Watching Obamacare Dominoes Topple


Watching a chain of cause and effect can be satisfying when it involves a long chain of dominoes or a Rube Goldberg machine.

When it involves the American health care system, not so much.

Last fall, UnitedHealth Group Inc. (UNH) disclosed major losses on policies it had offered through the Affordable Care Act’s exchanges. Nor was the country’s largest health insurer alone; competitors including Aetna Inc., Humana Inc. and Cigna Corp. have described the difficulties they face in attempting to make exchange-based offerings profitable.

So it is no surprise that UnitedHealth announced that it would reduce its exchange offerings for 2017. What did surprise at least some observers was the scale of the decision. According to The Wall Street Journal, the company will reduce its offerings from 34 states this year to “only a handful” going forward. In the same conference call, UnitedHealth steepened its projected losses on exchange plans for 2016 to $650 million. In contrast, the company’s overall earnings for the first quarter were better than expected.

Let’s break it down. UnitedHealth is making money in its employer-sponsored health insurance business. It is making money in its government-paid, nonexchange health insurance business. It is making money from individual health insurance policies sold outside the Affordable Care Act exchanges. But it is losing money hand over hypodermic on policies sold through the Obamacare exchange network. How come?

Simply because customers on the exchanges tend to buy insurance when they are sick and drop it if they get getter. They do so knowing that under Obamacare rules, insurers must sell them insurance again during the next open enrollment period, or even sooner if they qualify for a special exemption. You could not design a better system for making medical insurance a money-losing proposition if you tried.

As they say in the insurance business, “sickies never cancel.” Healthy customers, on the other hand, drop off as premiums rise out of reach and deductibles continue to climb, safe in the knowledge that they can always come back if their health takes a turn for the worse.

The cycle only reinforces itself over time. As more healthy customers leave, companies raise prices to try to compensate, driving yet more customers away. “We don’t yet have stable ACA markets,” Todd Van Tol, a partner with Oliver Wyman, told The Wall Street Journal. “Indications are, we have in many markets another round of significant rate increases.”

This instability is also reflected in the industry’s consolidation. Several major insurers are currently seeking federal permission to merge, which could leave customers with effectively fewer choices even in places where companies do not quit the exchanges altogether.

Not that customers are flush with choice now. According to the Journal’s coverage, UnitedHealth withdrawing its offerings will leave many Americans with very few options on the exchanges. In some parts of the country, especially the rural South, customers may only have one “choice” on their state exchange unless a new company decides to fill the hole that UnitedHealth leaves.

It is hard to imagine which company might step into the breach, however. Other big insurers are already struggling to manage their own offerings on the exchanges. And the small nonprofit co-ops, which were designed to offer cheaper insurance than their private sector counterparts, are already dying off at a rapid clip.

Even before UnitedHealth’s decision to reduce its exchange offerings, many Americans are simply choosing to do without insurance altogether. Many young and healthy customers simply cannot make the cost-benefit trade-off work as insurance costs continue to mount, especially when they know insurers will have to accept them later and the penalties for not purchasing insurance remain significantly cheaper than the cost of insurance itself. Try to get a year’s worth of coverage for $2,085 anywhere in the country and see how far you get. Between premiums and out-of-pocket expenses, the answer will vary from “not very far” to “nowhere.”

Other major insurers seem likely to hold on at least through 2017, but UnitedHealth will certainly not be the last major departure for the exchanges in the long run. The very structure of the Affordable Care Act made the failure of the exchanges inevitable. Until lawmakers tackle some sort of solution, there is not much to do other than watch the dominoes fall.

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About Larry M. Elkin 564 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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