What is the hue and cry about this time? United Healthcare is saying it has lost large bales and wads of money on Obamacare exchange plans, and just may give up on them entirely. Anthem and Aetna allow that they are not making very much either. Some new not-for-profit market entrants have gone belly up, and the others are having a hard time. So various industry pundits are pronouncing Obamacare a failed experiment, obviously doomed, done, toast.
Before we perform the Last Rites over Obamacare, perhaps we should think for a moment about the hit ratio of the first 711 Wolf Reports from Boy W. Cried and ask a few questions.
Trust the numbers?
First: Do we trust implicitly the numbers that the health plans are giving out in press releases, citing unacceptably high medical loss ratios? Medical loss ratios (MLRs) are self-reported. Yes, there is a certain amount of accountability. The numbers have to square with expenses given on their corporate tax forms and so on, but there is wiggle room in just what is reported and how. It is a reasonable supposition that if you wanted to look for the professionals with the greatest skill in juggling numbers, you would find them working for insurance companies, especially health plans, because the stakes are so high. These numbers people at the top of their game have huge incentives to report a high MLR, so if there is wiggle room, I am sure they will find it.
Beyond that, MLR is reported by state, by market segment (large group, small group, individual), against what portion of a premium is “earned” within that reporting period, and by calendar year rather than any company’s financial year. To say, “Our MLR is X” is to claim that X is the correct aggregate number across their entire multi-state system, from all their subsidiaries, appropriately weighted for the size of each region. We don’t have access to those numbers, just to what they are telling us. There are plenty of reasons for them to want to report the highest MLR they can get away with, plenty of reasons to be skeptical of the numbers they are giving out, and plenty of reasons not to base drastic policy changes on such pronouncements.
Obamacare fail or poor business judgment?
But let’s get down to business here. So they lost money (or barely made it) in 2014 and 2015, and they are projecting the same in 2016? Doesn’t this mean that they misjudged the cost of healthcare, so they need to raise premiums? And they didn’t realize this soon enough to raise them appropriately for the 2016 year?
Sounds like somebody (or a pile of somebodies) made faulty business judgments. This is not too surprising, given that these are new business models in new markets. Pricing, risk analysis, and utilization projections are hard enough in established markets, doubly difficult in emerging ones, and exponentially more difficult for a new company scrambling to grab any market share at all, like the failed cooperatives.
Well, waah. Welcome to competition, market capitalism, all that stuff. None of this is in the least surprising.
But does it mean that “Obamacare has failed”? Does it even mean that these companies have failed in Obamacare markets? No, it means what it is: These companies have failed to make the profits that they hoped for in the opening three years of Obamacare. And they are telling us all about their pain so that the government (through regulation) or the body politic (by repealing Obamacare) will make it easier for them to churn a profit.
So what’s the real problem here? In any kind of economy, you need to price your products so that (in aggregate, over time) your total cost of ownership is less than what you sell your products for. There’s your margin, the oxygen of your business. These folks are claiming that the aggregate total cost of ownership of what they are selling (access to healthcare) is close to what they are selling it for. Hmmm. That’s a problem. It has two paths out: Lower the total cost of ownership (get the actual costs of healthcare down) or raise the premium.
Get aggressive on real costs?
How about getting aggressive about the real cost of healthcare? Two problems with that part of the equation: 1) It’s really hard and takes years. 2) It does not benefit just them. It will benefit the whole market. So it’s not a path to greater profitability.
A health plan’s profit (margin) is some percentage of the total cost of care for the people they cover. So they have an incentive on the one hand to cover a lot of people (that is, increase their market share). They have an incentive to keep their premiums competitive not in absolute terms but relative to other payers in each regional market. On the other hand, they have no incentive to get aggressive about actually lowering the underlying real costs of healthcare for the whole market. That would not give them a competitive advantage.
What’s the business concern with raising their premiums appropriately? The concern is that these lower-cost narrow network exchange plans are price inelastic. If they raise their premiums, they will lose market share. But wait, if the cause really is the underlying high costs of healthcare, won’t everyone’s premiums have to go up the same amount? This complaint sounds more like an assumption that others can provision the market more efficiently, keep their premiums more competitive, and gobble up market share.
Again, is this a failure of the Obamacare model? Or is it actually proof of concept? To say that the Obamacare exchanges are failing because some companies might give up on them is to imagine that the purpose of Obamacare, the metric on which it should be measured, is to make health plans comfortable and profitable. Wrong.
The core idea of the Obamacare exchanges has been that health plans should compete on a level playing field to see who could offer the best service and the best access to healthcare at the lowest price. That’s what markets are for. The assumption built into this logic is that some organizations will do it better than others, some will not be good at it, and the market will shake out. If nobody ever failed in the Obamacare exchanges, then we would have to say that they failed to establish anything resembling a true market.