January 15 2015
by Todd Hixon

The Debacle Will Make The Feds More Powerful

[This post first appeared at on December 10, 2013.]

  1. The implementation of has flopped spectacularly. And, recently, the White House shot its other foot when it told 5 million Americans that they can keep their individual policies when, in fact, they can’t, and many in and out of government knew they could not. What does this mean for the ACA[1] and the role of the federal government in healthcare? Ironically, it will only make them more powerful.Secretary Sebelius told us last week that, two months post-launch, is ready to serve 100s of thousands of customers per day. Others have reported, however, that much work remains to connect the site to insurers on the “back end”. Realistically, it will take years to build a system that works well. Key parts, like the small business exchange, will be delayed a year or more. For the next couple of years, coverage of those currently uninsured will be below targets, and health insurers will be bruised by late and inaccurate subscriber information, angry customers, and probably a big adverse selection problem (more on this below).
  2. Segments of healthcare exchange users.

    Segments of healthcare exchange users.

    Moreover, a risky finesse lies at the heart of the ACA’s economics: the cost of healthcare for the less healthy is subsidized by healthy and prosperous people buying relatively expensive insurance. There is a big risk that many of the latter will opt out, and the economics of the ACA will collapse. The diagram illustrates the key dynamic. You can think of the exchange population on two dimensions: higher income (above the U.S. median) or lower, and less-healthy or more-healthy [2].

    Now that exclusion based on prior conditions is ruled out, the less-healthy people will work hard to sign up for health insurance, probably regardless of income level.  And they bring over 80% of claims cost with them [3].

    Many of the more-healthy lower income people are likely to come in as well, because they will receive big, new subsidies. Under ~$31,000 family income (133% of the federal poverty level) buyers are eligible for Medicaid, which is free insurance with no cost sharing, and availability of services is reasonable: primary care doctors in several states have told me that their Medicaid patients have more access to specialists, imaging, etc. than many patients on commercial plans.

    If your family income is between ~$31,000 and ~$50,000 (the U.S. median), your choice is actually difficult. Half or more of insurance cost is subsidized, but insurance covers only 70%-80% of actual medical expenses, and the remaining 20%-30% can be prohibitive relative to dollars available. Primary care doctors talk frequently about patients in these circumstances not getting advanced care that they seriously need because they can’t afford the cost sharing. But, I suspect, many of these people will purchase insurance, because it’s heavily-subsidized, and partial medical care is better than none.

    The big question is what happens with healthy/prosperous uninsured people? Will they come in? Some considerations:

    • Subsidies are smaller for this group, tapering to o% at the ~$95,000 income level. So the net cost is a big number: health insurance costs ~$5,000 for an individual policy and ~$15,000+ for a family-of-four [4].
    • The sanctions that enforce the “Individual Mandate” are not strong: basically 1% of income (in 2014) for higher income people. If you earn $100,000 the sanction is $1,000, compared to the costs shown above. The percentage rate rises to 2.5% in 2016: still only half the cost of an individual policy.
    • Massachusetts, which has been the prototype for the ACA, has an insurance coverage ratio of 98% six years after adoption of healthcare reform. The sanction in Massachusetts is similar to the federal sanction. However, Massachusetts is a high-income, highly-educated, homogeneous state. It is a dangerous to extrapolate Mass to the entire U.S.
    • Healthcare reform in Massachusetts launched in a bi-partisan political environment: driven by a Republican governor with a Democrat-controlled legislature. The health care exchange came up without a debacle. And, outreach to individuals and businesses helped Massachusetts achieve its high coverage rate. The ACA has none of these factors going for it: the politics are toxic, the exchange is stumbling, and these problems, rather than outreach to the uninsured, have dominated communications.
    • The cost of health insurance is rising sharply in 2014. Many corporate plans are experiencing double-digit premium increases coupled with further hollowing of benefits (this is what we saw at NAV). Low-cost “lite” individual policies are cancelled and replaced by policies costing 20%-60%+ more (causing the “I want to keep my old insurance” furor). And, while the plans mandated for the exchanges cover a wider range of services, some of which buyers may think they do not need, they typically leave the buyer exposed to large percentages of the cost of common services. Buyers are just now seeing this as they come to grips with the 2014 plans.

    I expect that a lot of healthy people with incomes between $50k and $100k will not buy insurance on the exchanges. They’ll go without or buy a lite policy (which can still be sold off-exchange) and pay the penalty for not having “creditable coverage”. If they become chronically ill, they can “jump in” by buying better insurance (which is common in Mass). The two-month outage makes this more likely: it’s the perfect excuse to stay on the sidelines. Early returns from exchanges hint at this outcome: most of the purchasers so far have been Medicaid-eligible or people replacing previous insurance that has been cancelled, not prosperous uninsured people coming in from the cold.
    In this analysis is right, chronically-ill people will take money out of the “risk pool”, but many of those who should generate a surplus in the risk pool will not pay in: what insurers call adverse selection. If this happens and is allowed to continue, the system will collapse. The federal government will have to step in and extract money from the healthy/prosperous group and put it into the risk pool in one of two ways: increase the sanction for the uninsured, or use tax revenues to subsidize the risk pool (this is already a feature of the ACA).

    Despite the ACA’s poor beginning, the role of the feds in health care will probably expand. The weak implementation of creates a grave risk that the economic design of the ACA will fail, and the federal government will be forced to act more like a single payer. Is this all a liberal plot to grab power? I doubt it; more likely it’s plain old management failure. There is huge irony here, however. The federal government’s failure to launch the online exchanges effectively is likely to force it to intervene more deeply in the insurance market, and that will ultimately expand its role as payer and rule-maker for U.S. healthcare.



    1. The Patient Protection and Affordable Care Act of 2010, commonly called the “ACA” or “ObamaCare”.
    2. These two dimensions are not fully independent, as lower income people tend to be less-healthy, but for simplicity I have drawn it as a matrix.
    3. “Anatomy of U.S. Healtcare”, Journal of the American Medical Association, Vol. 310, No. 18, Nov. 13, 2013.
    4. Source:

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