Council of Economic Advisers’ Bad Obamacare Economics
President Obama’s Council of Economic Advisers (CEA) has issued its valedictory report on the state of Obamacare. The gist of the argument is that Obamacare is doing fine, on the verge of overcoming its growing pains since 2014.
The CEA claims critics who suspect the 25 percent increase in premiums for 2017 are a problem are off-base. In a normal insurance market, this would indicate a “death spiral”: The sick enroll and the healthy stay away, causing next year’s premiums to increase. The cycle repeats itself until only the sickest enroll. The CEA asserts this cannot be occurring because 11.3 million people enrolled in Obamacare last December, which was 300,000 more than in December 2015. Further, insurers underpriced their policies in 2014 because the market was new. However, they have learned since then and are pricing policies more realistically.
While it is true enrollment in Obamacare’s market is a little higher than last year, it is still well below the Congressional Budget Office’s estimate of 21 million enrollees in 2016, which it made as recently as March 2015. Even in January 2016, it estimated 13 million would enroll last year, which was almost one fifth too high.
The major factor preventing enrollment from collapsing is that Obamacare’s tax credits ratchet up to blunt the pain of enrollee’s premium hikes. If the tax credit were a fixed-dollar premium, many enrollees would bail out rather than suffer a 25 percent gross premium increase. Further, the amount of people defined as “sick” has increased since Obamacare launched. Recall U.S. life expectancy declined among both men and women of all ethnic groups in 2015, for the first time since 1993.
As to the idea that the 2017 premium hikes are the last ones before the health insurers’ training wheels come off, this reflects a misunderstanding of economics that is shocking to hear from such an august body as the CEA. From page 2:
The available data indicate that insurers underpriced for 2014, the first year of the new market, and incurred significant losses. Insurers appear to have then fallen further behind in subsequent years, despite slow growth in underlying claims costs, because they implemented premium increases that were insufficient to accommodate the phasedown of the ACA’s transitional reinsurance program. Stemming the resulting losses necessitated larger increases for 2017.
There is so much wrong in that paragraph:
- It suggests insurers did not learn from 2014 to 2017. Indeed, they became more ignorant of the amount of medical claims to expect. This may be true, as premium hikes averaged five percent in 2015, 10 percent in 2016, and 25 percent in 2017. However, it does not tell us why the CEA thinks the insurers, after having become progressively dumber for Obamacare’s first three years, finally had a Eureka! moment and figured it out this year.
- For 2014 through 2016, insurers had special funds (reinsurance and risk corridors) that were supposed to protect them from underpricing. The insurers themselves claimed they would have learned enough in the first three years that future premium hikes would be reasonable. The 2017 hikes show that was not the case.
- Worst of all, the CEA suggest the 2017 premium hikes were so high because insurers had to gouge enrollees to fill in the holes they had dug for themselves in the first three years. No! Those losses are sunk costs. If insurers thought 2017 and future years were going to be profitable, they would have priced premiums competitively to win market share.
As a farewell address, the CEA’s report is an unfortunate testament to the state of “true believership” in Obamacare.
“Continued growth in Marketplace sign-ups for 2017 and a range of other evidence show that premium increases are not having substantial adverse effects on either individual market enrollment or the risk pool—rebutting claims that the individual market faces a “death spiral.””
These people are as delusional as Zeek Emanual. The reason signups are up is because people have been putting off major claims so they can sign up 1/1/2017 get their bills paid and then they will drop the coverage by the middle of the year.
The proponents of O-care are saying the repeal will hurt millions of low income Americans. They are saying it’s heartless to leave people without coverage.
They conveniently leave out the 60 year old couples making $65,000 a year who have seen their premiums rise from around $500 a month before the ACA to over $2500 a month today.
The rate increases in the article are not anywhere close to actual reality. Premiums are up over 500% in the individual market since the ACA went into effect.
Other Factors from the real world are also not being taken into account.
I have talked with more than 10 clients this year that tuned 65 in the last year. These clients are now on Medicare and have a supplement or a Medicare advantage plan.
Come to find out they have also been covered under the market place plans. These people have market place plans that the premiums were 100% paid by the tax credit and they had no idea they were covered for the full year under the marketplace plan.
When contacting the marketplace they were told the marketplace has no idea how old they were and that they qualified for Medicare.
In the old days individual insurance terminated at age 65 or Medicare eligibility which ever came first.
Not anymore. One of the clients had Coventry through the Marketplace turned 65 and got Coventry Medicare advantage. She just turned 67 and has had both plans for over two years.
