Healthcare.gov Rocky Start Won’t Mean The End Of Obamacare, But Carrier Losses Might

It's hard to sugarcoat the fact that the launch of Obamacare and the healthcare.gov website has been an unmitigated disaster, and there are few of us in the industry who are surprised. However, there have been many rocky product and website launches before, and Obamacare too will survive this administrative debacle. With a little time, a ton of money and the undivided attention of the Commander in Chief, the website will get fixed sooner rather than later. There is far too much for the President to lose politically for the administrative problems to persist.

The fact is that administrative problems don't bring down big ideas.  But financial problems do.

That’s why the White House is fixated on the ratio of enrollments, not the total number. The fact of the matter is that low enrollment will not kill Obamacare, but the mix of healthy/unhealthy might.

The number one selling point with Obamacare is the elimination of pre-existing conditions – the fact that people who need health insurance can get it when they want it without massive premium surcharges. But remember that insurance is a game of subsidy – the law of large numbers is based on the fact that you need healthy people to subsidize the unhealthy. In order to afford to cover the unhealthy without a financial surcharge, you need lots of healthy folks willing to pay a surcharge.

You need lots of healthy folks willing to pay a surcharge.

2.7 million of them, to be exact.  With 7 million people projected to join through public exchanges, underwriting assumptions require 40% of the enrollment to be age 35 and under in order for the premium structures to work.  Without these healthy folks, carriers will lose money and rates will go up dramatically.

So what happens if the young and healthy don’t enroll?  First, risk management provisions of the Affordable Care Act step in to absorb insurance carrier losses that exceed 103% of premium, up to a maximum of 108%. Carriers will then increase their premiums accordingly so then can make some money. So on the surface, there is no reason to expect carriers will drop out of the exchanges right away.

But they might.  ACA regulations require that carriers maintain a single risk pool on and off exchange.  Losses on the exchange will hurt the competitiveness of carriers off-exchange, by law.  So while the government will help to absorb underwriting losses, carriers need to worry about exchange losses infecting their entire book of business, and their ability to compete in the market.  Losses on exchange will increase prices off exchange as well and could result in carriers losing membership. They won’t like that at all.

So pay attention.  If the young and healthy don’t enroll, things could start to unravel fast.