Et Tu, Aetna?

What a difference ten months makes! In October 2015, after United Health announced its intention to minimize its participation in the online exchanges of the Affordable Care Act (ACA), Aetna vowed to continue its participation in them. Its CEO Mark Bertolini declared, “We view it still as a big opportunity.”

So how long did his view last? Not even a full year! Last week, Aetna reversed its position and announced its intention to follow United’s withdrawal strategy.

Why? Aetna claimed that, after reviewing its recent fiscal data, its executives decided that the firm could no longer afford the costs of care for members inside the ACA exchanges. And yet the insurance giant had previously announced that it had “achieved record annual operating revenue and operating earnings in 2015, and delivered full-year operating EPS that was above (its) most recent projection.” And they produced these results while participating in the exchanges.

Furthermore, Aetna had threatened the federal government that it might withdraw from ACA exchanges if regulators failed to approve its mega-merger proposal with Humana. After the Department of Justice refused to approve the merger, Aetna announced its exchange withdrawal plans.

For obvious reasons, some critics charge that Aetna’s withdrawal represented a decision to “make good” on an inappropriate threat. Whether or not you believe that the insurer acted appropriately, though, it might be helpful to ponder a more fundamental question.

Namely, why should we believe that any large, for-profit health insurer would remain committed to the ACA exchanges? Indeed, why would such firms find it profitable to sell policies to individuals at any time?

Think about it. Large health insurers were never eager to sell affordable policies to individual families before the ACA was passed into law. That’s why individuals who were unable to access health benefits through their employers were often forced to purchase extremely limited plans with very large premiums.

Then and now, major health insurers prefer to contract with large employers that maintain Departments of Human Resources. These Departments employ teams of professionals to help insurers manage their administrative and communications responsibilities with their enrollees, i.e. with corporate employees.

Thus, insurers can achieve significant economies of scale by insuring many employees through each group contract. They cannot possibly achieve such cost efficiencies in the individual market.

So was there ever any reason to believe that the ACA would alter this fundamental economic reality? It’s hard to understand why any large national insurer would maintain a long term commitment to the individual market under any regulatory system.

Of course, this doesn’t necessarily mean that the exchanges should be shut down immediately. For the eleven million individuals who obtain health insurance through the ACA each year, an insurance policy with a non-profit or small for-profit insurer is undoubtedly preferable to no insurance policy at all. Such insurers may remain interested in growth strategies that rely on the individual policy market.

Nevertheless, ACA supporters who are excoriating Aetna for its withdrawal decision may wish to hold their fire. Whether or not they have a point about the ethicality of Aetna’s choice, it may be difficult for them to dispute the inevitability of it.

Obama Care’s Here To Stay

When did it first become clear that China would be welcomed back into the modern global economy by the United States? Most experts point to Republican U.S. President Richard Nixon’s 1972 trip to that nation as the moment when today’s Chimerica colossus was born.

Why? Because President Nixon was a strident anti-Communist who had spent his career opposing such measures. And yet, when people now say that “Only Nixon could go to China,” they mean that American / Chinese rapprochement only became inevitable when the most powerful political opponent of that policy decided to embrace it.

Likewise, two decades later, it only became clear that America’s liberal welfare system would be dramatically downsized when Democratic President Bill Clinton signed the Personal Responsibility and Work Opportunity Reconciliation Act. Then, and only then, could American citizens truly believe that their government had permanently ended “welfare as we know it.”

So why are these historical events relevant to the continuing debate about the Affordable Care Act (ACA)? Earlier this month, the eminent conservative think tank American Enterprise Institute (AEI) released a major report entitled Improving Health and Health Care: An Agenda For Reform. It was written by a panel of ten illustrious knowledge leaders, and (as expected) it called for the replacement of the ACA with a different set of guidelines and regulations.

Ostensibly, by replacing the current law, the major elements of the existing Act would be swept away. The mandate that citizens purchase health insurance? Gone. The ability to purchase insurance on a web site that lists all available options? Goodbye. The issuance of subsidies that make coverage more affordable? Farewell.

But before we conclude that the AEI actually recommended major revisions to our national health care policy, let’s review some of the elements of its proposed reforms. Its report recommends, for instance, the implementation of a “default enrollment program” that would enable state governments to place uninsured citizens into health plans without their advance consent.

What’s the difference between “mandatory enrollment” and “enrollment by default”? One might argue that the second type of system (i.e. the AEI’s preferred alternative) would place even more regulatory authority into the hands of government than the first type. Indeed, it’s hard to understand how it would actually reduce such authority.

Likewise, the AEI report proposes to replace the existing internet-based market exchanges with vaguely defined, state-regulated “mechanisms for consumer choice of plans.” It also proposes the replacement of the existing tax subsidies with “refundable tax credits.”

