Will Rubio’s Measure Undermining ACA Survive?

Republicans stated goal is to “repeal and replace” the Patient Protection and Affordable Care Act. That hasn’t happened and won’t at least through the remainder of President Barack Obama’s term. So a secondary line of attack is to undermine the ACA. And Senator Marco Rubio has had success in that regard.

As reported by The Hill, Senator Rubio accomplished this feat by weakening the ACA’s risk corridors program. Whether this is a long- or short-term victory is being determined in Washington now. We’ll know the answer by December 11th

President Obama and Congress recognized that, given the massive changes to the market imposed by the ACA, health plans would have difficulty accurately setting premiums. Without some protection against under-pricing risk, carriers’ inclinations would be to price conservatively. The result would be higher than necessary premiums.

To ease the transition to the new world of health care reform, they included three major market stabilization programs in the Affordable Care Act. One of them, the risk corridors program, as described by the Kaiser Family Foundation, “limits losses and gains beyond an allowable range.” Carriers experiencing claims less than 97% of a targeted amount pay into a fund; health plans with claims greater than 103% of that target receive funds.

The risk corridor began in 2014 and expires in 2016. As drafted, if payments into the fund by profitable insurers were insufficient to cover what was owed unprofitable carriers the Department of Health and Human Services could draw from other accounts to make up the difference.

Senator Rubio doesn’t like risk corridors. He considers them “taxpayer-funded bailouts of insurance companies at the Obama Administration’s sole discretion.” In 2014 he managed to insert a policy rider into a critical budget bill preventing HHS from transferring money from other accounts into the risk corridors program.

The impact of this rider has been profound.

In October HHS announced a major problem with the risk corridors program: insurers had submitted $2.87 billion in risk corridor claims for 2014, but the fund had taken in only $362 million. Subsequently, payments for 2014 losses would amount to just 12.6 cents on the dollar.

This risk corridor shortfall is a major reason so many of the health co-ops established under the ACA have failed and may be a factor in United Health Group to consider withdrawing from the law’s health insurance exchanges. (United Health was not owed any reimbursement from the fund, but likely would feel more confident if the subsidies were available).

The Obama Administration certainly sees this situation as undermining the Affordable Care Act. In announcing the shortfall, HHS promised to make carriers whole by, if possible, paying 2014 subsidies out of payments received in 2015 and 2016. However, their ability to do so is “subject to the availability of appropriations.” Which means Congress must cooperate.

Which brings us back to Senator Rubio’s policy rider. It needs to be part of the budget measure Congress must pass by December 11 to avoid a government shutdown. If the policy rider is not included in that legislation, HHS is free to transfer money into the risk corridor program fund from other sources.

Senator Rubio and other Republicans are pushing hard to assure HHS can’t rescue the risk corridors program claiming to have already saved the public $2.5 billion from a ‘crony capitalist bailout program.” Democrats and some insurers, seeing what’s occurred as promises broken, are working just as hard to have it removed.

By December 11th we’ll know whether the ACA is further undermined or bolstered.

 

The Affordable Care Act and Affordability

The official name of what some call Obamacare is the Patient Protection and Affordable Care Act. Most frequently it’s referred to as the Affordable Care Act or the ACA. There’s just one problem with this title: it’s questionable whether the new law is making health care — or health insurance — more affordable

When you ask politicians about bringing down the cost of medical care, they invariably pivot to discussing health insurance premiums. And the press lets them, no doubt because: 1) insurance companies are easier to beat up on than doctors and hospitals; and 2) controlling the cost of care is much more complex than addressing insurance premiums.

When it comes to “bending the curve” concerning premiums, the ACA is arguably working. While every broker can cite examples of clients receiving double-digit increases (often, many examples and north of 20%), overall, according to PolitiFact, “premiums have risen by about 5.8 percent a year since Obama took office, compared to 13.2 percent in the nine years before Obama.” This year, for example, the 2015 UBA Health Plan Survey indicates that the average annual health plan cost per employee in 2015 is increasing just 2.4 percent from the prior year.

One point for the ACA–for now. In some parts of the country, it should be noted, the second most affordable silver plan in the exchanges (a key benchmark) is increasing by 30% or more.While this development doesn’t mean all rates are going through the roof in all places, it’s a warning sign that needs monitoring moving forward.

