Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

What Happens After Obamacare Collapses?

Even though the Trump-obsessed media has ignored it the health-insurance exchanges; a critical part of Obamacare, are dangerously close to collapse. Aetna (NYSE: AET) became the latest insurer to jump off the Obamacare ship by pulling out of exchanges in 11 states on August 16, 2016.

Aetna’s move followed UnitedHealth’s (NYSE: UNH) decision to leave most of the exchanges it is operating in by 2017. That will leave most people participating in the exchanges with far fewer choices. At least one community; Pinal County, Arizona, will have no health insurance plans available through the exchanges because of Aetna’s exit, USA Today reported.

Now to make matters worse many Blue Cross and Blue Shield plans and other local providers will be forced to leave the exchanges, Robert Laszewski; the president of the analyst firm Health Policy and Strategy Associates, told CNBC. Laszewki thinks that all insurers will be forced to leave the exchanges at some point in the future.

The Obamacare Nightmare

If that were to happen around 10 million Americans would find themselves in a nightmare situation. The Affordable Care Act requires them to have health insurance, yet there is no affordable health insurance available to them.The exchanges were set up to provide coverage to people; mostly self-employed individuals, who lack employer provided plans. The idea was that the federal government would subsidize part of the premium of private health insurance purchased through the exchanges.


The exchanges have failed for three reasons outlined in a McKinsey Analysis spotlighted in a July Politico story. Those reasons are:

  1. Not enough healthy young people purchased policies through the exchanges. Instead almost all those who bought insurance were older and often sicker individuals who require more medical services. The original idea behind Obamacare was that the premiums of younger people would pay for health insurance for the older and the sicker that did not happen.


  • A big problem was that the exchanges were most popular in very poor states like South Carolina where people tend to be less healthy. Another dilemma; and one the Obamacare creators, should have foreseen is that the lower-income people most likely to turn to the exchanges to be less healthy. After all many of them have gone without healthcare for their entire lives.


  1. Not enough people are participating in the exchanges. Projections were that around 20 million would sign up for the program, instead around 10 million did. One reason for this was that large numbers of people did not quit their jobs; or give up on employer-provided health insurance, as the Obamacare authors expected.


  1. Congress has refused to underwrite the cost of insuring higher risk (less healthy) patients as originally intended. Instead the burden of that was shifted to insurers who cannot afford it.


The most likely scenario at this time is that large numbers of people who should be getting insurance through the exchanges will not get it. To make matters worse those who still have choices will pay a lot more. Premiums might rise as much as 48% in some locations as I noted earlier.

So What can be Done About Obamacare?

Obviously politicians will have to do something about the exchanges even if they do not want the idea. In my mind there are three possible solutions to this crisis, none of which might be that politically popular.

These solutions are:

  • Have the federal government step in and subsidize premiums for those in the exchanges. This is what was supposed to happen; but it never did, because the Republican Congress has refused to fund the mechanism that would provide the funding – the so-called “Risk Corridors.” This would be the easiest solution; but it would be unpopular, particularly if it were seen as a subsidiary for the health-insurance industry. A potential problem here is that Congress would be effectively handing a blank check to health insurers and the pharmaceutical industry by fully funding risk corridors.


  • Expand Medicare or Medicaid to cover those in the exchanges. This would be popular because both programs are a much better deal than the exchanges. It would be troublesome because states are having a hard time funding Medicaid, and Medicare is slowly running out of money. Another potential pitfall is that Medicare does a poor job of containing costs; meaning any expansion might raise health insurance prices, unless Congress seriously reformed the system. One problem is that under present law, the Centers for Medicare and Medicaid are barred from setting drug prices for Medicare Part D patients. Although there certainly is support for this solution, Hillary Clinton wants to expand Medicare eligibility to cover those over 55; which would remove the most expensive group from the exchanges.


  • Set up a single-payer system which would replace the exchanges and other government health insurance plans. This is what the backers of Amendment 69 in Colorado want. That ballot measure would create a single-payer healthcare system in my home state. It also has the support of some popular political figures; including former Presidential candidate and US Senator Bernie Sanders (D-Vermont). Such a system would be popular but difficult to sale to the public. It would also face intense opposition from Republicans, Libertarians, many business interests, conservative activists and the insurance industry.


My prediction is that we will see some sort of Medicare or Medicaid expansion because such a move would be politically popular. Hillary’s Medicare over 55 seems to be a sneaky means of achieving that.

Something will have to happen and soon, because the Obamacare crisis will hit home in January. That is when the current policies offered by the exchanges will expire. That will ignite a political firestorm which will finally force the President and Congress to deal with Obamacare and healthcare.