“Peak Obamacare”: Will Exchanges End with a Bang or with a Whimper?

A version of this Health Alert appeared at Forbes.

The U.S. Supreme Court has agreed to hear King v. Burwell, an important case about Obamacare’s subsidies (tax credits) to health insurers. Plaintiffs argue that in the 36 states with federal Obamacare exchanges, subsidies cannot be paid legally. If no tax credits can be paid, neither the individual mandate to buy health insurance nor the employer mandate to offer insurance can be enforced.

Few people would voluntarily buy health insurance from an Obamacare exchange if the health insurers on the exchanges did not receive subsidies to enroll people. The premiums would be too high otherwise. Experts expect that the Supreme Court might decide on King v. Burwell in July, in which case Obamacare will end with a bang.

Some observers, like insurance expert Robert Laszeswki, believe that a legal victory would be like shooting the puck into your own team’s net. States which lose subsidies because they do not have their own exchanges would quickly try to establish them. Republican governors would be forced to cave in to Obamacare. Indeed, the risk of starving the federal exchanges of subsidies has led to some interesting fantasizing among Obamacare supporters about how states with operating exchanges, like California, could enroll people from other states, and hang on to subsidies that way.

It is not really politically tolerable for people in 14 states (plus DC) to receive significant subsidies to purchase health insurance while people in 36 states do not. Although there will be a battle of wills between the President and the anti-Obamacare governors over solving the dilemma that the Supremes might bring about, the results of the mid-term election significantly reduce the risk that Republican governors will stampede into state exchanges. Rather, a Supreme Court defeat of federal exchanges would likely force the President to return to Congress to re-open Obamacare.

However, even if the Supreme Court allows the administration to continue to unilaterally re-write the law, Obamacare’s exchanges — both state and federal — will likely end with a whimper in 2015 or soon after. Just look at how quickly the administration began to roll back expectations for enrollment, immediately after the election.

On November 10, the U.S. Department of Health & Human Services (HHS) announced that it expects 9.0 to 9.9 million to enroll in Obamacare exchanges (which it mischaracterizes as “Marketplaces”) in 2015. This is a dramatic scaling back of the Congressional Budget Office’s estimate of 13 million, most recently confirmed in April.

This memo is also noteworthy for the fact that, for the first time since May, HHS has publicized Obamacare enrollment figures from its own database, rather than forcing analysts to read tea leaves from private surveys or scour state insurance departments for filings. We now know that 7.1 million people were paying premiums for exchange plans in October.

That is a drop of 1 million people since the end of April. One in eight people who had chosen an Obamacare plan during the six-month-long initial open enrollment dropped it. If 9.0 to 9.9 million sign up for 2015, that implies that Obamacare will bring back the missing million and add 1 to 2 million more. And this unimpressive estimate comes in the wake of indications that 2015 premiums will be just about 5 or 6 percent higher than this year’s premiums, on average (but with huge variation).

That is, we are already close to “peak Obamacare.” Or maybe we’ve already passed it. Despite insurers’ enthusing about how many people they plan to enroll for 2015, current Obamacare customers are disillusioned. A recent Bankrate survey of Obamacare customers — the few Americans who actually stuck with it and paid their premiums through October — reported that 51 percent of them will not buy Obamacare policies in 2015! That implies about 3.5 million drop-outs next year, which means that Obamacare would have to enroll 5.5 million new customers to hit HHS’ low-ball estimate for 2015.

The survey’s responses were heavily dependent on income: About two thirds of those who earn $75,000 or more plan to drop Obamacare. These people benefit little if any from the subsidies, which depend on household income. Those who plan to tough out Obamacare for another year are heavily dependent on those federal subsidies that the Supreme Court might eliminate this summer.

Will Obamacare end with a bang or a whimper? 2015 will tell.

Comments (19)

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  1. Jardinero1 says:

    In states like Texas, no Republican elected official would lead a charge to establish a state run exchange if the subsidies disappear. The legislature, the governorship and the state agencies are all controlled by Republicans. None of these Republicans received a single vote from subsidy recipients so there is no concern whatsoever about political fallout from the loss of subsidies.

