This week, the White House finally admitted what had become obvious for months: premiums within the Affordable Care Act (ACA) exchanges will skyrocket in 2017. Unfortunately, neither the administration nor its intended successor Hillary Clinton demonstrated a grip on the failures that have driven the markets to collapse, or the need for a clear change in direction. Instead, both argued for Band-Aids that will make matters even worse.
The timing for both Clinton and Barack Obama could not have been worse. Less than a week earlier, President Obama had praised the ACA for “the progress that we’ve made in controlling costs” in a speech extolling Obamacare in Miami. Five days later, Josh Earnest had to fend off the reality of an average 25 percent increase in premiums for next year by claiming that “the vast majority” of those purchasing insurance through Obamacare exchanges “get tax credits that ensure health care is affordable.”
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Affordable to whom? Subsidies do not erase premiums; they shift the costs to taxpayers, which is why skyrocketing premiums matter to everyone. In March, the Congressional Budget Office estimated that premium subsidies in 2016 would come to $43 billion, or about $4,240 per subsidized enrollee. A 25 percent increase in premiums would increase that cost to $5,525 for 2017 if the out-of-pocket deductible remains $75, a 30.3 percent increase. That far outstrips the original projections for the cost of Obamacare, which means that the program will go far into the red rather than finish its first decade deficit-neutral as promised.
In response to the failure, Earnest tried to blame Republicans for their lack of “willingness to work with Democrats” to fix the Democrats’ program, and offered Obama’s own proposal – more taxpayer support for bad choices. “Expanded tax credits to young people” to encourage them to buy insurance “would improve the composition of the risk pool in a way that would reduce costs for everybody,” Earnest argued, but this ignores a very simple calculation.
Most young people see a health care provider only once or twice a year, which on a retail basis might cost several hundred dollars. Why would they spend $900 on already-subsidized coverage each year, and then pay for those visits out of pocket anyway because of the $6,000 deductible? Additional “tax credits” – which are just another form of subsidy – only change that calculation at the margins, and are precisely the same mechanism that has failed already in enticing healthier consumers.
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Not even the insurers selling the product believe that argument. “Young people can do the math,” Aetna CEO Mark Bertolini told a Bloomberg conference in New York, describing their priorities as “gas for the car, beer on Fridays and Saturdays, health insurance.” Unlike Earnest and the Obama administration, Bertolini understands exactly what the problem is – a lack of value. “As the rates rise, the healthier people pull out because the out-of-pocket costs aren’t worth it.”
If Obama wants to double down on failed and expensive subsidies, Clinton wants to do the same with mandates and price controls. Having made the continuation of Obamacare a campaign promise, the Democratic nominee pledged again to “build on the progress we’ve made and fix what’s broken.” The latter, not surprisingly, consists mainly of doing more of the former.
As insurance companies have found themselves stuck in the vicious cycle of rising costs and narrowing risk pools, they have begun exiting the ACA exchanges altogether, which has left some consumers with two or fewer options. Clinton proposes to “improve choices and increase competition” not by remedying the mandates for comprehensive coverage and community pricing, but by reviving “a public option.” That idea died in 2009, mainly under pressure from Republicans who rightly saw it as a Trojan horse for single-payer health care.
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Just as with the premium subsidies, the losses would have gone directly to the general fund and disappeared into annual budget deficits, while insurers would have been lowballed out of the exchanges within a couple of years. The lesson on the “public option” was made clear when the Obamacare co-ops all went under as soon as their access to general fund bailouts was blocked by a rule change on risk-corridor payments in the 2014 budget compromise.
Clinton also promised to “take on the pharmaceutical companies for driving up drug prices,” a refrain that should sound familiar to Americans. The Obama administration and Democrats on Capitol Hill made similar claims about health insurers and supposed “windfall profits” made off of Americans. Obamacare was supposed to cure that ill, too, only as it turns out, the disease didn’t exist.
Even at that time, for-profit health insurers had modest profit margins, far below that of other industries. The small margin pre-ACA became an acute problem when Obamacare forced them to take on high-risk consumers without pricing their risk directly. Rather than charge higher prices to those with higher risk, insurers had to hike premiums – and especially deductibles – across the board under required “community rating” policies.
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Everyone else had to pay more to shield insurers from the high utilization curves that resulted, and now much of that cost hits all taxpayers through premium subsidies. A government takeover of the market did not change the nature of risk pools, nor will a government takeover of pharmaceutical markets and pricing change the nature of technological innovation, research, and safety protocols.
After more than six years, the Obama administration has proven one thing – they have no clue how to run a health insurance market. Hillary Clinton has made clear that she has no more insight than a rehash of the same arguments that have led to this debacle. Only a complete reversal of Obamacare, and the rebuilding of an innovative insurance market based on consumer needs and choice will save this patient.