Would any of these changes address the fundamental impact of the law on the daily lives of American citizens? By simply redefining mandatory enrollment techniques as default enrollment techniques, market exchanges as consumer mechanisms, and tax subsidies as tax credits, the AEI appears to recommend the replacement of the ACA with a set of roughly analogous policies.

And so, just as Nixon’s embrace of China and Clinton’s endorsement of welfare reform certified permanent shifts in government policies, this month’s AEI report may have done precisely the same thing for Obama Care. By reading between the lines of the conservative think tank’s self-proclaimed desire to replace the ACA, we might be able to discern an implicit acknowledgment that the health law’s fundamental policies are now here to stay.

Obama Care’s Mortal Threat

Last week, we learned that the Affordable Care Act of the United States faces a new, and potentially mortal, threat for the first time.

And what is the source of the threat? Believe it or not, its threat is itself. More specifically, it is a single phrase that lies buried within its thousands of pages of legal jargon.

You see, the Act provides citizens with financial subsidies to purchase health insurance on each state’s online web site. The subsidy levels are based on each citizen’s annual income level; without those subsidies, health care coverage would probably be unaffordable for all but the wealthiest Americans.

So what is this threat? Well, according to the legal text, each of the fifty states can choose to either develop its own customized web site, or to utilize the federal government’s “built for every one” web site. And if a state chooses to develop its own site, it can either operate its site with public employees, or it can subcontract the function to private organizations.

Thus, a diverse array of options has emerged during the past year. Although more than two thirds of the states have opted for the federal government’s site, the remaining states are selecting from a wide range of choices.

Some are designing their own sites to integrate seamlessly with other state benefit systems. Others are contracting with for-profit heath insurance corporations to design freestanding sites. And some states are even acquiring software that is already in use in other states.

It appears that a healthy, competitive free market is now emerging to serve the needs of the states regarding the Affordable Care Act, doesn’t it? So what is the Act’s mortal threat?

Apparently, opponents to the Act are focusing on a single vague phrase in the original law. The language in Section 1401 states that subsidies are available to citizens covered by health plans “which were enrolled in through an Exchange established by the State.”

So if a state decides to adopt the federal government’s Exchange site, is it utilizing a site “established by the State,” or is it using a site established by the federal government?

Opponents to the Act claim that the latter is true, and that more than two thirds of the states have thus opted for a choice that deprives its citizens of the very subsidies that make health care coverage affordable to all. Supporters of the Act, conversely, claim that the former is true, and that citizens of all states can receive subsidies.

Last week, a federal court in Washington DC decided that the Act’s opponents are interpreting this ambiguous phrase correctly. It thus declared that citizens in more than two thirds of all states are not eligible for subsidies.

But just hours later, a different federal court in Virginia decided that the Act’s opponents are wrong. That court declared that the writers of the federal law could not have possibly intended to deny subsidies to citizens of states that choose to use the federal Exchange site.

It will undoubtedly take months, or even years, for the dispute to work its way through the federal court system. Nevertheless, the case represents a disturbing illustration of America’s dysfunctional political and legal systems.

After all, an opponent of any lengthy and complex law will always be able to find a vaguely written phrase that can be interpreted in a counter-productive manner. By allowing opponents to tie up such laws for years of legal challenges, the American judicial system makes it less likely that such transformative legislation will be drafted, debated, and passed into law at all.

And if there is one fact that Americans across the ideological spectrum can agree upon, it is that many of the nation’s economic and social sectors are in desperate need of transformation. Thus, the Affordable Care Act’s ambiguous phrase is more than just a mortal threat to the Obama Care program.

It may well represent a mortal threat to the nation’s ability to address any of the underlying causes of its troubling economic and social malaise.

Obama Care: Any Alternatives?

Without question, the biggest political news to splash across the headlines last week involved the amazing comeback of the Affordable Care Act (ACA). Despite the catastrophic roll-out of its signature e-commerce web site last autumn, the system handily surpassed its original 7 million enrollment target, while additional volume continues to roll in.

The biggest surprise of the week, though, may have involved the absence of any comprehensive alternative proposals from Republican opponents to the ACA. After all, with well over seven million Americans now obtaining health insurance through the online exchanges, a simple repeal of the law — without any alternative options whatsoever — would cause chaos in the health care sector.

Louisiana’s Republican Governor Bobby Jindal acknowledged the problem a few days ago, noting that “I think there are too many Republicans in this town thinking that we should just run against Obamacare … but I think that’s wrong.” Jindal proposed replacing the ACA with a collection of federal block grants, health care vouchers, tax deductions, and other government initiatives. But Jindal did not release any cost estimates, and failed to explain how he would pay for his proposals.

The primary challenge now facing the Republican Party is that such initiatives have been thoroughly debated — and repeatedly pilot tested — during the past several decades. But the pilot programs have never generated outstanding results, and thus the options have never drawn significant political support for widespread implementation.

