Wednesday, April 3, 2013

Obamacare Is Still Dangerous For Democrats

We only have six months until the Obamacare health insurance exchanges are available for enrollments. Most of the provisions of what I call the "Unaffordable Care Act" go into full effect on January 1, 2014.

I think it will be very interesting to see this play out.

As an outside observer who knows a good deal about the health insurance marketplace, I would have serious concerns if I were the Obama administration and the Democrats.  This is one that can't be blamed on Bush, the right-wing Republicans or the Tea Party if it does not go well.  And there are many ways it could go wrong.


There are three big areas where I think things could go very wrong for Obama and the Democrats.

  • Exchange Chaos 
  • Sticker Shock
  • Economic Armageddon

Exchange Chaos

The first question I have is whether the health insurance exchanges will be ready and will function as intended?  I believe there is a good chance that the entire process could be chaotic and confusing for the public.

The fact is that the information technology challenge to establish the exchanges is considerable.  This challenge has become even more pronounced since so many states have decided to forego establishing their own exchange and have delegated that responsibility to the federal government.

Therefore, the federal government is tasked with creating on-line healthcare exchanges in over half of the states.  Those exchanges must be availalble online in less than six months and have interfaces built with the IRS, HHS, SSA, Medicare, Medicaid, Insurance companies and the like. They must be able to indentify the participant and be able to determine that individual's eligibility for coverage based on where they live as well as the amount of federal subsidy for the coverage.  It is a monumental task and if that system is not already being tested right now I don't see how it could operate smoothly.  See this Michael Barone column for a sense of what has to be done from an IT perspectivve.  Here is another Barone column that calls this an impossible endeavor based on comments from a 35-year IT industry veteran.
“Wow, what can go wrong here? Let me assess this based on my years of experience in this industry. The federal government is going to build 50 exchanges, using a data hub that doesn’t exist physically and in fact, the design hasn’t been solidified, and must be accessible to a variety of data processing technologies that range from archaic to old.

Each of the 50 states have different eligibility rules, and with a significant number of states opting out, the federal government now has to learn the intricacies of each state’s Medicaid eligibility models which then scale to different applicability rules for different members of a given family. The thousands of pages of bureaucratic rules that will drive requirements haven’t been completed yet, and those requirements are needed to drive design not only for the application programs, but for the entire processing architecture. The issue of network, processor, and storage performance has to be decided, modeled and tested.
In addition, an early draft of the online application that must be filled out to apply for health insurance in the state exchanges is 61 pages!   Does government ever do anything in a simple way?  The application form even asks the applicant if they want to register to vote!  After all, if you are a Democrat you need to make sure you can keep getting people to vote for what they think is free stuff. 

How much is all of this IT and other development work costing the federal government?  Who knows?  However, to give you idea, California alone has already received $909 million in federal grants to help it establish and open its individual state exchange.

So where’s all the money going? A big chunk is going to the infrastructure and information technology components—building out the website and database technology necessary to manage the law’s subsidies and facilitate enrollment in the exchange-based health plans. But a lot of it is just going to marketing and enrollment. As Laszewski notes, the state is launching a two-year, $250 million marketing campaign intended to get people to sign up for the exchange. The state is also paying 20,000 part-time "enrollers" $58 an application for each person they sign up. In contrast, California Blue Shield serves 3.5 million members with just 5,000 employees. 
If you think I am offbase on where this could be headed consider this report from The New York Times yesterday.  This tells me that there are big systems problems and this may not be the end of the story. 
Unable to meet tight deadlines in the new health care law, the Obama administration is delaying parts of a program intended to provide affordable health insurance to small businesses and their employees — a major selling point for the health care legislation.
Tight deadline?  It has been over three years since Obamacare was signed into law.  These small business healthcare exchanges were a fundamental rationale for the law and the main incentive for these businesses to support the law.  Should we expect other delays?

