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Rick Roeder       July 2015

Well, the Supreme Court was sure busy last month! If you want to read about the Supreme Court’s views on same–sex marriage, sorry, this is not the site for you. Even if it was great fun to listen to the bleatings of Fox News, ranting about their perception that Chief Justice Roberts was schizophrenic and inconsistent in his opinionson two landmark cases. Our focus is on the aftermath of their decision in the other landmark case regarding the legality of a federal health exchange created by the Affordable Care Act (“ACA”).

The King vs. Burwell Supreme Court ruling affirmed that premium subsidies introduced by the ACA for the federal health exchange were legal .The Supreme Court case was triggered by the assertion that it was illegal for the Internal Revenue Service to issue guidance in regard to the subsidies for the federal health exchange. The issue at hand did not affect Covered California or other state exchanges. The key legal question was whether the four words, “established by the state,” also applied to the federal government. By a 6–3 vote, the Court said yes. The law verbiage is, admittedly, ambiguous. If a single letter “s” had been added to the word “state”, the ambiguity would likely have been resolved in favor of those who believed that the exchanges were limited to those voluntarily created by the 50 states.

For an actuary, the big questions ahead are not legal. One of the biggest impacts on any health plan valuation is the guesstimate as to future “medical trend.” Previously, there had not been a strong consensus as to the extent that the expanded coverage under the ACA would increase costs. However, some of the early returns in regard to actual and potential 2016 rate increases are pretty staggering.

The requested 2016 rate increases to state insurance regulators have all been substantial , ranging from 23%–54%, with the highest increases being presented to state regulators in New Mexico and Minnesota. 2016 Republican Presidential nominee is going to have a political field day if increases of this magnitude are accepted. President Obama is already trying to “jawbone” with the state regulators. One state, Oregon, has already accepted rate hikes of 25% and 33% from its two largest providers.

While there are going to be many yowls relating to 2016 rate sticker shock, actuaries really do not have a perfect handle on the long–term cost increases due to Obamacare for some small reasons and one large reason: pent up demand. One of the common themes in the rate hike requests is that actual utilization exceeded anticipated utilization by a fair margin. This should surprise nobody. The federal exchange has been used by 6–7 million. State exchanges have also insured numerous millions. A significant percentage of those signing up for the exchanges had no insurance. Among those with no previous insurance, a number were excluded from coverage due to “pre–existing conditions.” Obviously, this group with no previous insurance will utilize more services in the short run, including costly surgical procedures. So, my guesstimate is that actuaries will not have a good long–term cost picture until 2018 or so. Of course, the ongoing rancor from politicians and those frustrated with rate hikes may be a catalyst for ACA changes.

Some changes will need to be made to keep Obamacare from breaking the bank. The firm grip of Big Pharma lobbyists has been effective in preventing greater use of generic drugs. The cost differential between our drugs and those in other countries is extreme. The large difference is justified by the drug companies as a way to be reimbursed for the cost of research and development of new drugs. Even if so, one can anticipate a lot of friction in future drug reimbursement levels. As the American population continues to age, the costs relating to drug prescriptions becomes more and more critical.

Also, better balance between the demand for medical services and providers is essential. As of now, the two elements are not in harmony. Obamacare has expanded the covered population but not the universe of medical providers. We will need more doctors yet the cost of medical school has become prohibitive for many. Exacerbating the problem, a number of existing doctors have no desire to be part of the insurance under exchanges. My experience in San Diego is that a significant number of doctors have said “no” to Covered California.

I also believe that some of the initial cost projections incorrectly assumed that people would make medical choices based solely upon price. While often true, there will continue to be some resistance to change from a familiar higher–priced provider to an unfamiliar lower–cost provider.

The possibility of the actuarial costs attributable to Obamacare being deliberately understated during the legislative process is disturbing. For the second time in less than a decade (Medicare Part D machinations being the other instance), the actuarial process may not have operated ideally. One solution, which I propose, is to have future actuarial work presented to Congress be completed by an independent actuarial committee sponsored by one of the professional societies of actuaries.

Back to the same–sex Supreme Court ruling . OK, I lied when I said I would ignore that decision. The Supreme Court ruling on same–sex marriage will have an impact on health coverage in states that banned same sex marriage to the extent that certain domestic partners were denied coverage that was offered to a traditional spouse. This will be one of the “small reasons” for cost increases. In California, the same–sex issue was decided by the Legislature more than a decade ago when the state made it illegal to discriminate against a registered domestic partner.

So, while last month’s Supreme Court decision answered many questions about the legal status of Obamacare, for actuaries, our work is really just starting to get into gear.

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