Obamacare’s death spiral has begun

The healthcare industry is still recovering from news UnitedHealth Group (UHG), the largest U.S. health insurance company in terms of enrollment, is now considering pulling out of all Obamacare health insurance exchanges across the nation in 2017.  

The news came as UHG announced it was downgrading its earnings forecast for 2015 by $425 million, a move the company suggested was connected to losses linked to the Obamacare exchanges.

As reported by The Wall Street Journal, UHG CEO Stephen Hemsley said in response to a question about whether UHG would be willing to take another loss in the Obamacare exchanges in 2017, “No, we cannot sustain these losses. We can’t really subsidize a marketplace that doesn’t appear at the moment to be sustaining itself … we saw no indication of anything actually improving.” 

{mosads}UnitedHealth’s Obamacare troubles are not unique. Many analysts believe other large health insurance companies, such as Aetna and Anthem, could also face tough times in the coming years due to the increasingly large number of sick people joining the Obamacare exchanges.  

Because the Affordable Care Act (ACA) does not ordinarily allow insurance companies in the exchanges to charge different rates based on the health of the applicant or to deny coverage due to pre-existing conditions, countless Americans in poor health are joining exchanges and taking advantage of the subsidies offered through the marketplace, which has put health insurance companies in a very precarious financial situation. Insurers want to sell their plans in the Obamacare exchanges to take advantage of the larger pool of Americans now able to afford health insurance because of government subsidies, but insurers also know that if an increased number of healthier people choose not to sign up for health insurance, the costs related to sicker enrollees will far outweigh the benefits of being in the exchanges. 

The Obama administration and Democrats understood this scenario was likely to occur when formulating the ACA, and their answer to this predictable problem was to force all people to have health insurance using a “fine” as a punishment to those who chose not to be covered with plans that met government-established standards. Younger, healthier people would choose to buy health insurance rather than pay a fine, Democrats reasoned, and this would help offset the costs associated with insuring a greater number of sicker people.

The only problem with this plan is numerous people are simply choosing to pay the fine, and many uninsured young people, due in part to a sluggish economic recovery, have been able to attain an exemption from the Obamacare fee for not earning enough money. The current maximum fine for 2016 is either $695 or 2.5 percent of taxable income—whichever is greater—for an individual who remains without qualifying coverage for 12 months.   

Although $695 isn’t chump change for a lot of lower-income Americans, it’s still far less than what it would cost many of them to actually buy health insurance. The reality is the penalty just isn’t large enough to force a lot of people to purchase insurance they don’t want, but increasing the penalty at this point would be politically impossible and wildly unpopular. 

Without a clear incentive to sign up for an expensive health insurance plan, many healthy Americans are choosing to go without health insurance or to purchase a non-qualifying health insurance policy that covers only the costliest procedures. This means insurance companies are stuck with an ever-worsening ratio of sick customers to healthy customers, causing businesses such as UHG to consider leaving the Obamacare exchanges completely in the hopes they can find a way to succeed in the health insurance marketplace without having access to people who are eligible for Obamacare subsidies. 

The Obamacare system as it currently exists does appear to be heading down a completely unsustainable road, but before conservatives and big government opponents break out the celebratory champagne, a few considerations must be taken into account.  

If the real goal of Obamacare, as many free-market advocates speculated at the time the ACA passed, is to expand the power of government then a death spiral for Obamacare could ultimately be a success story for the Democrat Party. The more health insurance companies try to earn a profit by removing themselves from Obamacare programs, the greater the opportunity will be for federal and state government agencies to fill the void left behind by insurance companies through government programs.  

To some extent, this concern has already begun to rear its ugly head through Medicaid expansion. According to the Centers for Medicare and Medicaid Services, there are now more than 72 million Americans enrolled in Medicaid or the Children’s Health Insurance Program, a figure that’s 23 percent greater than it was in 2013. Combined Medicare and Medicaid enrollment figures now top 120 million nationally, or about 38 percent of the total population.  

If the current trends continue, Obamacare as we know it may collapse under its own weight, but in its place could emerge something very similar to the single-payer healthcare system President Barack Obama and many of his Democrat colleagues desired in the first place.

Haskins (Jhaskins@heartland.org) is editor of The Heartland Institute and the author of Heartland’s weekly Consumer Power Report.