    • Jim Dillon says:

      I’m not sure TX is representative of the other 35 federal exchange states, but even TX may cave when given the choice between an instantaneous solution, “OK, give me the passwords and we’ll do it,” vs, say, a quarter million people, some fairly ill, having to drop insurance with no back-up plan. Even a drunk Republican at a barbeque would have trouble saying “No” under those circumstances.

  2. Jack Towarnicky says:

    So, if the taxpayer subsidies were paid illegally:
    Will the IRS be charged with collecting subsidies received to date – noting that PPACA requires full repayment of all subsidy paid where the individual was not eligible for any subsidy (versus, where the subsidy advanced exceeded the subsidy due)?
    Will employers be subject to the employer shared responsibility rules (play or pay mandate) since employees in those states were never entitled to taxpayer subsidies?
    Should we anticipate that employers in those states will dump any Minimum Essential Coverage and Minimum Value Plans that were offered to employees solely to comply with PPACA requirements?

    Note, of course, that there will still be some individuals in the public exchanges in those federal exchange states – as approximately 15% of those currently enrolled don’t receive a subsidy today. We expect the number enrolled who do not receive a subsidy to decline substantially over time as the cost of public exchange coverage increases – as Jonathan Gruber says, no one will buy it / the law will die without the subsidies between taxpayers to beneficiaries.

    Of course, why won’t the states simply adopt the federal exchange as their own?

    And, how about the seven states (more or less) who have partnered with the federal exchange … do people covered there qualify for subsidies?

  3. Bob Hertz says:

    Thanks for an excellent post, John.

    Kind of a fascinating contrast between your accurate remark about it being intolerable to have 36 states with no benefits, vs. Jardinero’s equally accurate remark about the Texas legislature “couldn’t care less” about Obamacare beneficiaries.

    This is a dramatic example of why Republicans have lost national elections.
    The smug selfishness of some state legislatures becomes repellent on a national scale.

    The right wing states have fought against most forms of social insurance for many years. Social Security excluded farm workers and domestics for its first 15 years. Arizona had no Medicaid whatsoever for over 20 years.

    Bill Maher once said that the mission of the Democratic Party was to drag the hillbilly half of America into the 21st century. A little harsh but not without some truth.

    • Jardinero1 says:


      The problem with this statement is that there is more than one way to solve social ills. State mandated social insurance is but one of many possible ways to cope with the issue of providing healthcare to the poor and uninsurable. Prior to the PPACA, the state pools managed the uninsurable quite well. Medicaid, grants and county hospitals and clinics managed the rest who could not otherwise afford healthcare. Believe it or not, no one in America went without care if they desired care in the prior regime. If you measure the cost and effectiveness of the prior regime to the current regime, then the prior regime still beats it.

  4. Big Truck Joe says:

    So if the states did not set up an exchange, the people of that state would simply go to the federal exchange, correct? why would states want to get involved in a potential trillion dollar train wreck if they weren’t forced by law to do so? And us those states would not bear the burden of an increased Medicaid population that are now being thrust into the state health exchanges and those costs as well. It seems to me that all of those people who wanted or needed to get into Obamacare have gone into Obamacare. Unless companies stop providing healthcare coverage for their employees, which I contest Obamacare has been designed to do, there shouldn’t be many more people voluntarily signing up for Obamacare. You can lead a horse to insurance, but you can’t make him get insured.

  5. Santiago says:

    “Rather, a Supreme Court defeat of federal exchanges would likely force the President to return to Congress to re-open Obamacare.”

    “the few Americans who actually stuck with it and paid their premiums through October — reported that 51 percent of them will not buy Obamacare policies in 2015! That implies about 3.5 million drop-outs next year.”

    It’s notable how quickly public opinion reversed its course over a period of only a few years. Like it or not, neither Obama, nor his plans for healthcare enjoy the same popularity they did in 2010 when the PPACA became law.

