Richard A. Epstein: Is Obamacare Sustainable? 

The marketplace’s uncertain response to the ACA suggests the program could unravel.

Richard A. Epstein It has been over five years since the Patient Protection and Affordable Care Act (ACA) was passed into law on March 23, 2010. Today, the major legal challenges are over. In 2012, the Supreme Court sustained the power of Congress to enact the law in NFIB v. Sebelius. Three years later, it held that the ACA allowed for the payment of subsidies for all applicants who enrolled through either the state or federal exchanges. Chief Justice Roberts wrote both decisions. They will not be overturned.

” The issue here is simple enough. Can the plan, which has weathered the legal challenges, survive in today’s highly dynamic economic market? The prospects are uncertain to say the least. Some clear signposts indicate the answer is no.”

But if the legal battle over Obamacare is over, the economic battle over Obamacare has just begun. The issue here is simple enough. Can the plan, which has weathered the legal challenges, survive in today’s highly dynamic economic market? The prospects are uncertain to say the least. Some clear signposts indicate the answer is no. The ACA cannot succeed simply by securing first-time enrollments in its exchanges. Insurance policies are subject to annual renewals. The first year of operations will give information about how the second year will go.

“Market rate insurance will always contain differentials that reflect these risk differences.  Liberals may decry the supposed inequity, but in so doing they overlook the decisive advantage of market rate plans.  They are stable in ways that Obamacare is not, because customers will not leave plans from which they derive a net benefit unless they can get a better alternative.”

On the insurer side, it has proved unclear whether the premiums collected have been sufficient to cover the incurred losses. No one yet knows how the various new types of coverage required by the ACA will be priced going forward.  For plans now running a deficit, belts have to be tightened.

On the insured’s side, a year’s experience could lead many customers to think that they pay too much for benefits they would rather not have. The point is especially true of people who are both healthy and young, from whom Obamacare exacts a heavy cross-subsidy that they won’t pay year after year. Market rate insurance will always contain differentials that reflect these risk differences.  Liberals may decry the supposed inequity, but in so doing they overlook the decisive advantage of market rate plans.  They are stable in ways that Obamacare is not, because customers will not leave plans from which they derive a net benefit unless they can get a better alternative.

 “The government takes it as an article of faith that private plans are inefficient. But that unfortunate mindset leads to additional government oversight. The upshot is reduced business flexibility coupled with an additional layer of administrative costs.”

These forces are now exerting tectonic pressures in many, but not all states.  Across the country, many insurance companies are increasing their rates between 25 and 35 percent as they adjust to the “shock waves set off by the Affordable Care Act” in the marketplace. But the full story is necessarily far more complicated because a lot more goes into providing an insurance policy than setting the annual premium. Equally critical are the rules on coverage, how high the deductibles and copays are, where the plan facilities are located, and what the options are in the choice of physicians. And, of course, there is the tantalizing question of whether the current round of increases are one-shot adjustments, or whether they represent the onset of a consistent trend that will replicate itself in future years?

Without detailed information, it is not possible to access the peculiarities of the individual plans. But it is possible to predict that the slow death of Obamacare has become more likely. Most obviously, any premium increases within the exchanges can lead potential and current enrollees to direct their healthcare dollars elsewhere, perhaps by doing without any insurance at all or by signing up for Medicaid. Ironically, it will be hard to win these defectors back with advertisement or improvements in plan coverage, because these options are tightly constrained by Obamacare, which by design limits competition only to the choice of various care levels. Ordinary markets allow for innovation on all dimensions of service, and thus have a resilience that is all too lacking in Obamacare.

Here are some instructive results. As of early June, some 1.5 million people dropped out of the exchanges by failing to pay premiums, reducing the number covered from a February 2014 high of 11.7 million enrollees to 10.2 million four months later. That figure was still a substantial increase over the 6.3 million people insured at the end of 2014. But in the next three months, the downward trend continued so that by September 2015, the number of enrollees tumbled to 9.9 million, which was still above the administration’s goal of having 9 million on the rolls by the end of this year. But the current negative trend line is all the more striking given that some 8.3 million subscribers receive a subsidy of about $270 per month, which works out to a program wide subsidy of about $224 billion per year.

At this point, most of the gain in coverage, about 71 percent of the total, has come through the expansion of Medicaid, which in general offers inferior care to that provided by private insurance carriers. The decline in enrollees on the exchanges represents a displacement of ordinary people from insurance plans that they chose for those which come with a government stamp of approval. Read the rest of this entry »