For now, the rate of increase we’re seeing in health insurance premiums have stabilized. That, however, doesn’t mean that health care coverage is more affordable. Health insurance costs are like a teeter totter. On one side is fixed-costs known as premiums. On the opposite seat are variable costs represented by out-of-pocket expenses. The higher the fixed-costs, the lower the variable ones and vice versa. The laws of physics cannot be legislated away. So as the ACA helps keep premiums down, out-of-pocket costs are rising.

One driver of higher out-of-pocket costs is straightforward: High deductibles in health plans are increasingly common. Another less obvious reason is that carriers are narrowing their provider networks while increasing the cost of seeking treatment outside their networks. For example, according to the UBA study, family out-of-network deductibles increased 75% in the past five years.

For healthy consumers this is a net positive. Premiums are lower under the ACA and, since they don’t see providers, narrow networks aren’t a problem. For those who do need health care treatment, however, (and families are especially likely to have someone needing medical attention in a given year), this teeter totter is what’s making the Affordable Care Act not so, well, affordable.

This isn’t to say that the ACA is a failure. The uninsured rate in America dropped to 10% in 2014 from 18.2% in 2010–and will likely be lower in 2015. This means 15 more million Americans now have coverage than in 2010. Perhaps if we renamed the ACA the Health Insurance Access Act the description would be more accurate.

However, that’s not what it’s called and the ACA is failing to keep live up to its name. The reason, I believe, is because it does too little to address the cost of medical care. To be fair, the ACA includes provisions to reduce medical costs. Accountable Care Organizations and the Independent Payment Advisory Board are two elements of President Barack Obama’s health care reform plan that show promise.

At best, however, the ACA only lays the groundwork for controlling medical costs, and we need to do more. Because at the end of the day, to make coverage more affordable, we have to attack where the money is going. And in that regard, the facts are straightforward: health plans must spend 80% (individual and small group coverage) or 85% (large group plans) on claims. If health insurance is to become more affordable, health care must be more affordable.

That means changing the ACA something that will not happen during a presidential election year. That doesn’t mean, however, that we can’t begin pinning presidential candidates on what they would do to bring down medical costs. We’ve had a question  about fantasy football during the debates. Maybe the moderators could slip one in on concrete steps the candidates would take lower the cost of health care … and not let them pivot to the easy dodge of attacking health insurance premiums.

OK, that’s asking too much. Maybe they could ask them what they’d do to control insurance premiums and then ask about controlling medical costs. If nothing else it would be interesting to see how many of the candidates realize these are two different questions.

America’s Disappearing Common Ground

Everyone knows the reason so little gets done in Washington is that the two political parties have become ever more divided and uncooperative. We can see it on cable news programs. We can hear it on talk radio. And we experience it as the federal government generates more crises than solutions. We also experience it every Thanksgiving dinner when our crazy uncle starts spouting eye-roll inducing political nonsense.

For those of us engaged with health care reform, we witness this dynamic every time politicians on both sides of the aisle identify the same problem, but refuse to work together to resolve it.

Subjectively, we all know common ground is shrinking in this country. Turns out there’s objective evidence, too. The Pew Research Center tracked the distribution of political values held by Democrats and republicans between 1994 and 2014. As the graph below shows, the gap is widening.Pew Ideological Divide Graphic

There’s a couple of things to note in the graph. First, the gap between the center of each party is further apart now than 20 years ago. The second is the bulking up of the extremes. “92% of Republicans are to the right of the median Democrat, and 94% of Democrats are to the left of the median Republican”. This shows what we’ve all felt: the parties have moved apart and common ground is increasingly rare.

The Pew study was issued more than a year ago. However, anyone watching this year’s presidential debates will attest that ideological differences between the parties is definitely not diminishing.

America moves forward when reasonable people can disagree, find common ground, and compromise. Over the past 20 years, however, fewer partisans see the other side as reasonable; fewer are willing to compromise. Common ground is disappearing.

The Pew Study is pretty depressing for those of us who want less fighting between the parties and more problem solving. However, there is some good news in the report. While there’s movement towards the extremes, the majority of Americans remain neither uniformly liberal nor conservative. As the Pew Research Center notes, “more [Americans] believe their representatives in government should meet halfway to resolve contentious disputes rather than hold out for more of what they want.”