I thought this comment from Henry Chao, who is the deputy chief information officer for the Centers for Medicare and Medicaid-which is setting up the federal exchanges-was very telling. It tells me that chaos has a good chance of reigning come October.
We are under 200 days from open enrollment, and I'm pretty nervous. The time for debating about the size of text on the screen or the color or is it a world-class user experience, that's what we used to talk about two years ago. Let's just make sure it's not a third-world experience.
If Obamacare gets off to a rough start with the public due to chaos and confusion with the health exchanges this could signal deep problems for the program going forward.  It is hard to recover from poor first impressions, especially if media attention picks up on it.   A compliant Obama-friendly media is not likely to play up any problems, however, if they jump on the bandwagon if things go poorly it will be difficult to turn around the public's perception of the program.

Sticker Shock

The second big area for trouble with Obamacare is with potential sticker shock.  This could cause problems from two perspectives.  First, I believe that a substantial number of Obama/Democrat low-information voters believe that Obamacare is going to provide them free coverage.  What will be the effect when the reality sinks in that this is not the case?

Let's take the case of a 27-year female who makes $35,000 per year.  Under Obamacare she is required to purchase health insurance coverage that is estimated to cost $3,391 per year.  She would be eligible for a government subsidy of just $66.  She would also be responsible for up to $4,167 in additional out-of-pocket costs for the year.

How about a family of four making $85,000?  They would be required to purchase health isurance coverage that is estimated to cost $14,245.  They would be eligible for a government subsidy of $6,170 reducing their net cost to $8,075. They would also be responsible for up to $8,333 in additional out-of-pocket costs for the year.  However, if their annual income increased to $94,000, they would no longer be eligible for any subsidy.  In effect, $9,000 in additional income would cost the family $6,075 in subsidy not to mention the additional tax costs they would pay on that income.  So much for the incentive to work harder.

You can check out all sorts of Obamacare subsidy scenarios with this online tool that was developed by the Kaiser Family Foundation.

Of course, what is the penalty  tax if someone does not buy the required coverage?  For that young female the tax penalty would be the higher of 1% of her income or $95 in 2014 increasing to $325 in 2015.  What do you think she will do?  Pay $350 or pay $3,325 ($3,391- $66 subsidy)?  Of course, if she gets sick she will want to buy the coverage and there is nothing to stop her since the law requires guaranteed issue. 

This is exactly what has happened in Massachusetts where 40% of all the healthcare policies issued at the Harvard Pilgrim plan are in effect for less than five months.  Claims on those plans average five to six times the expected actuarial cost meaning people get in the plan when they are sick and get out of the plan when they are not.  The result is the overall cost of the plan skyrockets due to adverse selection which then hurts the people in the plan who play by the rules.

This is the other piece of sticker shock.  The fact is that Obamacare will increase the cost of healthcare thereby making it less, rather than more, affordable.  I wrote about this last week in "The Unafforable Care Act". This is exactly the opposite of what we were told was the objective of the law.  Where will most of these costs fall?  A lot will fall on individuals and businesses who were already doing the responsible thing by having coverage.  These are the people who will be hurt the most as their health premiums increase even faster due to a mix of mandated benefits, higher usage, adverse selection and other effects of Obamacare. 

The Obama administration now admits that costs are going up but they argue that federal subsidies will soften the blow for many.  However, at what cost?   It is interesting to note that the CBO recently raised the estimated cost of the Obamacare subsidies by $233 billion over the next ten years.  This was largely driven by an increase in the average cost of the required subsidies due to higher expected premium costs.

This is a chart that shows how the CBO has consistently been increasing the estimated amount of the average subsidies that will be required as the true costs of Obamacare have become better understood.  The CBO now estimates that 7 million workers will also lose their employer-provided healthcare.  That is double the original estimate.  These people will need to get coverages in the exchanges and the federal government will need to provide the subsidies.

Credit: National Review Online

Sticker shock is also going to be a factor in the public perception of Obamacare.

Economic Armageddon

The final big risk that Obamacare poses to Obama and the Democrats is the effect it is going to have on the economy and the federal budget.  You can get a sense of the potential budgetary effects from looking at the CBO revisions below.  Obamacare is going to be enormously more expensive than was originally estimated.  It is going to make our fiscal problems even worse even though we were told that it would make them better.

