Another Obamacare Prediction Comes True

Critics of the Affordable Care Act, myself included, have said from its misbegotten inception that it is a recipe for destroying health insurance.

But don’t take our word for it. Take the word of the companies it is already killing at a rapid clip: the very insurance cooperatives that were created under Obamacare’s auspices in the first place.

The theory was that co-ops, which would not aim to make a profit, could offer cheaper insurance than private-sector enterprises that expect to pay shareholders a return on their capital. So rather than raise equity from private investors, the 23 co-ops received $2.4 billion in federal loans. In addition to the government eventually getting its money back, supporters claimed, the co-ops would reward even nonsubscribers by eventually creating lower insurance rates for everyone through the pressure of their low-priced competition.

In less than two years, this approach has proved to be bogus as a theory and disastrous as a real-world exercise in risk management. Eight of the 23 co-ops have already collapsed, including the two largest, and the surviving companies are banding together in a coalition to argue that they are being destroyed by the very law that created them in the first place.

It turns out that when consumers confront a choice between, on the one hand, a large, reputable, well-established private insurer that has a vast physician and hospital network and decades of experience in paying for health care and, on the other hand, a newly formed, thinly capitalized co-op that lacks all the resources and experience of its competitors, the co-op can compete only on price. So the co-ops grossly underpriced their policies. Since the ACA forbids insurers from excluding pre-existing conditions from coverage, the co-ops attracted a combination of sick people whose care is very expensive (especially for organizations that lack the scale to negotiate big discounts from providers) and healthy young people on tight budgets who will bolt at the first sign of a premium increase. And co-ops lack the corporate-health-plan business that also provides scale and financial cushion to private competitors.

The unsurprising result: The co-ops ended up spending significantly more on claims than they collected in premiums.

The co-ops are dropping like flies, with many of the remaining programs subject to “enhanced oversight” from the government due to performance issues. A government audit found that all but one are already unprofitable. Chances are good that most, if not all, of that $2.4 billion in federal startup loans will never be repaid. Hundreds of thousands of co-op customers are already being tossed back into the marketplace to hunt for replacement policies.

The co-op coalition blames another part of the ACA that requires companies that attracted healthier pools of patients to subsidize the losses of companies that attracted sicker pools. The so-called “risk corridor” was, in theory, meant to give small companies and start-ups a cushion to help them survive long enough to compete. But the payments were generally less than the co-ops expected, possibly because there aren’t enough insurers doing well under the Affordable Care Act to make up the shortfall. And Congress passed legislation last year forbidding the administration to make up shortages using other federal revenues.

The co-ops, who have aimed their marketing at the price-sensitive segment of the youngest adult consumers, essentially argue that their mission is to cherry-pick the most profitable consumers while shifting costlier customers to the private sector – and yet this is somehow supposed to bring down insurance costs for everyone. The co-ops overlook all of their own structural and operational disadvantages, which are going to bring them down as surely as a crippled gazelle standing in a grassland teeming with underfed lions.

Meanwhile, over in the private sector – again as predicted – costs are already spiraling in many areas, as companies that entered the ACA marketplace discover that being forced to cover older and sicker patients means higher costs than they projected, while tens of millions of healthy Americans continue to choose not to pay for insurance that they believe is not the most pressing use for their funds, even with the aid of massive government subsidies. The law’s largely toothless penalties, in combination with premiums that will only continue to rise, mean that this group is unlikely to shrink substantially anytime soon.

It has gotten tiresome for everyone to listen to Obamacare critics point out the many ways the law defies economic logic while distorting and inflating the spending in our vast health care sector. It is probably time for us to keep quiet. Obamacare’s participants and backers, and the very entities it created, are now making the same points anyway.

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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