high-cost enrollees on the health insurance exchanges.
  2. Both public and private employers are about to dump their retirees on the exchanges.
  3. Employees who are trapped by job lock will leave their employer plans and head toward the exchanges as well.

In all three cases, people with above-average health care costs will be attracted to the plans in the exchanges and odds are they will go for the gold and platinum plans while they’re at it — because this insurance will look cheap, compared to their expected health care costs.

 

In other words, in addition to the problems that the current mass Medicaid enrollment through the exchanges poses for the actuarial science of the ObamaCare exchange, you can add the entire population of every state’s high risk pool, retirees who are not old enough for Medicare, only the really sick who really need health insurance now braving the headaches of the website, phone or paper applications to sign-up, plus, add those too sick to leave their current employment for fear of losing their insurance.

Given all of the above, Goodman, again, is worth citing: “Before going on, let’s stop to reflect on how monumentally stupid the designers of ObamaCare were in even allowing the possibility of what is about to happen.”

You all may recall that the Obama Administration cancelled the high risk pool for ObamaCare shortly after the law passed because of the massive and growing cost associated with it. Those who were in that risk pool are now seeking coverage in the exchanges, and will continue to seek coverage under the guaranteed issue provision: everyone is issued insurance.

There is this sense that the subsidies for insurers are untouchable under ObamaCare, this is simply not the case. This, from the Wall Street Journal, “Another ‘Affordable Care’ Sticker Shock Looms, Cost-sharing subsidies are subject to sequester. Guess who foots the bill?”

“Some have claimed that the sequester “exempts” ObamaCare’s subsidies from spending reductions. That is only half true. The Budget Control Act does exempt from sequestration the premium subsidies for households with incomes up to 400% of the federal poverty level ($94,200 for a family of four) and that meet other eligibility criteria.

But other ObamaCare subsidies, paid directly to insurance providers on behalf of eligible beneficiaries, are subject to the sequester—namely “cost-sharing subsidies.” These include subsidies for households with incomes below 250% of the federal poverty level ($58,875 for a family of four) to reduce copayments and deductibles. They also include subsidies to reduce out-of-pocket expenses for households with incomes up to 400% of the poverty level.

The Obama administration has acknowledged that the cost-sharing subsidies are subject to sequester reductions. A May report from the White House Office of Management and Budget estimated that the sequester would reduce the subsidies by 7.2% in fiscal year 2014. That amounts to a $286 million reduction through next September—the first nine months of ObamaCare.”

Which brings us to October 31, 2013, the date insurers must declare their intentions to the U.S. government about whether they are going to participate in the federal run exchange and/or which specific state exchanges.

Those insurers, who met last week at the White House, no doubt were being given assurances about the “stabilization fund” and how the Federal Government will protect them from massive losses by tapping into that fund, or, that the federal government could assess those insurers who made a profit and give it to those insurers who took a loss, to make them whole.

The problem is the $10 billion available from the stabilization fund is simply not enough money to make up for the perfect storm of the super sick swarm, and the Medicaid enrollment numbers re-routing the relatively healthy, the sick being the only ones braving the website to sign up, along with the other key three points Dr. Goodman makes above, means that the only way the Federal government can make the insurers whole — those insurers who agree to participate — is to appropriate a massive bailout for insurers by passing a law through Congress to do so.

Therefore, given the likelihood of an ObamaCare Insurance Company Bailout passing the U.S. House of Representatives is less than zero, the insurers should understand that agreeing to participate in the ObamaCare exchanges means no bailout.

The message to the insurers is relatively easy to write: you will have to act like a normal company and take your financial losses without counting on the government to bail you out, regardless of the assurances you have been given by the White House. (Given that new money will have to be appropriated, the voice of Congress needs to be weighted too.)

Insurers who rely on the taxpayers bailing them out think politics and crony capitalism are their salvation, not insurance economics and actuarial science.

The insurers have a choice to make by October 31, 2013 (days from now) and it will be very interesting to see what they decide.

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