The GOP should have punted. Obamacare is a losing proposition.

So, the government has officially “shut down” over the impasse between Republicans (who want to see Obamacare dismantled) and the Democrats (who don’t).  Don’t know about you, but I didn’t notice much change in my world today.  Even now, the President is holding press conferences blaming the GOP for the shutdown, while touting just how many “millions” have “access to affordable coverage”.   Rubbish.  The sad part is, many Americans will believe him.  The GOP missed an opportunity…the opportunity to allow Obamacare to fail on it’s own.  And fail it will…although now, the President can blame it on the Republicans.  To understand my certainty that Obamacare is a failure waiting to happen requires some background and basic knowledge.  You can’t understand the reasons for its eventual failing if you don’t understand the moving parts and how they operate.

First off, we need to stop calling it “Health” Reform…it may have been that in the very beginnings in 2008 and 2009, but that went out the window in summer of 2009…when the government realized just how powerful the pharmaceutical lobbies and the trial lawyer lobbies were.  So, they set their sights on the industry that everyone loves to hate…(unless they need it that is) – the insurance industry.  What Obamacare did was rewrite the way insurance companies conduct business…and in the process, went against every principle of insurance theory known to man.  Read any book about insurance theory, and you will come across the concept of Risk.  Risk (as opposed to Certainty) is the chance of something happening.  If the chance of something happening is 100%, it then becomes a certainty.  The whole concept of insurance is threefold: 1) the transferring (not eliminating) of the risk of a large loss (say, a heart attack) to someone else for a relatively small certainty (monthly insurance premium) in return, 2) the pooling of a large, diverse group of people’s premiums, sufficient enough to pay the claims of those who have a large loss (like that heart attack mentioned before), and 3) having more people who contribute than those that take.  Insurance companies have been helping out those less fortunate for hundreds of years, allowing those beset by misfortune not to lose everything.   (It actually had its beginnings back in ancient history when sailing ships would contribute a portion of their cargo to a communal “pot” to be used when a ship lost their cargo due to storm or other event). 

Today, insurance pays for about 96% of medical costs in the United States.  Without it, care would be reserved for those who could pay for the actual cost of care, not a miniscule (by comparison) premium amount.  The infrastructures necessary for an insurance company to operate are immense; besides the “normal” expenditures of paying those people who work for the company (Americans are weird that way…they want to get paid for the work they do) and the “owners” of the company (i.e. shareholders) wanting some payment back for their investment, the amount of regulation (reserves, premium taxes to name just two) prior to Obamacare was staggering.  Now…it’s nightmarish.  Funny thing about “profit”: If you look at the profit margins of all industries in the U.S., “Health Plans” ranks #86 with a 3.3% average profit margin.  Pharmaceuticals ranked #7 at 16.5%.  Number 1 ?  “Beverages-Brewers” at 25.9% average profit margin.  Good to know where our priorities are.

So, what did Obamacare do and why is it going to spell the demise of the health insurance industry ? First, a quick observation: with over 2700 pages of law and over 20,000 pages of subsequent regulations, there is absolutely no possible way that I can cover every single thing.  So, I’m just hitting a few highlights to make my point.  The first thing Obamacare did was eliminate lifetime insurance caps…Hooray !  Oh, wait, let’s think about this for a moment.  If insurance companies are simply a way to spread the risk over a large group of people, (ultimately it’s the “people” who are paying it) it stands to reason that a cap would need to be in place to properly assess the risk (and the subsequent “share” of that risk paid for by an individual, i.e. insurance premium).  I mean, think about it.  What’s easier to plan for, $1,000,000 in bills or infinity ?  If we now have to plan on at least some people exceeding the previous caps, my individual share has to go up to account for that. 

Now, while scary, in reality, the lifting of these caps didn’t really do much in the way of higher premiums…the reason being that most insurance companies had $5 million or more in lifetime caps and the likelihood of someone exceeding that is small when you consider the total number of people in the system.  But here’s what killed it:  They messed with the risk profile.  The new law compresses the age-bands and provides for unisex rates—which will lead to a “death-spiral”.  I can hear it now, “You lost me”… Allow me to explain;

If insurance is based upon risk (of an illness, of a loss at sea, etc.), not everyone is created “equal” so to speak…older ships, ships that haven’t been maintained, ships made out of inferior materials, that had incompetent crew, etc. had less likelihood of successfully reaching their port and fulfilling their mission.  Similarly, people tend to have more health issues as they age, not the other way around.  So, a 22 year old has less risk of having expensive medical problems than a 64-year old does.  Put another way, we typically don’t get in better health as we age.  That’s why you see people in their 60’s paying $800 a month for health insurance—and 22 year old guys paying $50.  It reflects their likely usage.  Remember the 3^rd insurance principle outlined above  ? Having more contributors than takers.  The other way around (having more takers than contributors) is called a “death spiral”…eventually you don’t have enough money coming in to pay the costs going out.  The key of course, for an insurance company, is to have more young, healthy people than old, sick people.  Which was actually in the government’s brilliant plan.  But they didn’t figure in the realities of human behavior.  More on that in a moment.

