The bipartisan solution to Obamacare

There are plenty of problems, so where & what are the solutions?

A recent OpEd on describes some of the problems with the Affordable Care Act (ACA)…

“The architects of the new health law built into it a three-year program to help cushion early insurance company losses as those previously unable to gain coverage were expected to flood into the program at the start. By year three, they assumed, the risk pool, and the prices the participating insurance companies charged, would begin to stabilize.

“But that hasn’t happened. With each successive annual open enrollment the tendency of the sickest to buy coverage while the healthiest hung back has only repeated itself

“…the health insurance plans carriers are selling are so unattractive — with their still high premiums even after subsidies, ever larger deductibles and narrower provider networks — that only about 40 percent of the exchange eligible population has signed up. The longstanding insurance industry rule is that 75 percent of the eligible must sign-up to get the enough healthy people in the pool to pay for the sick.

Despite that article’s misleading title (“Obamacare is failing and there’s only one way to fix it”), it hilariously offers no solutions to fix it. Notwithstanding that — plus the fact that Aetna had an ulterior motive for abandoning ACA — the problems described in the CNBC OpEd are real.

So, let’s actually talk about some real solutions…

The problem

To summarize…

  1. Skew toward unhealthy policyholders:
    The least insurable (“unhealthy”) people are signing-up, motivated by their need for coverage and subsidized rates.
    The most insurable (“healthy”) people are not signing-up, since they don’t have an incentive to pay for coverage.
  2. Sampling error:
    With healthy people holding-out, the skew toward unhealthy starts a deathspiral for ACA exchanges, wherein an unhealthy pool of policyholders increases claims payouts > increases the cost of coverage > encourages relatively healthier policyholders to drop coverage > decreases the healthiness of the pool > repeat.
  3. Fail:
    With rising losses for private sector carriers and rising subsidies for the government, Obamacare’s days are numbered.

In other words, participating carriers’ insurance pools are too risky, because not enough healthy policyholders are joining to offset the cost of carrying the unhealthy, so Obamacare is becoming a worse & worse business for insurance companies, who are therefore opting-out.

So, we need some form of alchemy that will help everybody win: to make sure unhealthy policyholders can afford health insurance; healthy policyholders don’t have to subsidize the unhealthy; and insurance carriers remain profitable/solvent without raising prices.

The solution

In the current regime, that alchemy is government subsidies, which were scheduled to slowly scale-down — although it appears they might need to actually scale-up due to the aforementioned deathspiral.

Congress will not tolerate such increases in federal subsidies. So, we need another equalizing force… and securitized health insurance policies can be that great equalizer.

To review, Obamacare has overwhelmed the health insurance system with low-quality policies, skewing risk pools toward the unhealthy. Overweight these risk exposures, participating ACA carriers need a counterbalance to normalize their risk pools. Unfortunately, relative to insurers’ demand, there’s an undersupply of healthy people applying in open enrollment.

However, there’s a massive supply of healthy policyholders already on the books, away from Obamacare, in more traditional, private plans like HMOs or employer groups. If we could unlock these assets to make them transferable, then insurers could reallocate their portfolios to reach desirable risk targets. Securitization would allow carriers to package policies and sell them to either other carriers (“commercial hedging”) or 3rd party investors (“speculation”).

Let’s call these tradable securities “Securitized Health Insurance Policy Pools (SHIPPs).” Since there may hypothetically be no limit on the size of a health insurance claim, SHIPPs would have to be tranched in a unique way to make sure that buyers have their liability limited to the value of their investment. For example, there could be two tranches, senior and mezzanine. Each tranche participates 50% with the other in losses, but the mezz tranche assumes all liabilities in excess of face value.

This mezz tranche has to be non-transferable, remaining on the books of the underwriting carrier for a few reasons. First, the insured policyholders require the confidence that their claims will be paid. They contracted with a specific carrier, having been given that specific carrier’s full faith & credit. That contingent liability should not be transferred to a potentially less-creditworthy counterparty. In addition, the tranched structure keeps underwriters’ skin-in-the-game, a means of quality control via mutually assured destruction that would avert a greater fool race-to-the-bottom.

In the case of private insurers securitizing high quality policies, holding a non-transferable mezz tranche is no big deal due to the infinitely low probability of loss. But, for ACA participating carriers who have to package a bunch of junk policies, the probability of loss is higher — such that the non-tradable mezz tranche could defeat the purpose of risk transfer.

This is where the federal government would come in. A new federal agency should be established to guarantee the mezzanine tranches of participating carriers’ qualifying ACA SHIPPs. Depending on actuarial tables, model simulations, and stress tests, perhaps this agency could buy a special equity tranche that’s subordinated even further, beneath the mezz, to assume losses beyond the mezz’s face value. (This would effectively rank ACA SHIPPs’ mezz pari-passu with the senior tranche.)

An agency guarantee like this requires no hard dollar outlays from the government. This all allows ACA carriers to reestablish sustainable books of business by capping losses and rebalancing risk pools. Thus, it also lowers the costs for both unhealthy and healthy applicants. Then, finally, we’ve reversed the death spiral into a virtuous cycle.

The insurance business is predicated on scale. If an insurer insures the entire population, risk models are insanely accurate thanks to [what essentially amounts to] big data. Short of ubiquitous scale, it’s difficult for an insurer to capture a simple sample of policyholders that’s representative of the population; therefore, empirical risk can deviate from the model. By securitizing policies, you’re actually bringing the whole population online, allowing every carrier to maintain a portfolio that’s a true simple sample.

I know what you’re thinking

Haunted by the cautionary tale of synthetic CDOs and the housing crisis, opponents to this solution will balk at the financialization of healthcare. But, the insurance industry is already stuffed with financial assets—from OTC derivatives to bespoke reinsurance contracts. Standardizing these assets and clearing them through exchanges will shore-up the system. I could do a whole other column on this.

Frankly, securitization should also extend to life insurance policies in much the same was as described above. From a holistic standpoint, the federal government is naturally a short-seller of life expectancy, because an overwhelming majority of its liabilities are associated with entitlements programs (e.g. Social Security & Medicare) that are bled-dry by longer lifespans. Therefore, by accumulating long exposure to life insurance policies, the US government can hedge its naked short. The government is a natural buyer; insurers are natural sellers… but this is another thesis for another day.

Mr. Barack Obama, Mrs. Hillary Clinton, Mr. Donald Trump, Mr. Paul Ryan, et al, let me know what you think.

“Perfection is achieved not when there is nothing more to add, but when there is nothing left to take away...” 👉

“Perfection is achieved not when there is nothing more to add, but when there is nothing left to take away...” 👉