The First Spin of Obamacare’s Death Spiral

The Affordable Care Act seems to be entering the first turn of what will likely prove to be a death spiral.

While the development is grim, it is not exactly unforeseen. On the contrary, the law is behaving exactly as expected. When sick people gained the right to buy health insurance at the same price as healthy people, guess what? They bought it. Healthy people, or at least those lacking big government subsidies because they are both healthy and relatively affluent, didn’t buy it.

Now that insurance companies have 2014 under their belts, those that sold the largest numbers of policies under the health care exchanges are, by and large, seeking the largest premium increases. The Wall Street Journal reported that major carriers have sought increases as high as 30 percent for 2016. (My own firm’s carrier in New York, UnitedHealthcare’s Oxford unit, wants to raise my group’s premiums by just over 12 percent.) The law requires insurers to justify any increases higher than 10 percent. The Obama administration published those explanations online, and has emphasized that states may negotiate some of these percentages down. But these negotiations will necessarily be constrained by economic reality.

Obamacare supporters cannot rationally argue that the companies are acting purely from greed, because another of the law’s provisions requires that companies spend at least 85 cents of every premium dollar on actual health care expenses. So unless companies are simply acting as collection agents for physicians, drug companies and hospitals, insurers have little to gain from big premium increases for their own sake. Raising rates arbitrarily would mean companies are either driving away customers or setting themselves up to refund excess premiums down the line.

Instead, companies are raising rates because they need money to cover more expensive care just as they have strong reason to doubt their younger and healthier customers will continue to purchase their products.

In an actuarial sense, companies are voting with their feet, saying that they would rather lose some business – business that they lobbied very hard to get in the first place – than keep it under current conditions.

All of this is happening prior to the Supreme Court ruling in King v. Burwell, expected later this month, which will decide whether Affordable Care Act premium subsidies in as many as 37 states are legal. They’re probably not. Should the court cut these subsidies off, Obamacare’s death spiral will become more of a nosedive.

But either way, this vessel will eventually crash, because it can’t generate enough lift to stay aloft. The law guarantees people the right to wait until they are sick to buy health insurance at the risk only of penalties that, as I have written in the past, are essentially toothless. In doing so, the law also guaranteed that the insurance companies will be stuck with the oldest and sickest patient population possible. When risk isn’t spread out among a population with younger and healthier members, providing insurance eventually becomes economically unsupportable.

The heavily Democratic Congress that wrote this brilliant plan may have envisioned an endgame where what we call Obamacare would eventually be folded into Medicare. Thus we would have the universal, federally funded health insurance that many in that party advocate without the impossible task of trying to pass the necessary legislation outright. While this is not an outcome I favor, at least it might have been mathematically rational.

But since most of the country, especially the younger and healthier part, is unwilling to pay what medical care actually costs today, the pursuit of this endgame is also a big reason why the Democrats no longer control Congress, and why a simple technical correction, which would moot the Supreme Court case, is currently impossible.

Instead, we have embarked on an aerodynamic experiment in which we shut off the engines and cut off the stabilizer of an aircraft in midflight and wait to see what happens. The results are becoming clearer every day.

About Larry M. Elkin 553 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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