Obamacare "Death Spiral" Looms As Co-Op Losses Mount

Failing insurers. Rising premiums. Financial losses. As Bloomberg details, the deteriorating Obamacare market that the health insurance industry feared is here.

As concerns about the survival of the Affordable Care Act’s markets intensify, Bloomberg notes the role of nonprofit “co-op” health insurers -- meant to broaden choices under the law -- has gained prominence.

Most of the original 23 co-ops have failed, dumping more than 800,000 members back onto the ACA markets over the last two years.

 

Many of those thousands of people were sicker and more expensive than the remaining insurers expected -- and they’re hurting results. With more of the nonprofits on the brink of folding, the situation for the remaining providers looks dire. Anthem Inc., for example, is facing an estimated $300 million in losses on its exchange business for individual plans this year, after turning a profit in 2014 and almost breaking even on the program in 2015, according to the company.

 

“These co-ops have attracted, we think, disproportionately high health-care utilizers,” Gary Taylor, an analyst with JPMorgan who follows the industry, said in a telephone interview. Their former members “are now enrolled in these for-profit health plans. That’s been a factor driving the deterioration in their profitability.”

In a death spiral:

As options for coverage shrink, insurers attract increasingly sick patients and suffer losses.

 

That forces them to raise rates, driving away healthy, profitable customers.

 

Facing more losses, they raise rates again, causing more healthy people to leave, and so on -- until all that’s left are high premiums and a small pool of the unwell.

And that is what is occurring as some insurers may already be feeling the burden of increasingly sick patients.

Anthem’s then-Chief Financial Officer Wayne DeVeydt said in April the company was “disproportionately picking up market share” in states where co-ops had folded.

 

On a July conference call, Chief Executive Officer Joseph Swedish said that as the insurer had brought in new membership, its costs of caring for patients with heart disease, diabetes and especially dialysis had increased. Jill Becher, an Anthem spokeswoman, said the CEO’s comments referred to the company’s overall ACA membership.

The administration remains in denial...

People getting insurance in the ACA markets still have access to affordable plans, said Aaron Albright, a spokesman for the Centers for Medicare and Medicaid Services, which oversees the health-care program.

 

“America is on stronger footing today because of the Affordable Care Act with 20 million gaining health coverage and the uninsured rate is at the lowest point on record,” he said in an e-mail. “Consumers are satisfied with their coverage, have better access to care, and greater financial security -- core metrics of success.”

But, we already know what a health insurance death spiral looks like because we've seen them before, in states such as New York, New Jersey, and Washington. As we noted previously,

The experience in those states varied somewhat, but they all shared several essential qualities: The states put in place regulations requiring health insurers to sell to all comers (guaranteed issue), and strictly limiting the ways that insurance could be priced based on individual health history such as preexisting conditions (community rating). As a result, insurers ended up with large numbers of very sick customers who were very expensive to cover. Because they were subject to limits on how they could price health history, they responded by signficantly raising premiums for everyone. The new, higher premiums caused the healthiest, most price sensitive people to drop coverage entirely, which caused insurers to raise premiums further, resulting in yet more individuals dropping coverage, and so on and so forth, until all that remained was very small group of very sick, very expensive individuals.

 

Washington state's experience in the 1990s is particularly instructive: After the state put in place guaranteed issue and community rating rules, carriers saw an influx of unusually sick and expensive beneficiaries, as well as individuals gaming the system by signing up for coverage in advance of an expensive medical event, then cancelling as soon as that event was over. Insurers simply couldn't make money in the individual market, and so between 1993 and 1998, 17 of the state's 19 plans stopped selling individual insurance plans. The next year, the final two carriers left the individual market. It was a total meltdown.

 

The lesson most observers took from this was that insurance market regulations would not work without a mandate: In 1994, a Republican-led legislature had killed an individual requirement to carry coverage but left guaranteed issue and community rating in place.

Obamacare, of course, has a mandate, but what's happening in the health law's exchanges is starting to echo what happened in Washington and other states that experienced death spirals.

In the meantime, as we noted previously, Obamacare will likely continue to falter... as the remaining co-ops are deep in the red...

It’s not clear whether the remaining co-ops can survive without additional funding, said Deep Banerjee, an analyst with S&P Global.

The law, of course, has avoided multiple potential near-death expenses thus far, and it may still survive. But at the moment, at least, it looks like one sick patient. As The Daily Sheeple's Joshua Krause concludes,

If the financial well-being of the Millennial generation doesn’t improve, there are really only one of two things that are going to happen in the near future, and they both involve the collapse of Obamacare. Perhaps the Affordable Care Act is going to crumble, and Americans are going to demand that we all go back to a mostly privatized healthcare system, Obama’s legacy be damned.

 

On the other hand, if Obamacare falls apart, that event could be used as an excuse to roll out a fully socialized healthcare system. This shouldn’t come as a shock to anyone. Every time socialist policies fail, their socialist engineers double down, and claim that the real problem with their policy, was that it wasn’t socialist enough.

 

Which has to make you wonder, was that the plan all along for the Affordable Care Act? To create a semi public healthcare system that was so expensive and so dysfunctional, that the American people would eventually come to despise it? That instead of discarding it, the public would clamor for a system that was even more socialist?

Perhaps Obama will get to keep his legacy after all.