It wasn’t supposed to be like this. After more than half a century of effort, the Democratic Party finally realized its goal of passing legislation to provide health insurance to millions of uninsured Americans. The law almost died several times during its tortuous road to passage. When President Barack Obama finally signed the Affordable Care Act (ACA) in 2010, Democrats could be forgiven for thinking the hard part was over.
As candidate Obama might have put it in a very different context: “The invasion went fine. It was the post-invasion planning that left a bit to be desired.” Over the past several weeks, the administration’s implementation of the ACA has moved from one crisis to another. The rollout of Healthcare.gov—the web portal to the federal health-insurance exchange—has become the most disastrous software product launch since Microsoft Windows Vista. Obama knew how important it was that the site function. On the night he signed the ACA into law, as he and his staff were celebrating their victory, he warned, “If the website doesn’t work, nothing else matters.” Was no one listening?
Following coverage of the website’s problems came more bad news: millions of Americans losing their health-insurance policies because of the ACA. While it is estimated that only 3 percent of Americans will end up paying higher premiums because of the ACA, that still amounts to millions of people—enough to cause headaches for members of Congress.
Is Obamacare doomed? Some Democrats fear (and many Republicans hope) the answer is yes. Yet, while the next few months are likely to be rocky, there are still good reasons to be optimistic about the ACA’s future. To understand why, it helps to know a few details about the law. The ACA has two principal mechanisms for expanding insurance coverage. The first (often forgotten) is a large expansion of Medicaid to cover significantly more low-income families. The Obama administration’s original projection was that roughly half the uninsured would be covered by that change alone. The expansion is an exceptionally good deal for the states because the federal government is paying the vast majority of the costs through 2020. While twenty-one states with Republican governors or legislatures have refused to participate, it remains to be seen how long they will be able to resist the program’s alluring fiscal logic.
Even if other parts of the ACA were changed or repealed, the Medicaid expansion might well survive. Pulling back the federal money would blow a large hole in the budgets of many states, forcing them either to raise taxes or to throw millions of newly insured people out of the program. This is not a choice that governors of either party want to face, and past efforts at the federal level to scale back the Medicaid program have usually met with failure.
The ACA’s second mechanism for expanding coverage is subsidizing the purchase of private health insurance through an “exchange,” a marketplace where consumers can compare health plans offered by different insurance companies. Consumers can choose from one of four options—“bronze,” “silver,” “gold,” and “platinum”—each of which offers a different level of financial protection. While the cost-sharing varies, the covered benefits (office visits, hospitalization, prescription drugs, etc.) are standard across the plans. Insurers must sell coverage to all comers and cannot charge higher premiums because of an individual’s health status. (They can, however, charge older customers and smokers more, within limits.)
This latter policy—a change that Americans across the political spectrum support—is one of the most important features of the ACA, but it is also one of the most difficult to implement. Health insurance is essentially a form of socialism, a transfer of money from the healthy to the sick. For that to work, an insurance plan must strike a rough financial balance between the two groups. In the absence of any other policy change, requiring insurers to take anyone regardless of health status increases the number of sick people in the plan, which means premiums must go up in order to cover the additional costs.
That’s what makes the so-called individual mandate so important. By requiring everyone to purchase insurance, health plans will be able to achieve the necessary balance between the healthy and the sick. In the absence of the mandate, the people motivated to buy insurance would probably be sicker than average, which would force plans to raise premiums. That would lead some people—mostly the healthier ones—to drop coverage, leading to a further round of premium increases. In the industry, this is known as the “death spiral.”
While the individual mandate is good policy, it’s not popular. Candidate Obama, you may recall, campaigned against it. Most people don’t like to be required to do anything, much less something that costs money. That’s why the Obama administration was holding its breath over the summer to see what premiums the insurance companies participating in the exchanges would charge. Fortunately, most came in at a reasonably affordable level. When coupled with the subsidies, the cost of a “bronze” plan for many low- and moderate-income individuals will be close to zero, if not entirely free.
The longer Healthcare.gov fails to work, the greater the threat to Obamacare itself. A broken website could make it harder for insurance companies to achieve the necessary balance of risk. If you’re healthy, how likely are you to continue trying to enroll? Sicker pools mean higher premiums. Obama’s decision to allow individual policyholders to keep their current policies longer creates the same problem because it means this group of relatively healthy people will remain outside the exchanges.
If the federal website can be fixed quickly, these problems may go away. Several states, including Kentucky, California, and New York, have websites that are working quite well. That suggests the technical challenges are not insurmountable. If problems persist, however, lawmakers will face enormous pressure to modify the March 1 deadline for the individual mandate. If that happens, panicked insurance companies could raise premiums dramatically—or exit the market entirely.
But that’s not a foregone conclusion. The ACA provides insurers an unprecedented opportunity to enlarge their customer base. With job growth at a snail’s pace and many new jobs not offering benefits, selling health insurance has become a Hobbesian war in which one insurance company gains business by taking it away from others. The ACA, by contrast, offers the possibility of enrolling tens of thousands—perhaps even hundreds of thousands—of new customers.
Once those customers enroll, they are likely to stick with the plan they have, particularly if they are no longer forced to abandon it when changing jobs or retiring. Being the first mover in this new market carries significant advantages. Insurers don’t want to be on the outside looking in. They have every incentive to absorb some short-term losses in order to build market share later. What’s more, the ACA contains little-known provisions that protect insurers in case their enrollees end up costing them significantly more than expected. Known as “risk corridors,” these are essentially payments from the federal government to insurance companies that end up with more than their share of high-risk enrollees.
If the individual mandate were to be repealed entirely, many insurers probably would throw up their hands and flee the exchanges. But if it’s delayed a few months, then they may be inclined to ride out the storm. Conventional wisdom among the ACA’s critics is that many people would rather pay the penalty than buy insurance. That penalty, however, is larger than most people think. For 2014, it’s $95 or 1 percent of your taxable income, whichever is greater. If you are an upper-middle-class person with $75,000 of taxable income, that’s $750 a year, for which you get nothing in return. The penalty increases over time, rising to 2.5 percent of taxable income by 2016. For all but the most ideologically opposed, buying health insurance will seem smarter than burning a thousand dollars or more.
An often overlooked feature of Obamacare’s current crisis is that it is the most “conservative” elements of the law that are causing the most trouble. The law’s ancestry—including its reliance on an individual mandate and private health insurance—can be traced back to proposals offered by President George H. W. Bush in 1992 and by Sen. Bob Dole during the 1994 fight over President Bill Clinton’s health-care-reform bill. While Rep. Paul Ryan (R-Wis.) has vociferously opposed the ACA, his proposal for Medicare reform—which expects seniors to purchase subsidized insurance in a regulated market—is structurally very similar.
If Obamacare does collapse, the conservative victory may be short-lived. Many liberals never completely reconciled themselves to the ACA’s market-based approach. They would like nothing better than to take the money being spent on premium subsidies and “risk corridor” payments and use it to expand Medicare and Medicaid instead. It would be ironic if the conservative war against Obamacare ended up resurrecting the movement for single-payer health insurance.