Obamacare’s Latest Problem is Real, But Not Fatal

Here’s a funny thing. Conservatives have spent the past five years pointing to a long litany of alleged problems with Obamacare and gleefully predicting that each of them would lead to its downfall. They never did, either because the problems weren’t even problems, or because they were pretty small beer and didn’t really have any effect. Nonetheless, every month or two brought yet another harbinger of doom for Obamacare.

So you’d think they’d be over the moon at the moment, now that Obamacare really does appear to be facing a serious problem. Even liberals are worried about large insurers like Aetna and United Healthcare abandoning the exchanges, leaving some regions with only a single monopoly insurer. But conservatives aren’t really saying much about this. It’s kind of odd.

Maybe it’s because they’re all too freaked out by Donald Trump. I don’t know. Still, there are some who are noticing the problem and predicting the eventual demise of Obamacare. Here’s Megan McArdle:

Unfortunately, while basically everyone in the country thought that the U.S. health care system was as messed up as a party-school group house on graduation day, most people actually liked whatever coverage they had. That created a political bind: No reform could pass if it seemed to shrink any of [the existing] major markets in any significant way. Expanding everything would cost a boatload of money and make taxpayers freak out, so the architects of Obamacare finessed this problem with a combination of:

  • Opaque rules.
  • Disingenuously optimistic promises such as, “If you like your plan you can keep it.”
  • Weak versions of unpopular measures needed to make the law work, such as paltry penalties for failing to buy health insurance.
  • Not touching the wildly inefficient profusion of programs.

All that stuff is what has left Obamacare where it is. The dishonesty was exposed. The weak versions of European measures failed to encourage the behavior changes needed to make the system work. And the fact that every other program was left in existence, largely untouched, created new ways for patients and consumers to game the rules to get maximum reimbursements for minimum expenditure.

None of these are actually operational problems with Obamacare except for the third one. But here’s the thing: last year was the first time people actually got hit in the face with the prospect of a penalty for not having insurance. And McArdle is right: it was too small to motivate people to change their behavior—especially all those young healthy folks that insurers want. $325 for a single adult just wasn’t enough.

But this year the penalty was $695. Next year, it will be either $695 (plus a bit for inflation) or 2.5 percent of your income. For someone making, say, $30,000, that’s $750.

Is that enough? Hard to say. If your income is low, it’s more than the cost of insurance, so you might as well just get the insurance. If your income is a little higher, then it’s true that you can save money by just paying the penalty. But the net cost of insurance is probably only about $1,000 more than the penalty. Once this starts to sink in, a lot of young folks are probably going to conclude that for a hundred bucks a month they might as well sign up.

It will be a few years before we know for sure. In the meantime, it’s clear that insurers screwed up pretty badly in their initial estimates of how much it would cost to insure the typical Obamacare pool. They shoulda listened to the CBO. Still, here’s the thing I don’t get: the obvious response to insurers losing money is twofold. First, some insurers will abandon the market. Second, the surviving insurers will probably raise their prices. This is how competitive markets work. It’s messy and inconvenient, but in the end it all settles down.

The only thing that would prevent this is some kind of death spiral, as rising prices cause even more healthy people to stop buying insurance and instead just pay the penalty. This isn’t impossible. But prices won’t rise at all for low-income buyers, and are capped at 9.5 percent of income for most others. So there’s a limit to just how far this can go, even in theory.

Maybe I’m letting partisan views blind me to the scope of this problem. But I think this is a problem that Obamacare will survive. Prices will go up over the next couple of years. My guess is a rise of around 20-25 percent or so. As the penalties sink in, more young people will sign up. The most efficient insurers will remain in the market and become profitable. And yes, there will probably be individual counties here and there that have only one insurer, or even no insurers in a handful of cases.

In other words, it won’t be health care nirvana. But it will work. The end is still not nigh.