The Worst Case Scenario and Best Case Scenario for Implementing Obamacare

Now that Obamacare is for real, what might reality look like?

By Ian Morrison

January 2014 seemed so far off when Obamacare passed in March of 2010. Now it is around the corner.

There were a lot of benefits of phasing in implementation so that the big bang of coverage expansion was more than three years off. Specifically, the government could collect some revenue before coverage costs kicked in (not hugely popular with the revenue generators but it did mean the deficit didn’t balloon further). The relatively cheap step of covering 26-year-olds would reduce the uninsured and give the public a taste of benefits from Obamacare (it did and it is popular). Postponing the major Medicaid expansion and providing incentives to maintain Medicaid coverage through the recession kept Medicaid coverage expanding (a mixed blessing depending on whether you are paying for Medicaid through taxes or you’re on Medicaid because you are poor).

And then the Supreme Court threw a curve ball by saying the major Medicaid expansion was essentially optional for states (the foundation of coverage expansion is now optional; what a splendid idea to have an optional foundation — try that at home). Finally, and perhaps most importantly, the benefit of delay was that states would have valuable time to do the long and arduous work of establishing health insurance exchanges required by the law (most states didn’t bother with this aspect of the law, imagining — incorrectly, it turns out — that it would go away when the Supreme Court or the American electorate smartened up). So now you are up to date.

As of January 2013, KFF/Harvard tracking polls show that 52 percent of Americans still say we should “continue trying to change or stop” Obamacare (including 27 percent of Democrats who think the law did not go far enough). Conversely, only 40 percent of Americans say “let’s accept that it is now the law of the land and we should stop trying to block its implementation.” So implementation is in for an uphill battle against public opinion, and there are many ways the implementation can go horribly wrong.


The Worst Case Scenario

The core promise (and challenge) of Obamacare is coverage expansion through Medicare and exchanges. I will focus solely on these aspects here (in future columns I will deal with the health care costs issue in more depth). The latest Congressional Budget Office estimates, released in February 2013, peg the coverage expansion by 2022 at 27 million (12 million through Medicaid and 15 million through net expansion of exchanges, factoring in conversions from previous coverage). That could be an unreasonably high estimate. Here is why:

The weakness of the penalties. The major carrot for coverage expansion is 100 percent federal coverage for Medicaid expansion (at least in short run) and significant federal subsidies for coverage through health insurance exchanges. However, the major stick to encourage the uninsured to seek insurance through exchanges or Medicaid if they are eligible for coverage is the individual mandate. If you do not have health insurance you have to pay a fine through your income tax return. The fine starts at $95. A year! You do the math.

The cascade of sticker shocks. Sticker shock is just getting started. Because of the new insurance rules and the creation of exchanges, there are enormous one-time price dislocations in the individual and small group market. Insurers are already asking for 10, 20, 30, 40, even a 100 percent rate increases for certain products in these markets. Larceny? Extortion? Opportunism? Not really; it’s that pesky math again.

The cost of insurance premiums is the actuarially predicted costs of care for the population covered plus an administrative fee. If the administrative fee is regulated (as it is with the medical loss ratio provisions of Obamacare) and the products are becoming more standardized to explicit actuarial values (the precious metal bands we will all come to know and love), then the variation is about the costs of care and the actuarial risk of the pool.

Take a typical individual policy in the market that in many states has an actuarial value of around 40 percent to 50 percent (meaning the policy has high deductibles and co-insurance so that it covers about 40 percent to 50 percent of the expected costs of care). If you require that person to purchase at least a 60 percent actuarial value plan (bronze level), then the premium is going to go up, perhaps as much as 50 percent without factoring in medical cost trend and the risk that the person who is electing to be covered and not pay the fine is more likely to be sick.

So you kind of get it how those guys with green visors called actuaries tell their bosses that the premium has to go up 50 percent or so. Now the bosses have to explain in English to the customers, the press and the regulators that people must pay more for insurance. These conversations are not going well.

But this is just the beginning. Just wait until we see how much people have to pay in the exchanges after the subsidy. As I have reported in this column before, this can amount to several hundred dollars a month for a family, up to almost 10 percent of their income. Obamacare is not free. Trust me, I am a social scientist: Free is more popular with consumers.

Small employers drop coverage. Much is made of the theory that employers (particularly large employers) will dump their employees into the exchange and simply pay the fine. I will not repeat the arguments made in previous columns that this is overblown. But what is a real and present danger for Obamacare implementation is that insurance rates are going up in small group and the individual market.

Most uninsured people work for small businesses or are part-timers in big businesses (both categories are exempt from employer-sponsored mandates under Obamacare), and it is quite likely that many small businesses will get priced out as they have been consistently over the last two decades. We have reached a point where only one in six employees working in small business and making less than $15 per hour has employer-sponsored health insurance. The number of uninsured in this category could increase, because the only backstop to prevent coverage erosion is the exchange subsidy and the individual mandate (see $95 per year above).

Eligible but not enrolled. Studies show that Medicaid has a positive impact on the health, health care and economic circumstances of beneficiaries. Medicaid also enjoys surprisingly high satisfaction ratings among beneficiaries. However, millions of Americans are eligible for Medicaid yet do not enroll. Medicaid take-up rates vary across the country: For example, California has a take-up rate of 61 percent, Massachusetts 80 percent, and Washington D.C. 88 percent. This presents two problems for implementation: First, take-up rates will probably be lower than CBO estimates, and second, Obamacare doesn’t pay 100 percent federal dollars for the currently eligible who end up getting coverage under Medicaid. This, in turn, increases the economic burden on states to bring those existing eligibles on board.

