ObamaCare Faces Two Existential Challenges In 2018 – Pacific Research Institute

ObamaCare Faces Two Existential Challenges In 2018


It’s a New Year — but not a happy one for ObamaCare’s defenders. Two recent developments could lead to the collapse of the health law’s exchanges.

First, the Trump administration will soon announce that it will allow insurers to sell “short-term” health plans that last up to 364 days.  Currently, insurers can only sell these plans, which don’t have to adhere to ObamaCare’s premium-inflating mandates, if they last for three months or less.

Insurers can consider individuals’ health status and history when setting premiums for term plans. ObamaCare forbids them from doing so for conventional plans.

Consequently, term plans often cost far less than the coverage available on and off the exchanges — at least for healthy people. For instance, a 40-year-old man living in San Francisco who earns $55,000 annually can buy a term plan for $141 per month. The cheapest bronze plan he’d find on California’s exchange, Covered California, costs $338 each month.

Second, the tax reform bill — signed into law on December 22 — effectively repeals ObamaCare’s individual mandate, which fines people for not buying ObamaCare-compliant health plans. Right now, people must pay a penalty of $695 per adult and $347.50 per child, up to a maximum of $2,085 or 2.5% of household income — whichever is greater — if they fail to obtain such coverage.

This tax overwhelmingly falls on the working class. About 80% of the 6.5 million Americans who paid the penalty in 2016 earned less than $50,000 per year.

Neither of these developments, in and of themselves, would prove fatal to ObamaCare’s exchanges. But together, the availability of year-long term health plans and the absence of an individual mandate will prompt an exodus from the exchanges.

Here’s why. Right now, term health plans are of limited appeal to consumers, who must pay the individual mandate penalty if they buy them. Our 40-year-old San Franciscan would pay a $1,375 fine — 2.5% of his income — if he opted for the $141 term health plan. The mandate penalty wipes out most of the savings he’d enjoy from choosing the cheaper plan.

As a result, many people grit their teeth and pay for overpriced ObamaCare-compliant coverage.

Without the mandate penalty, millions of healthy people who currently shop in the exchanges — even middle-income people who receive small ObamaCare subsidies —would instead purchase more affordable, year-long term plans. Only people with pre-existing conditions and those with low incomes — who receive subsidies that cover virtually the full cost of ObamaCare plans — would remain in the exchanges.

These people would be far sicker, and require far more medical care, than the current average enrollee.

Knowing this, most insurers would likely abandon the exchanges. Already, 25% of Americans live in areas where only one insurer sells on the local exchange.

Any insurers that continue to offer ObamaCare coverage would drastically hike premiums to offset their higher expenses on medical care. The price increases would drive any remaining healthy, middle-income customers out of the exchanges. Within a couple of years, the ObamaCare exchanges would effectively transform into high-risk pools — only the very sick and very poor would seek coverage there.

Some in Congress think they can prevent this meltdown by bribing insurers to stay in the exchanges. Sens. Lamar Alexander, R-Tenn., and Patty Murray, D-Wash., are spearheading a bill to restore the “cost-sharing reduction” subsidy payments to insurers that President Trump cut off in October. They hope that their measure will be included as part of the bigger government funding bill that Congress will consider in January.

CSRs were created to bail out insurers from losses associated with one of ObamaCare’s most burdensome provisions. ObamaCare requires insurers to cover co-pays and deductibles for about 6 million exchange enrollees who earn between 100% and 250% of the poverty level — or between $24,600 and $61,500 for a family of four.

ObamaCare then reimburses insurers for the losses they incur covering those out-of-pocket expenses. The CSRs cost taxpayers $7 billion in 2017 and would have cost $10 billion in 2018 had President Trump not eliminated them.

Similarly, another bipartisan duo — Sens. Susan Collins, R-Maine, and Bill Nelson, D-Fla. — are sponsoring a bill that would fund reinsurance programs. The legislation, which they hope will be folded into the bigger congressional spending bill as well, would enable insurers to shift the burden of paying for the sickest enrollees onto the federal government.

These bailouts are a waste of taxpayer money. They aim to cure the symptoms of ObamaCare — high premiums and deductibles — without addressing the cost-inflating regulations that are the root cause of insurance markets’ dysfunction.

President Trump’s decision to expand access to year-long term health plans, coupled with the repeal of the individual mandate, will deliver a severe blow to ObamaCare. This New Year, let’s hope Congress resolves to pass a coherent replacement, rather than prop up the floundering law with billions in taxpayer dollars.

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Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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