Obamacare - The 2017 Realities are Ugly

Do you sometimes look at the world around you and wonder if you're in a nightmare of some kind? I mean, regardless of what side of the political isle you're on, this year's primary season has been one for the record books. Hillary Clinton and the....mmmm.....misstatements about her email. Bernie Sanders, his utopian vision, and his difficulty with math (delegate-wise or tax-wise). Donald Trump and his ego. Wow.

And on top of all of that, we have Obamacare issues. What am I talking about? Well, read on....

WHAT is happening?

From a financial perspective, 2016 has been a very ugly year for Obamacare. And 2017 looks to be even worse.

As you may remember, when the law was passed, there were 23 health insurance co-ops across the country. Since then, 12 have gone bust. A lot more unhealthy people than expected flowed onto their rolls and many of those people had very big claims. Of the 11 remaining co-ops, 8 are thought to be in such poor financial shape that they are projected to fail by the end of this year. Not good. Not good at all.

Furthermore, insurance companies are approaching state insurance commissioners with requests for big premium increases in 2017. Here's a short list:

• Virginia - average 18% increase
• Oregon - average 27% increase
• New York - average of 17.3% increase
• Maine - average 22.8% increase
• Florida - average 17.7% increase
• Washington - average 13.5% increase
• Texas - one insurer is asking for a nearly 60% increase
• Georgia - one insurer, Humana, is asking for a 65% increase
• United Healthcare, the nation's largest health insurance company, says that it lost $475 million in 2015 and it expects to lose approximately $500 million in 2016. As a result, it is pulling out of the exchanges in several states across the country.

WHY is it happening?

The drivers of this healthcare pain are largely a result of two things: (1) the health demographics of the individuals on the exchanges, and (2) the risk/return dynamic of the health insurance business. Allow me to explain.

HEALTH DEMOGRAPHICS
Consider this simple fact: America is the fattest nation on the planet. In a weird way, that's a good thing. Our citizens are not starving. Nevertheless, being over-weight....being obese....being severely obese....is very expensive because of this condition's chronic nature. Our national spend - for this largely self-made condition - ranges from $147 billion to $210 billion a year.

What does this have to do with anything? Well, remember that one of the goals of the Affordable Care Act....Obamacare....is to insure those without insurance. By and large, that means insuring those that are on the middle to lower part of the socio-economic ladder. Unfortunately, that segment of our society is MUCH MORE PRONE to weight problems. As a result, the AVERAGE health status of the entire INSURED population has gotten worse. Simple math says premiums MUST increase if all else stays equal.

RISK/RETURN
In business, there is always a trade-off between risk and return. If the trade-off is positive enough in the right direction, people....business people....will take risk. But when the risk is too high....or the risk is unknown....well, people tend to freeze and decline to engage. And that was a big problem when those in favor of nationalized health care were trying to figure out how to incentivize health insurance companies to support what was being proposed. After all, insurance companies were being told that (1) they had to insure everyone, regardless of health....meaning that some really big claims could be coming their way and (2) participants could change insurance companies from year to year....meaning that healthy, profitable insureds could be leaving said insurance company and unhealthy, unprofitable insureds could stay....in any given year.

To address those concerns, the law put in place three provisions (e.g. Risk Adjustment, Reinsurance, and Risk Corridors) that were designed to minimize the risks to insurance companies. Explaining each is too detailed for our purposes, but just understand that they were designed to limit losses and/or gains to participating insurance companies.  What is of incredible importance to our discussion is the fact that only the Risk Adjustment provision is permanent. The other two provisions are temporary and both expire beginning in 2017.

Now, if your were the CEO of a health insurance company operating on one of the exchanges, what would you do if you'd seen co-ops on the exchanges become insolvent due to claims and if the programs designed to protect you were going to go away next year?

You'd either raise rates or you'd get out, right?

And that's exactly what we are seeing now.

Personal thoughts

With nationalized healthcare, our country is clearly undergoing a transition. In the near term, especially in the individual/family market-place, I don't see how the average costs per patient will fall appreciably. Insurance premiums for the same benefit are going to increase. Of course, consumers don't want to pay more for their insurance....so at least some will opt for even higher deductible plans than they currently have. And that, my friends, is something to watch.

I suspect that you will see a higher level of patient bad-debt - even though many of those patients have insurance - than you have seen before. If you're a private practice physician or hospital, you'll want to pay even closer attention to your cash-flow and further build-up your cash reserve for bad debt. And buyers of medical debt, be aware....and beware.