Will Obamacare's Federal Health Exchange Cost 5 Times More Than Estimates?


There's really no way to sugarcoat it -- it's been a very unimpressive and largely ugly start to the enrollment in Obamacare.

Between state and federally run exchanges, 10 of the state-run exchanges have reported some moderate levels of success as they deal with, in most cases, more sporadic and less serious glitches in their software. The federally run exchanges, on the other hand, have been the government's worst nightmare.

Source: White House on Flickr.

Composed of 36 states, Healthcare.gov has been a work in progress for the past 19 days with some people, like the Fool's own Steve Symington, seeing the off-gray screen of death for 30 minutes or more at a time. Despite the Department of Health and Human Services noting that some 17 million people had visited the federally run exchange since Oct. 1, HHS still refuses to report enrollment figures, only adding to the speculation that the magnitude of the glitches is keeping a good chunk of interested Americans on the sidelines, unable to sign up.

The other big concern here would be that these glitches are blocking the only chance Obamacare has of successfully courting healthy young adults which are needed to balance out the adverse selection process which will have the sickest and most in need of care people signing up for health insurance first. Since insurers can no longer deny coverage to those with preexisting conditions, this tech-savvy group of young adults might see these technology problems and simply give up for a very, very long time which would be extremely bad for the sake of Obamacare.

Federal health exchange costs are soaring
Then came yesterday's findings from NBC News that the contract which was divvied out to the U.S. arm of CGI Group to construct the architecture behind Healthcare.gov has more than tripled from a cost of $94 million in 2011 to a whopping $292 million as of May 2013.

Why has this cost ballooned so rapidly you ask? When the Patient Protection and Affordable Care Act, better known as Obamacare, was first signed into law in 2010, the expectation was that while some states would relent joining in, about half or even more states would opt into the system and design their own health exchange. That estimation versus what would actually happen weren't even in the same ballpark. Ultimately, only 16 states chose to design their own health exchange, and two of those states eventually dropped into the federal system since they didn't have the time to complete the build-out of their own health exchange. With 36 states and the government essentially gumming up the works for CGI Group, it's been unable to respond quickly enough to fix the log jam.

CGI isn't alone, though, as Experian and UnitedHealth Group subsidiary Optum (which owns Quality Software Services) have also come under fire. UnitedHealth's QSS, for instance, is responsible for certifying that health plans being offered on the exchanges remain in compliance with the rules set by the PPACA. The problem QSS is having is based on a combination of servers being overloaded and the architecture behind Healthcare.gov not navigating consumers properly throughout the system. You might say UnitedHealth's QSS is guilty by association, but it's nonetheless dealing with some finger-pointing.

Is there an end in sight?
The real concern here has to be the quickly rising costs associated with this rollout and when they might abate. You're probably familiar with the longtime business motto that "you have to spend money to make money." In this case it appears that the government is going to have to keep spending and spending, yet there's no guarantees that a near-term end to the glitches on the federally run exchanges are anywhere in sight.

Over less than a two-year period the projected Healthcare.gov costs rose 211% over initial projections. There's no reason to believe this won't scoot well past 400% by the time we get another update and approach close to $500 million. Obviously this is purely speculation on my part, but keep in mind that these estimates were taken in May, long before CGI Group was in crunch time and well before the government brought its last-minute changes to the table, which included pushing back the employer mandate for another year.

It's quite possible that between the changes the government has requested to Healthcare.gov, and the fact that 36 of 50 states are part of the federal system could balloon CGI's costs to get the federal site fully functional could swell well beyond $500 million. For CGI's shareholders, it's great news because it means added cash flow and a consistent backlog for the time being. However, negative publicity surrounding these glitches could ultimately come back to haunt some of the nation's leading exchange architects over the long run.

Xerox , as a perfect example, has brought numerous positives to the table for investors with the rollout of Obamacare. It should, theoretically, see a nice bump up in the number of Medicaid claims it's processing and it's been collecting electronic-health record incentives from the federal government on behalf of numerous states. Xerox was also the architect behind Nevada's state-run exchange, which has had its fair share of technical problems since the start with account creation, verification, and pricing problems, allowing just 700 people to sign up for health insurance after the first week, according to The Las Vegas Sun. Ultimately we're talking about one minor weakness for Xerox among a sea of positives recently, but it's PR flubs like this that can haunt a company for multiple quarters.

What does this all mean?
Overall, I think we can expect cost overruns and delays to become the norm -- at least through the end of the open enrollment period at the end of March. This isn't necessarily a knock against Obamacare so much as it's a knock against any social reform ever orchestrated by the government. Cost overruns and delays have occurred during the overhaul of practically every social reform, which means that investors probably shouldn't overreact too much in the near term to these short-term snafus.

Instead, I would use any weakness in software developers behind the health exchanges and other Obamacare-related companies to potentially look for buying opportunities. Xerox, for instance, hasn't demonstrated any visible weakness despite Nevada's technical problems, but its advances in other areas of its IT-business could certainly be a reason to go bargain hunting if its share price does come under pressure.

Obamacare's changes yield big investment opportunities
Healthcare as we know it is about to change. Do you know how the changes in the health-care law will affect you and your portfolio? If not, we're here to help: The Motley Fool has compiled a special new report filled with Everything You Need to Know About Obamacare. This report is a free offer from us to help you get educated on this important subject. Please click here to access your free copy.

The article Will Obamacare's Federal Health Exchange Cost 5 Times More Than Estimates? originally appeared on Fool.com.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool recommends UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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