    • Perry says:

      I don’t think it was that popular even back then, Santiago.
      And to paraphrase Big Truck Joe,
      it’s a product you don’t want, for a price you can’t afford.

  6. Jim Dillon says:

    This question is terribly naive, but …

    After the USSC rules that only state exchanges qualify participants for federal subsidies, why can’t the feds, the very next day, send all the passwords and manuals to the governors– who will be facing 100,000’s of voters screaming for return of their subsidies– declaring that, “Voila,” these are now STATE exchanges? Of course, the governors may refuse, but that would be very hard to do under pressure from citizens needing an immediate solution.

  7. bob hertz says:

    I appreciate your broader perspective, Jardinero. However I think you are wrong when you say that high risk pools were adequate before the ACA. About 20 states did not have any pools, and several other states had huge waiting lists.

    Here is an article with references.


    • Jardinero1 says:

      You are right, Bob. And the solution to that is to fill the gap. The PPACA did this, successfully, with the creation of the federal high risk pool, which has since been phased out as the exchanges were phased in. The federal high risk pool was phenomenally successful, so successful, that the they had to cap enrollment for want of funding. One has to wonder, if properly funded, the federal high risk pool would have been a more cost effective solution than guaranteed issue and the health care exchanges. I guess yes, but that is just a guess, based on no data.

  8. bob hertz says:

    The federal high risk pool was indeed a good idea, but the initial costs were pretty scary. As I remember, there were less than 200,000 enrollees and yet the program burned through $5 billion in claims in 18 months.
    If the enrollment were ten times as high, the costs would be $50 billion.

    That is still cheaper than Obamacare, but big numbers scare people.

    • Jardinero1 says:

      Sick people cost money. If, we as a society want to treat them; then we, as a society are going to pay. We can treat them as members of a high risk pool, or via health insurance exchanges, or at clinics, or at county hospitals. Either way we pay. The problem of the uninsured is not that complex. There are three kinds of uninsured: the sick, the poor and the lazy/cheap. For the sick, high risk pools; for the poor, subsidies; for the lazy/cheap, you ignore them.

  9. Bob Hertz says:

    I have said before on this blog that high risk pools are a cheaper way to help the sick uninsured, as opposed to guaranteed issue Obama-style.
    Let’s say that high risk pools do cost $50 billion a year. An honest government would raise income taxes about 3/4 of 1 per cent to cover this.
    A healthy person making $40,000 a year would pay about $300 a year as their share.

    Instead under guaranteed issue, a healthy person without employer coverage pays about $300 PER MONTH extra in insurance premiums.

    But to make this work, you do have to raise taxes by the $50 billion. And if Obama had proposed this, the Grover Norquist sheep would have dragged out their promise never to raise taxes for any reason.

    Jon Gruber is an arrogant technocrat, but he did have a point. The Republican stonewall against raising taxes forced the designers of the ACA into many wasteful policies.

  10. Charlie Bond says:

    The debate over exchanges is blurring the more fundamental debate over the necessary redesign of the delivery of health care. The money-changing is simply that–a shell game to distract attention from the root causes of the crisis.

    At the core, we have a crisis of abundance. We are all living longer with greater treatment options than humankind has ever experienced. If we are a bit confused as to how best to steward this bounty, it is somewhat forgivable. What is not forgivable is the perpetuation of disorganized and inappropriately incentivized care.

    Exchanges merely attempt to put plaster over the more fundamental problems in health care: 1) there is no cost-based pricing, so the health care economy is a fantastical bubble that is now bursting; and 2) the incentives currently encourage cost escalation and massive duplication and dysfunction. Other than that, everything is fine.

    Exchanges presuppose a workable financial model for providing care. Unfortunately, that doesn’t exist. So political gotcha-games are pyrrhic victories, no matter who wins. The ultimate loser will be you, me and the rest of the American people who will–sooner or later–need care.

    Charlie Bond