ObamaCare is failing. The evidence continues to mount. Something will have to be done soon. The decision depends on the voters in 2016.
In recent posts (White House Concedes ObamaCare Failure, ObamaCare Failing the Middle Class) I have discussed the mounting evidence of ObamaCare failure, including the poor enrollment numbers that even HHS Secretary Sylvia Matthews Burwell admits will be a challenge to improve. The main reason people are not signing up for insurance, even with government subsidies, is that the insurance is a poor value.
The implications of these poor enrollment numbers were discussed in Failing ObamaCare Enrollment Ominous. Now comes information from the insurance industry that bodes poorly for any improvement in the future.
Medical Loss Ratios
The Wall Street Journal editorial board sites a new study from the researchers at the Robert Wood Johnson Foundation and Urban Institute that analyzed medical loss ratios (MLRs) in the insurance markets. MLRs measure the share of premium revenue that pays medical claims.
The insurance industry pre-ObamaCare liked MLRs of less than 80% because that leaves more than 20% to pay administrative costs and leaves plenty for profits. But ObamaCare set a minimum MLR ratio of 80% in the small group market and 85% in the large group market. If MLRs are less, the insurance industry must rebate the difference to the consumer.
This new study, however, found that in 2014, the first full year of claims experience in ObamaCare, average MLRs across all health plans sold on 16 state exchanges ranged from 90% to 99%. Average MLRs in 11 states climbed to 100% or more, reaching as high as 121% in Massachusetts. An MLR of 121% means the insurance company is spending $1.21 for every $1 of premium collected.
Rising Insurance Premiums
The 2014 MLRs are being used to set the premium rates for 2016. The researchers estimate that to lower MLRs to 85%, premiums in the 11 money-losing states need to rise by 10% to 36% in the best estimate and 23% to 52% in the worst scenario. Even worse, when these rising rates discourage people from renewing their coverage, rates will have to rise even higher to make up the short-fall.
People will be faced with a decision between purchasing expensive insurance that has deductibles that averaged $6,600 last year – or paying a fine of $695 or 2.5% of their earnings, whichever is higher, for not buying an ObamaCare compliant plan. Secretary Burwell has already conceded that only one of four eligible enrollees is willing to purchase the insurance. That number will get increasingly worse as the premiums rise to stabilize the MLRs.
The natural result of such intense pressure on the insurance market will be the bankruptcy of smaller companies and the consolidation of larger ones. That is already happening. In 2015, health insurers had already announced $45 billion worth of healthcare mergers and acquisitions by August when Anthem declared its intent to purchase Cigna. An earlier announcement that Aetna would purchase Humana leaves the industry with only three major players -Anthem, Aetna, and UnitedHealth.
Previous insurance industry mergers have led to higher premiums, according to Bloomberg Intelligence’s Jason McGorman. When Aetna purchased Prudential’s healthcare business in 1999, premiums rose 7 percent according to a study by the American Economic Review. When UnitedHealth acquired Sierra in 2008, premiums rose 14 percent according to a Health Management report.
With rising MLRs and insurance industry consolidation, pressure is mounting for raising premiums to unsustainable levels. The collapse of the insurance market will then force politicians to come up with a solution to this ObamaCare train wreck. Look for this to be a major issue in the 2016 presidential election.