ACA – Death Spiral or Murder Victim?

We’ve been hearing the same tired headlines for more than seven years now. Scary, disconcerting, terrifying words warning of its imminent demise. Also known as Obamacare or by the initials ACA, the GOP’s terror target has been the Affordable Care Act.

“Obamacare is about to implode”
“The ACA is in a Death Spiral”
“People’s lives are being ruined by the failing Obamacare”
“Premiums are spiraling out of control”

It’s time we stopped being terrorized by these words of impending demise. In this post I’ll look at one of the major reasons Obamacare is faltering. I might even have time to make a suggestion to keep it sustainable into the future.

(If this gets too long-winded for you, click HERE to skip down to the summary.)

Insurance Basics

Insurance plans like the ACA work by spreading the risk across large numbers of people. The larger the pool of people sharing the risk, the less the chance that insurance payouts will empty the insurance fund. Insurance companies are in business to precisely calculate the amount of risk and the cost of taking that risk. Obviously the more people they can sell insurance to, the better their chances of staying solvent. An easy analogy is to think of insurance as a giant money bumper. More people buying insurance means more money in the fund and thus a bigger sturdier bumper.

There is also the risk spread. People come in all ranges of risk. There are really good drivers just like there are really bad drivers. There are really healthy people just like there are really sick people. More low-risk people in the insurance fund means lower overall premiums for everyone. Part of the problem with healthcare insurance is you can’t really tell that someone is a health risk until they’re really sick.

How It Used To Be

In the past the insurance companies tried to hedge their bets by denying coverage to people that were already sick. While it saved them money and decreased the premiums people had to pay, it was also incredibly inhumane to deny health insurance to the people that needed it most; those with pre-existing conditions. Insurance companies also engaged in data mining efforts to try and eliminate groups of people that might be at higher risk than others. For example populations in heavy mining or manufacturing areas tend to have higher healthcare costs because they are exposed to higher work-related injuries and illnesses.

The Affordable Care Act (ACA) was designed to spread the risk pool as widely as possible. Everyone not already covered by employer-paid insurance would get coverage through the ACA. It also required that insurance companies provide coverage for people with pre-existing conditions. The goal was to spread the risk pool so wide that even sick people could pay for their coverage while at the same time healthy people wouldn’t be penalized too heavily.

Here’s The Rub

Health insurance is a game of averages. Some people are going to pay more than they would if they just paid for their own healthcare, some people are going to pay less. When you open up the pool to include people that are already sick, in some cases very sick, you can’t really predict how much everyone will need to pay in premiums until after the fact. That means that doing the right thing, providing coverage to those that need it most, also makes the “Insurance Gamble” a lot riskier for insurance companies. The one thing that typifies insurance companies is they hate unknown risk more than a Vegas bookie.

It also means that healthy people, or at least people who are healthy right now, will wind up paying monthly premiums that seem even higher than normal. This fact has been one of the favorite bitching-points of the ACA’s detractors. They have blasted the ACA’s growing premiums, chanting non-stop that “real” insurance would never cost so much. Of course they’re wrong, but that hasn’t stopped them spreading their lies anyway.

ACA – Spreading the Risk

The ACA has a fix for the unknown risk. It’s called “Risk Corridors”. Basically it’s a way to share the gains from profitable exchanges with those suffering losses. For the first three years (2014-2016) those insurance companies that lost money paying out insurance claims would receive payments from the Federal Government to cover their losses. Those payments would come from fees paid by companies that had made money. The concept is not new, it’s been used in the past. But the ACA is the first time it’s been used on such a large scale at the federal level.

Risk Corridors are actually a very good idea. Just like having more people in any one insurance fund helps spread the risk and lowers the amount each pays in premiums, Risk Corridors spread the risk across state lines, across companies, and even further spreads the risk across a wider pool. In essence it helps build one really giant freaking money bumper to guard against at-risk populations being charged premiums that are completely out of their reach.

Why Hasn’t It Worked?

There are two primary reasons why Risk Corridors haven’t done their job. Those reasons feed into the larger general problem of why the ACA hasn’t lived up to the promises made by Obama and team during their sales pitch of the law (2009-2010). Both reasons have at their core the Republican party and their unending efforts to cripple the ACA.