In fact, to the chagrin of Republicans, the ACA remains the sole contemporary option for extending health coverage to millions of uninsured Americans across the nation. And according to the Congressional Budget Office, by the end of President Obama’s term in 2017, 28 million Americans will receive coverage through the health insurance exchanges (see Table B-3).

Even if the Republicans achieve sweeping victories in the 2016 Presidential and Congressional elections, it is difficult to believe that any President and legislature would ever simply repeal the ACA and cancel the health plans of 28 million Americans without offering any alternative options. Does this mean that Obama Care is now an irreplaceable cornerstone of the American health care sector?

If you were Reince Priebus, the Chairman of the Republican National Committee, would you support the development of a comprehensive national health program as an alternative to the ACA?

Introducing the NY Insurance Exchange!

If you were the Governor of New York State, what would you propose?

The recent collapse of Wall Street has damaged the downstate N.Y. economy. And the closures of large manufacturing facilities by former industrial titans like Bethlehem Steel, General Electric, General Motors, IBM, and Kodak have devastated the upstate N.Y. economy as well. As a result, Governor Paterson used his State of the State address last week to criticize his state legislators for failing to reduce state spending to levels that could be sustained by its shrunken economy.

But then how did Governor Paterson suggest improving New York’s economy? With stronger public education? Less government bureaucracy? More effective regulation and oversight?

Well, he did indeed address all of these issues, but he also proposed a dramatic new private sector initiative as well. Namely, he proposed the relaunching of the New York Insurance Exchange.

Back to the ’80s!

If Paterson’s mention of the New York Insurance Exchange makes you reminisce about the go-go times of 1987, when Michael Douglas conquered the financial markets in Wall Street and Michael J. Fox rose from mailroom to chief executive in The Secret of My Success, it’s likely because New York City actually did host an Insurance Exchange that folded that very year.

First launched in 1980, and patterned on the famous Lloyd’s of London market, New York’s original Insurance Exchange collapsed under the weight of its own complexity and lack of capitalization. Lloyd’s, a firm that once insured Betty Grable’s shapely legs, then resumed its role as the world’s only operator of a global exchange for insurance products.

But if an Insurance Exchange couldn’t survive in New York in 1987, why does Governor Paterson believe that it might succeed now? Does the world now require a second trading market for insurance? And is New York City now prepared to operate it?

A Persuasive Case

To be sure, an Insurance Exchange in New York City may make more sense today than it did two decades ago. One reason is that the world has become far more complex in nature, and thus insurance products have become more complex as well. Instead of simply negotiating with individual insurance companies for customized policies, organizations may well benefit by accessing a commercial market to devise risk management strategies.

Then why don’t they go to the Lloyd’s market, you may ask? Well, many organizations do so, but American firms may prefer to process transactions in an American insurance market. Organizations outside of the United States, but doing business in America, may prefer to do so as well. And even European firms that are doing business in Europe may appreciate an alternative to Lloyds; after all, a little competition is always a healthy situation!

Yet another reason for New York’s improved chances of success is today’s use of modern technology to operate electronic global markets for financial products, markets that were only in their infancies during the 1980s. The internet facilitates the shifting of financial transactions from one corner of the world to another, and global electronic market places have become commonplace; thus, a fledgling insurance exchange in New York City may well find it possible to gain acceptance (and new business) relatively quickly.

A Few Nagging Questions

Sounds like a great idea, doesn’t it? Nevertheless, before New Yorkers erect another Romanesque building with a gigantic trading floor next to the venerable home of the Stock Exchange, they might wish to ponder a few nagging questions.

First of all, who is going to regulate the new insurance products to be traded on the floor of the exchange? The N.Y. Insurance Department, after all, failed to stop AIG from creating what Warren Buffet called financial weapons of mass destruction, instruments that claimed to reduce financial risk but that eventually destroyed AIG and threatened the global economic system as well. A relaunched Insurance Exchange would challenge N.Y.’s regulators with a new array of complex securities.

Second of all, how much benefit would the state actually derive from the exchange? All trading activity on the NASDAQ exchange, and most trading activity on the New York Stock Exchange,  is electronic in nature. If an electronic system is employed by the new Insurance Exchange as well, would traders move their residences and establish offices in New York City? Or would Wall Street simply serve as a virtual address for trades that are consummated in cyberspace?

And third of all, who is going to invest in the products that are traded on this exchange? Governor Paterson suggested that hedge funds, private equity firms, and other parties who have no direct interest in insurance might establish trading strategies there. Such momentum traders, of course, have been blamed for wild and destabilizing swings in the prices of crude oil, food commodities, and other exchange traded products; it is therefore possible that new markets for insurance products would produce similarly detrimental effects.

So do the prospective benefits of an insurance exchange outweigh the risks? A believer in open competition would undoubtedly recommend that New York launch the endeavor, thereby allowing the free market to determine whether it becomes a success. Nevertheless, like the products to be traded on its exchange floors, a new Insurance Exchange would itself represent an initiative with great promise that is fraught with great risk.