I guess it helps out with enrolment numbers if you just keep the people aging into Medicare enrolled in ACA plans as well.
I’m sure I’m the only agent in America that has seen this kind of waste
It’s like watching an Abbot and Costello who’s on first what’s on second skit.
“Other administrative actions, including actions by CMS to ensure that individuals transition to Medicare coverage when they reach age 65 (as appropriate) and actions to ensure that “limited duration” policies are not being sold in situations that go beyond what the law intends, will likely further improve the risk pool and put additional downward pressure on growth in claims costs in the near term.”
Do these people have any idea how insurance works?
The ACA completely destroyed the individual market but they think its doing great. how do these people get there jobs?
“Second, there is significant potential for the level of competition in the individual market to increase in the years to come. With premiums returning to a sustainable level, incumbent insurers are likely to become less likely to exit markets and more likely to expand their participation into additional areas. Sustainable pricing will also create attractive opportunities for insurers to re-enter markets they may have left and for new insurers to enter markets for the first time.
A number of policy actions could further improve affordability and competition in this market; President Obama, for example, has proposed increasing financial assistance to people who purchase insurance on the Marketplace and introducing a public plan fallback in areas with limited competition (Obama 2016). Conversely, disruptive administrative or legislative changes, or developments that create substantial uncertainty, could easily undo recent progress. The individual market now provides coverage to around 18 million people, and the evidence presented in this brief implies that, absent disruptive policy changes or developments that create substantial uncertainty, it is likely to continue to do so for the foreseeable future. Policymakers should therefore take a measured approach when considering administrative and legislative changes that could have major implications for these individuals’ coverage, access to care, and financial security.”
As the commenters here say, it’s sad that so many Amerikans are being surprised by high increases in their healthcare costs occasioned by Obamacare.
Worse still is the plight of those Amerikans who venture overseas as tourists or adventurers and are required to pay Obamacare premiums with no promise of receiving any healthcare, unless they pay again out of their own pockets.
An individual tax credit, if large enough (e.g. 100%), would certainly halt the death spiral. The question is what’s the minimum level of spending required to accomplish this, and how to structure it. I wouldn’t expect a minimal credit to have an instantaneous effect, since it would only be effective at the margin, but it might be enough to halt and begin to reverse the spiral.
With 3:1 age banding I tend to favor a fixed credit (since older subscribers are already receiving an implicit subsidy). Not saying I favor 3:1 age banding, but that’s what we currently have. What’s the overall average (unsubsidized) premium now for ACA-compliant policies? Supposing it’s around $8000, then a fixed $2000 tax credit would pay 1/4 of the premium on average.
I’m assuming any income-based subsidies would be reduced by the amount of this tax credit, so there would be no net effect on lower-income subscribers. And tax-advantaged employer-sponsored insurance should not be eligible (I think it’s better to leave the employer market alone for now).
With 12 million people in the exchanges, half of whom are currently unsubsidized, a $2000 tax credit would have a net cost of (6,000,000 x $2000) or $12 billion. It would be a wash for people who are already subsidized.
From Lee’s quoted 18 million figure, there must be an additional 6 million people with off-exchange individual plans. Assuming these are all ACA-compliant and eligible for a tax credit, this would double the net cost to $24 billion.
This is only about a tenth the cost of the employer exclusion. The question is would it be enough to begin to have an effect?
Fairness requires that any tax credit be available to the uninsured who pay their own healthcare bills, like the Amish, Mennonites and me. Insurance is a religion that many of us do not participate in.
Don’t worry, you’ll get your tax credit equivalent when you come down with a serious illness and need to apply for Medicaid because you were uninsured.
I was struck by the following sentence in this interesting post:
The major factor preventing enrollment from collapsing is that Obamacare’s tax credits ratchet up to blunt the pain of enrollee’s premium hikes. If the tax credit were a fixed-dollar premium, many enrollees would bail out rather than suffer a 25 percent gross premium increase – See more at: http://healthblog.ncpathinktank.org/the-council-of-economic-advisors-bad-obamacare-economics/#comments
This leaves me wondering what will happen if either ACA reform and/or Medicare reform comes out with fixed tax credits.
The fixed credits are of course a more honest way to budget for government health care spending. However I wonder if such credits could lead to more actuarial death spirals!
In this case I take it that “fixed dollar credit” means
“not tied to the price of a silver plan.”
Of course it could also mean “fixed” in the sense that it’s not income-based, but in that case premium hikes wouldn’t be the only driver. Given the promises that were made, it’s hard to believe income-based subsidies will go away entirely.