The most damaging effort mounted by the GOP has been their 7-year long battle to delegitimize Obamacare. Never once in those seven years did any GOP Senator, Congressman or political mouthpiece ever mention the words “Obamacare” or “ACA” without tacking on some pretty nasty adjectives. It was always the “disastrous Obamacare” or the “failing ACA”. Just as the Grand Canyon was created by water droplets slowly carving out rocks, the GOP’s bad-mouthing convinced people that they could not afford ACA coverage and didn’t want it anyway. That in turn kept healthy people, the exact population needed to make the law work, from buying ACA policies.

Let me say that again so it is perfectly clear: The GOP’s smear campaign succeeded in keeping healthy people from signing up. They convinced people that it was too expensive, and they convinced people that the insurance policies they could get were worthless.

Knock-On Effects

With healthy people staying away from ACA insurance plans, the expected monthly premiums turned out to be too low. As a result many insurance companies wound up paying out way more for claims than they collected in premiums. It wasn’t just a small amount either. The losses were as much as 10 times more than expected. Even the nationwide risk pool provided by the Risk Corridors could not handle such a large shortfall. It was looking like the Federal Government would have to arrange a bailout similar to that used to save the auto industry. But the GOP had a fix for that too.

Sliced and Diced by the GOP

First the GOP led Congress passed laws that prevented the Federal Government from covering the insurance company losses with any outside money. That meant that only the money collected from insurance companies making a profit from ACA policies could be used to pay back the insurance companies that lost money. The result was to put such a hard financial squeeze on many insurance carriers that they had to leave the ACA Marketplace or, as many did, go out of business.

Then in an even more business destructive move, Marco Rubio (among others) mounted an effort to completely remove all payback methods including Risk Corridors. That would have meant that insurance companies were on their own with no hope of recovering their losses. The net effect was to completely eliminate spreading the risk as wide as possible, thus further dooming Obamacare plans in many higher-risk states and communities.


Again let me say this clearly: The GOP acted in two distinct and obvious ways to destroy businesses, make healthcare coverage too expensive to afford, and place those most in need at the most disadvantage. And they did this simply because they got their feelings hurt by Barack Obama and his signature healthcare law.

Let’s Summarize

It’s been a bit confusing getting here, so let’s catch our breath and summarize everything up to this point. I’ll do it with a short series of Talking Points:

  • Health Insurance works better when more people are covered
  • Doing the Right Thing (covering sick people too) is more expensive
  • ACA provides methods to responsibly handle the added risk and expense
  • GOP drove people away from ACA with a 7-year smear campaign
  • GOP hobbled insurance companies by blocking repayment of their losses

Where To Go From Here

The GOP’s answer to the ACA was the American Health Care Act (AHCA). Hallmarks of their plan were:

  • Massive Tax Benefits to Insurance CEO’s (tax income loss)
  • End-of-year Tax Credit (capped, fed payout savings)
  • Block grants to States (fed payment savings)
  • Rapid curtailment of Medicaid funding (fed payment savings)
  • Removal of Essential Health Benefits (return of “junk” ins. plans)
  • Defunding of GOP-hated agencies (Planned Parenthood, etc.)

When it comes to the basics of insurance plans, their AHCA went entirely the wrong direction. Instead of working to increase the size of the risk pool and thus decrease premiums, their plan would have created a myriad of much smaller risk pools and forced sick people into their own extremely high-risk and thus high-cost pool. Their mantra of “access for everyone” would have meant that sick people had access, but could only purchase health insurance at astronomical prices.

A Saner Plan

Instead of hobbling the mechanisms that help insurance companies participate, Congress should work toward strengthening them. Remove the shackles on funding to reimburse insurance company losses. That will bring more companies back into the Marketplaces. Next use the marketing might and resources of the Federal Government (and the GOP) to start saying nice things about the ACA. Stop this incessant bashing and demonizing and start saying positive things that work to help our country and not destroy it. (Yeah, I know. The GOP would never do anything nice to help out. But it’s a hope anyway.)

So where do we get the extra tax income that will be needed? How about we start with a $0.01 tax on every electronic stock trade made. Once we have a budget surplus (in about six months) then we can cut that back to 1/10th of a penny per trade.

ACA Approved


References:

  1. Premium Stabilization Programs – Centers for Medicare and Medicaid Services
  2. Congress intended for HHS to make ACA risk corridor payments each year to insurers – Wolters Kluwer
  3. The state of the ACA’s risk corridors – Modern Healthcare
  4. Marco Rubio: We ‘wiped out’ Obamacare ‘bailout fund’ for insurance companies – Politifact
  5. ObamaCare’s risk corridor corruption never ends – The Hill

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