Still, some may say that those most vulnerable (older people) should have access to health insurance and should not be priced out of the market.  To them, I say it already exists…I mean wouldn’t it make sense for an insurance company to target, say just the young males  ?  But they can’t…insurance is state run (some exceptions) and each state has created an upper cap on what older people could pay, which is expressed as a ratio.  In states like my state, that ratio is 7.5-1.  What that means is that a 64-year old guy can’t pay more than 7 and a half times what a 22 year old guy pays for the same insurance.  (I know the example above doesn’t reflect that, but there are other factors: A healthy 64 year old shouldn’t have to pay the same rate as a very sick 64 year old—so, insurance companies are (were) allowed to “rate-up” or charge a higher rate for the sicker person who would be using it more- but only a specified amount by law).   The new law changes that to a 3-1 ratio AND does away with charging a sicker person more.  So, a guy who was paying $800 a month for health insurance was already being charged the maximum that an insurance company was allowed, even though they were using many times that monthly amount in medical services (which the insurance company was paying).  The insurance company certainly isn’t going to reduce the sick guy’s premium…they’re already losing money on him. So now, the healthy 64-year old will be paying $800, but that’s not the worst of it…the 22 year old guy’s premium jumps to $267 a month, or a third of the $800. So, the 22 year old (who used to balk at paying $50 a month -22-year olds aren’t particularly known for buying health insurance when a frosty beverage looks so much more appetizing) is going to rush right out and buy a $267 a month policy because the law says that he has to have it…or face a $95 first YEAR penalty…let’s see, pay $95 a year for something they never use or pay $2200 a year for something they don’t use.  I think I know what choice the majority will make.  (Even if they get a $200 a month subsidy, if they didn’t pay $50 a month before, they’re not going to pay $67).

Also along these lines is the subject of unisex rates.  Let’s face it, a young 22 year old guy is more concerned with drinking beer on the weekend and finding a lady to share some quality time with, so to speak.   It’s a fact that guys can’t get pregnant; women of course can.  It wasn’t so long ago that pregnancy and childbirth were one of the most risky endeavors one could undertake.  Countless scores of both mother and baby didn’t survive the actual pregnancy or birth.  Medical advancements have changed a large part of that…but it’s not free.  And pregnancy complications and premature babies are still some of the most expensive medical costs around, routinely running into the millions of dollars. Now, some might see the unisex rating as some sort of warped justice for irresponsible male youth…to which I say, that’s why there are deadbeat dad laws, but I digress.

“But that’s the 22-year old kids, Dan and they can remain on their parents policy until they’re 26”… which is true, assuming the parents have a group plan.  However, there is a wrinkle in the law that is having employers a) cut back on hours to avoid the heavy costs associated with Obamacare and b) drop dependent coverages because that can inadvertently penalize the employees’ family.  It’s all connected people.

Throw in the Government limiting the insurance companies’ profit margin (a private entity), the exclusions for governmental plans, guaranteed issue, etc. etc. etc. and it is a nightmare of epic proportions (all 23,000 pages and counting) of it.

I could go on for months on end outlining all the pitfalls and ramifications of this nightmare of a law…but I’ve got to pay some bills, too.  Another provision of Obamacare was directly responsible for slashing my (and the 100,000’s of small business-owners like me) income stream by 50%, stretching back 20 years, my lifetime’s work.

But hey, we’re the industry people love to hate.  For those that voted for this law, I say, you get what you deserve.  But it’s just a shame the rest of us have to suffer too.

The Why and What Behind Another ObamaCare Delay

ObamaCare (technical name The Affordable Care Act or ACA for short), among other things, mandates that health insurance companies have to offer certain benefits called "Essential Health Benefits".  Essential Health Benefits must include items and services within 10 specific categories.  These categories include benefits like hospitalization and prescriptions but also such things like chronic disease management and behavioral health treatments.  While the law was passed March 23, 2010, it is up to various agencies like Health and Human Services (HHS) and the Department of Labor (DOL) to further define the law and help implement it.  When HHS issued it's final regulations on Essential Health Benefits, it stated that Out-of-Pocket limits (known as OOP and is the maximum amount that a patient can pay in medical costs in any given policy year), could not be higher than $6350 for an individual or $12700 for a family.

However, not all costs are created equal.  Prior to the law, usually only the amounts paid by a patient related to hospital stays typically went toward satisfying this maximum amount*.  Flat fee costs (called copays) for doctor visits and prescriptions typical didn't accumulate to a maximum amount. The ruling by HHS went further in that it included these amounts paid to doctors and for outpatient prescriptions. Therein lies the problem and the reason for the delay.

To understand why, one must understand the landscape in which insurance companies and self-funded plans (large corporations that typically choose to act as their own insurance company to save money, oftentimes with help from insurance companies and managing organizations designed for that purpose) operate. Insurance companies oftentimes rely on specialized vendors to handle parts of their plan.  It's like a grocery store-- the store doesn't actually "grow" the food or manufacture the products...it relies on outside vendors.  Same thing with insurance companies...many don't have their own pharmaceutical services, but oftentimes "farm out" that component of their health plan to a pharmaceutical services company.  It's why so many people see "ABC Pharmaceutical Services" on their health insurance cards, right under "XYZ Insurance Company".  With the new ruling affecting all the amounts paid for prescriptions, (which prior to this were not part of that calculation) because they were being managed by another entity, there were more complexities to deal with.  It's not hard to see why extra time was needed for these entities to comply.

Last note...not all health plans are affected...only those that use multiple administrators get the one-year reprieve...but all will have to comply starting January 2015.

* TECHNICAL NOTE  The term "hospitalization" is used in the above context for simplicity reasons;  deductible and coinsurance (the "80/20" part of a health plan...I put 80/20 in quotes because that is what most people know it as; however, ANY combination is applicable such as 50/50 plans, 70/30 plans, etc.) typically go towards the Maximum Out of Pocket.  Certain insurance plans can (and do) require that other items like doctor visits, lab work, outpatient surgery and/or prescriptions, etc. go towards deductibles, coinsurance etc. and in that instance could contribute to the Maximum Out of Pocket amounts.

 

Dan M. Heffley is a nationally-recognized author, columnist and health care advocate with over 20 years experience in the health care financing arena. He can be reached at 702-581-4048 or dan.bgb@gmail.com.  He can also be found on LinkedIn.