The states that balk. Some states are going to take forever to expand Medicaid, and the low-income population in those states will not see much improvement in their health care coverage. Those states may also be slow on the implementation of the insurance exchanges, especially if the federal exchange fizzles for all the reasons I discussed in my last column. The net result may be total coverage expansion under Medicaid and exchanges closer to 16 million or lower by 2022.

The state exchanges screw up. Even states that are embracing exchanges could screw up on implementation. Experts point to vulnerabilities such as enrollment system complexity, adverse selection, lack of participating insurers and sticker shock on prices of policies, particularly for young people.

Young people are revolting. In polls, young people are the most likely to support Obamacare, but they will be the ones getting the raw deal. An actuary would say a 31-year-old should pay a seventh of what a 60-year-old pays, but Obamacare says a third. The result is that rates for young people will go up substantially in the exchange compared with offerings today. How will they react politically?

You can always go to an emergency room. Unfortunately, it is true that hospitals have to treat you if you turn up at an ER. But, let’s be clear this is far from ideal for patients, providers or payers (especially us taxpayers).

Rube Goldberg apparatus fails. Put all this together and you can imagine a scenario in which Obamacare through a combination of political opposition, public unpopularity and implementation disasters fails to deliver on the basic promise of coverage expansion. My friend and colleague Emily Friedman extended this story into a brilliant and wildly entertaining fable that leads to a single payer system (LINK Emily Piece). Maybe her fable becomes fact, but I just can’t imagine an American electorate willing to have an additional 10 percent of the gross national product flow through the federal government in the form of increased taxes to support such a scheme.


The Best Case Scenario

Look — it might not be that bad. There are many ways Obamacare could get implemented and coverage could get expanded pretty much as promised. Here’s how:

A new normal for insurance markets. Sure there will be short-term dislocations in small-group and individual markets. Hey what do you expect? We are moving toward a more regulated, community-rated insurance market that will involve short-term dislocations. But these are one-time effects. Small group rates are not going to necessarily increase by 20 percent per year forever.

The Brewer trigger. Governor Jan Brewer of Arizona, one of the most vocal opponents of Obamacare, plans on expanding Medicaid in compliance with the law, provided the federal government does not renege on the deal where it pays the lion’s share. This trigger may represent a face-saving way for Republican governors to expand Medicaid without putting state budgets at risk for a new entitlement. My understanding is that prominent Republican strategists are advising many governors how to navigate this difficult Tea Party terrain. And, just as I write this Governor Rick Scott of Florida announced he had secured a waiver to expand Medicaid, this is a signal event and more may follow quickly.

The Latino vote. Along with Brewer, Republican governors in New Mexico and Nevada have indicated they will support state exchanges and/or Medicaid expansion in recognition that there are significant and popular benefits in Obamacare for Latino voters. The recent bipartisan interest in immigration reform and the growing recognition of the power of Latino voters may be a very good thing for getting Obamacare off the ground.

The West comes through. The Western states have an opportunity to demonstrate that Massachusetts was not an aberration, that coverage can be expanded through Medicaid and exchanges. While there may be some stumbles, the Western states have skilled leaders in key positions that are committed to successful implementation. These states also have the benefit of continued federal financial support under continuing resolutions enacted in the law to establish state-based exchanges. If the Western states can pull it all off, then other states that hold off will have to answer to their electorates as to why they are not acting.

Health system leaders step up. In many states, from Wisconsin to Oklahoma, reluctant Republican governors philosophically opposed to implementing Obamacare are hearing from health system leaders that Medicaid expansion and exchanges may be good for the state. Many of these health system leaders are even offering provider-based taxes to create the matching state funds to sweeten the Medicaid expansion plans.

The gratefully covered. I am days away from being uninsured. My COBRA coverage will run out before you read this column (don’t ask unless you have an hour or two). I am applying for a $6,000 high-deductible health savings account with a nonprofit local insurer (which will remain nameless in case its underwriting department reads my column).

The insurer’s outsourced fact checkers reached me in the middle of the night (I was on a trip) to triple-check my blood pressure, my medications and my latest cholesterol readings. They hunted me down when neither my clients nor my children could.

I completely understand why they are interested in tracking me down, given the dysfunction that is the current individual insurance market. They are taking a significant risk insuring 60-year-old Scotsmen. So, I can’t wait for the exchange to open. In fact, I paid a kid $50 to hold my spot in line, and he is pissed that I am going to pay only three times as much as he is.

There are millions of hard-working self-employed Americans like me who are 60-plus and in the individual market and are denied coverage; there are millions more even harder-working Americans who make less than $15 per hour and need help getting coverage because illness can hit any one regardless of race, creed, class or economic circumstance. Obamacare will help all of us, and believe me, millions of us will be very grateful to have that security. That’s why this all has to go well. It is ugly, but it is better than any alternative that we have in front of us. Let’s make it work.

Ian Morrison is an author, consultant and futurist based in Menlo Park, Calif. He is also a regular contributor to H&HN Daily.