Politicians often claim to speak for the “silent majority.” This is usually not the case as it’s their next statement is often a pander to the most extreme elements of their party. The real silent majority are those who want their representatives to “meet halfway.”

The problem is, however, the silent majority is, well, silent. No one hears them. In a political context, silence equates to voting. If it’s the extremists who vote, then politicians listen to the extremists. When a majority of Americans stand up and insist that their representatives work together, politicians will find a way to work together. Maybe not right away, but eventually they’ll get the message.

Until the majority speaks up (votes), however, it’s the crazy uncles that are listened to–and not just on Thanksgiving. In fact, it seems the crazy uncles are part of the presidential debates now, too.

Zenefits’ Problems Real, Not Fatal

Zenefits has hit a rough patch. Given the insults the company’s CEO, Parker Conrad, has heaped upon brokers, the Schadenfreude percolating through the broker community is understandable. Yet declarations of Zenefits’ demise are premature.

Zenefits raised $500 million in May of this year at a valuation of $4.5 billion. At the time, Parker Conrad, Zenefits’ founder and CEO claimed the company was “on track to hit annual recurring revenue of $100 million by January 2016….” That was then.

Now the Wall Street Journal is reporting that Zenefits is falling short of its earlier revenue projection. According to the Journal and Business Insider, through August Zenefits’ revenues came in at closer to $45 million and the $100 million annual revenue figure is likely out-of-reach. In response, Zenefits is reportedly instituting a hiring freeze and imposing pay cuts. The latter step is cited as a reason at least eight executives left Zenefits.

In light of this news, in August or September Fidelity Investments reduced the value of its Zenefits investment by 48% estimating the company was now worth about $2.34 billion. That’s a seismic event: in May Fidelity thought Zenefits was worth $4.5 million. Just five months later Fidelity thinks this was being a tad optimistic … if by “a tad” we mean “$2.16 billion.”

In an interview with Business Insider, Mr. Conrad admits Zenefits is unlikely to keep his promise of earning $100 million this year. However, he claims Zenefits continues to hire (although not as fast as in the past) and is happy with its revenue growth–“more than $80 million of revenue under contract” (which, it should be noted, is not the same as saying “we’ve taken in $80 million so far this year,” but maybe that’s what he meant). Mr. Conrad also asserts Zenefits is getting “closer and closer” to being cash flow-positive, although he doesn’t expect them to get there until 2017 at the earliest.

Missing his $100 million commitment and having to address the subsequent fallout is no doubt adding to Mr. Conrad’s stress levels. Since Mr. Conrad went out of his way to insult community-based benefit brokers on Zenefits way up, the joy brokers are taking in his discomfort now is to be expected—and is arguably earned.

Should brokers assume Zenefits is no longer a threat, however? No. They are still bringing in tens of millions of dollars in revenue. According to what I’ve heard, only about 60% of this revenue comes from commissions. An ever-increasing portion of their revenue flows from fees earned by selling third-party services or their own non-commissioned services. Zenefits launched their own payroll service today so their non-commission revenue will continue to climb. Zenefits may not be worth $4.5 billion any more, but it is still valued at over $2 billion. And while no CEO is happy when a serious investor marks down his company by nearly 50%, Mr. Conrad says Zenefits won’t be out raising money anytime soon. As a practical matter, the impact of the devaluation on Zenefits is minimal.

In short, Zenefits is sticking around.

But I predict Zenefits is in for a rough time. Direct competitors like Namely and Gusto are raising money and stepping up. Community-based brokers are increasingly leveraging technology. Full disclosure: I’m co-founder of the company launching NextAgency, software that will help brokers level the playing field against Zenefits, so I’m delighted to point out this trend.

While new initiatives like their payroll offering will create new revenue streams, they also carry significant risk. Current partners will view Zenefits as a potential competitor. Management will be distracted from the company’s core business. New skills and expertise need to be acquired. There’s something to be said for focus and Zenefits may be losing theirs.

Schadenfreude is German for deriving pleasure from the misfortunes of others. That Zenefits’ current problems generates this impulse in the brokers they’ve insulted should surprise no one. That Zenefits will face challenges, problems and set-backs moving forward is inevitable. That community-based brokers should continue to take the threat Zenefits represents is seriously is wise.