Affordable Care Act Roll-Out: Are “Train Wreck” Fears Justified?

Expect to see a large U.S. Department of Health and Human Services (HHS) advertising and public relations program this summer ahead of the October 1 federal and state health insurance exchanges open enrollment, one of the key features of the Affordable Care Act (ACA). The Administration, Congress and the nation have much riding on successful implementation of the law and the participation of newly-insured individuals. Public surveys show limited awareness and initial understanding of insurance options. Among others, the Democratic designers of the law have stated their concern that the ACA roll-out may be problematic, with Senators Baucus and Reid warning of a “train wreck” if ACA begins poorly. There is low likelihood that Congress will pass even minor changes to the law. Healthcare stocks, particularly those of managed care and hospital companies, will be volatile around the law’s start. Bear in mind that early enrollment reports will mean little, since initial open enrollment extends through March 2014. Also, the costs to implement ACA increase over time due to progressively higher individual mandate penalties (to be assessed by the IRS), less federal funding for states, and larger federal health excise fees.

At the least, a basic federal insurance exchange will begin and be available within those states that have refrained from starting their own. Participating states have or will establish their own exchanges, most notably California. Among possible initial problems are surprisingly high insurance premiums, functional and technical malfunctions, poor publicity, insurance enrollment below estimates and high subsidies paid by government sponsors. Health insurers have warned of rising premiums and guided to only minimal new business from the exchanges. The causes and magnitude of premium increases and the federal government’s response will dominate early news coverage. “Sticker shock,” particularly to the previously uninsured, will affect the decisions by many on whether to participate. This may be the case because of the essential health benefits (EHB) package that every plan must cover beginning in 2014. These EHBs appear to be above what most health plans cover today and will likely lead to higher utilization, which leads to higher premiums. Also, requirements associated with guaranteed issue and community rating (level premiums for all) without a concurrent effort to expand coverage to healthier individuals, may lead to surprisingly higher premiums, before any subsidies.

The Congressional Budget Office (CBO) has reduced its estimates of 2014 exchange and Medicaid enrollment to numbers well below the full extent of coverage eligibility, which it has estimated at 38 million. If enrollment falls below even these reduced estimates, the companies most likely to be affected negatively are hospitals, which are seeking to serve more insured patients and offset Medicare reimbursement pressure, and Medicaid managed care plans, which are seeking new Medicaid enrollees. Still, hospital companies, health insurers, drug manufacturers, and medical device manufacturers have provided conservative 2014 guidance on additional volumes due to health insurance exchanges.

Overall health insurance coverage and the exchanges are burdened by the relatively lower cost of the individual mandate penalty compared to the cost of insurance coverage, even with federal subsidies, that may cause many, particularly the young and healthy, to opt out of coverage. This could lead to adverse selection, that is, the disproportionate enrollment of sicker and older individuals who have lacked coverage in the past. Managed care companies’ losses on exchange business, however, would be partly covered by federal reinsurance payments. The potential exists for employer “dumping,” the cancelation of employer-sponsored insurance with the presumption that workers will look to the exchanges for coverage. Employers face a low penalty for not offering affordable insurance (relative to the cost of coverage). It seems so far that most employers speaking publicly have committed to continuing to offer coverage, despite the availability of the exchanges, as a way to attract workers and maintain the existing tax deduction for employer-sponsored health insurance. Some employers are cutting workers to part-time status to eliminate the need to offer health insurance.

HHS insists that it plans to complete its IT development and testing for the federal exchanges and data hub by September 2013, ahead of the October 1 open enrollment and January 1 coverage start, and will be able to run the federal exchange in every state it needs to due to its coordination with those states. Further, HHS says it has contingency plans for any problems that arise in the complex program. The only comparisons on which one can draw are the implementation of the Massachusetts state insurance exchange and Medicare Part D drug coverage, both over six years ago. Both programs, smaller than ACA, overcame initial problems with publicity and enrollment, record interconnectivity, and premium miscalculations. For many involved in the creation and management of ACA, as well as those who analyze it, this is the challenge of a lifetime.


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