The bigger concern is what type of distortions is it going to have on the overall economy.  You have seen above how it could affect the incentives for a family of four whose income exceeds the subsidy level.  There are even bigger effects on businesses.  The law is written in such a way for businesses to avoid hiring full-time workers. If a business grows beyond 50 full-time workers it must provide healthcare coverage of pay a penalty.  The obvious answer for many businesses is only hire part-time workers.

For a real-life look into how a business sees the risks of Obamacare take a look at this excerpt from a prospectus for the recapitalization of a restaurant chain that I saw reported on in PowerLine.  Bear in mind that this is not a political statement, this is a legally-required disclosure on the risks to this business of Obamacare as deemed necessary by its attorneys and accountants.

If you don't want to read the whole excerpt let me summarize-in order to deal with increased costs with Obamacare they are cutting back the number of full-time jobs, they expect even higher health care costs in the future but they will either reduce benefits under the plan or raise menu prices to cover the extra cost.

Although [XXX] already offers health care, there is expected to be an increase in costs associated with the affordable health care act (“ACA,” see “Risks” section). To mitigate this cost, employees that were working more than 30 hours per week, but less than 33, have moved down to 29 hours per week, reducing the “full time” pool requiring health insurance from 1100 to 835 employees. Those full time employees will be offered health care insurance through the Company’s program or may obtain it through the state Exchanges or expanded Medicaid programs. The Company cannot estimate the number of enrollees in the future program but based on several discussions with Health Insurance Agencies and the experience of restaurants in other states instituting mandatory health insurance, many are expected to turn it down or seek other publicly funded options. According to an NFP study of the Company’s health insurance and potential impact of the ACA, the total cost increase to the Company in 2014 is estimated to be $400,000 (or a 33% cost increase) which we have factored into our Projections. We believe this cost will continue to increase as the ACA is modified over the next several years but that most of the impact can be managed through cost reducing the plan or offset through menu price increases. Management does not agree with some in the industry that want to make a political statement by adding a line item to every check. Given their broad menu and ability to control portions, we believe the company has substantial control to raise prices at a time when everyone else in the industry will also try to raise prices or somehow otherwise improve margins.
Replay this scenario thousands of time across the economy and it will have a substantial negative effect.  


The ultimate test of Obamacare is just over the horizon beginning later this year with the open enrollment process.  Obamacare took a real body blow with the 2010 elections but gained new life with the Supreme Court decision upholding the law and it seems to be here to stay thanks to the Obama victory in last Fall's election.  However, I am not prepared to say the final story has yet to be written quite yet. 

I want to see how the public reacts once they really see what is in the law.  If I were the Democrats I would have serious concerns of what that reaction will be once the provisions are really understood and we start seeing the real-life effects.

At the same time, money talks and Obamacare, like all federal programs, is spreading a lot of money around.  Health care companies, technology providers, hospitals and others are already putting that money in their pockets.  Look no further than the pressure that the hospitals and other groups are putting on various governors and state legislatures to expand Medicaid under Obamacare. 

Betsy McCaughey recently wrote that the reality of Obamacare is adding up to a disaster for Democrats in 2014.  I think that is premature at this point.  There is risk from all of the factors I describe but we need to see how this plays out.  I will watch with a lot of interest between now and the 2014 mid-term elections.
Since only Democrats voted to impose ObamaCare on America, there’s no question who voters will blame for this colossal mess. The chances for a new Pelosi speakership are minuscule; we’re more likely to see Republicans win control of the Senate.
The GOP only needs to pick up six Senate seats to do that — and three seats the Republicans will target are in Iowa, Virginia, and Arkansas — the states set to be hit with the highest premium increases in the individual market.
Of course, all that may not be enough to repeal ObamaCare — it may take a few more elections before the will of the people prevails. But the system the Obama health law sets up is so dysfunctional, there’s an excellent chance voters will persevere until they get their way.
It’s not over til it’s over.
My view is that Obamacare is still dangerous for Democrats but it is not time to write their obituary. Money talks and as long as the money keeps flowing, they are alive and well with the voters.  What happens when the money stops is the unanswered question.

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