The Success of Obamacare Hinges on Only One Factor
With the Patient Protection and Affordable Care Act's state- and federally run health insurance exchanges set to open in less than 24 hours, the number of predictions as to whether this law, better known as Obamacare, will be a success or failure are off the charts.
Many of the current prognostications do have some merit as we've seen nothing but mixed data and finger-pointing from the early onset of this law. Supporters will point to the expansion of Medicaid and the millions of people people who should gain insurance through government-sponsored care that had previously never had access to affordable health care as a testament to its upcoming success. In addition, the average silver plan premium cost across the nation came in well under the Congressional Budget Office's projections at $328 per month. President Obama himself and supporters certainly have to be pleased by these figures.
Conversely, opponents of the law will point to a staggering number of technical and educational delays that are putting tomorrow's health exchange launch into serious jeopardy in certain states at a time when neither party can agree on a federal budget. The employer mandate was pushed out a year, and the Spanish-language and small business online marketplaces are delayed by three weeks to a month. Numerous individual states are encountering problems -- such as in Vermont, where the online marketplace won't be ready to accept payments for another month, or Washington D.C., where the software is currently unable to calculate the proper subsidy should an individual be entitled to one.
Despite this back-and-forth battle, there's just one thing that's going to determine the success or failure of this law... and it may not be what you think.
Will the technology behind Obamacare speak wonders of its effectiveness?
A lot of speculators want to place the onus of success or failure on the enormous technical and educational challenges of this law. There's no question that connecting multiple government agencies together via cloud-based software and then having that software calculate plan rates and subsidies (if any) from multiple geographic regions across the U.S. is going to come with a few glitches.
But, as I've pointed to previously, preceding health reform laws have had similar glitches from the start and turned out just fine. Medicare Part D had more than a handful of problems when it debuted in 2006, but those were largely contained within the first year. While many would just assume that the technology and educational factors behind Obamacare will determine its success, it's very unlikely to be the case.
Is it Medicaid enrollees?
Others will point to Medicaid-eligible uninsured individuals as being the lynchpin of success for Obamacare. The proposed Medicaid expansion under Obamacare was originally expected to reach approximately 16 million people throughout the rest of this decade. However, with 22 state governors either opting out, or strongly leaning in the direction of opting out, of expanding Medicaid in their respective states, somewhere in the neighborhood of 5 million to 6 million lower-income people may not gain access to affordable health care.
Some would view this as a potential failure of Obamacare, but I would consider the addition of 5 million to 10 million newly insured individuals be a big boost to hospital operators such as HCA Holdings that are counting on more insured people to walk through its doors so it doesn't need to write off 10.25% of its revenue as it did in the previous year.
It's much simpler than that...
Behind all the white noise -- the political bickering, the technical glitches, the delays, the better-than-expected premium figures, and so on -- only one thing really seems to matter: Will young adults sign up for health insurance?
Without question, Obamacare's success hinges on young adults willingly going onto health exchanges and purchasing health insurance to help offset the high costs of terminally sick and elderly patients who comprise the vast majority of health care spending in the United States. A report from the U.S. government just last year pointed to the stark fact that in 2009 1% of people accounted for 22% of all health care costs. Expanding that out a bit, just 5% of people accounted for 50% of all health care costs. Without young, healthier adults paying into the system, there's nothing to stop premiums from going sky high.
The only unanswered question that matters is: How will young adults react?
On one hand, you'd expect contempt from this age group. Comparatively speaking, young adults get the fewest subsidies and thus have the highest premiums. Furthermore, many young adults that had been previously able to purchase catastrophic plans are now going to need to purchase beefed-up insurance plans that comply with Obamacare's broader benefits package. In other words, most catastrophic plan costs have doubled. Then there's also the group of individuals who are young and feel invincible and are now compelled by law to purchase insurance when they have, in fact, never purchased insurance before. Given the above factors and the extremely low penalties within the first year of the greater of $95 or 1% of annual household income, I could very easily see a path where few young adults sign up and Obamacare flounders.
But, there's also another side to this story. Never before have price and benefit packages been as transparent and comparable as with the new health exchanges. This generation of young adults grew up with technology and may jump at the chance to take part in this nation's health reform given the myriad of transparent choices they'll now have.
Who wins and who loses?
There are obviously going to be companies that will wind up as winners and losers in each scenario.
Clearly, insurers are on the ropes and in desperate need of a good showing from young adult sign-ups, especially in the early going. The reason is that new Medicaid-eligible patients and the most sick and in need of care are likely to be the first to sign up on Oct. 1. With insurers no longer having the ability to turn away patients with preexisting conditions, medical costs are likely to balloon over the next couple of quarters. This will place a lot of pressure on companies that spent big to get a slice of the government-sponsored health care pie like WellPoint , but will also affect the nation's largest insurer, UnitedHealth Group. If young adults don't join in, it's unlikely that either company will meet already lofty profit expectations in the upcoming year.
A winner here -- even if young adult turnout proves to be disappointing -- could be e-commerce insurance platform provider eHealth . The thing about young adults is they like choices, they like technology, and they like a company that's been around for a while. Unlike the Obamacare health exchanges, which are just magically going to pop into existence on Tuesday, eHealth has been around offering a private health insurance platform for more than a decade. If there's a potential winner here, it could be eHealth.
There are implications, though, beyond just insurers. I've already mentioned that hospitals like HCA Holdings are eager to get as many people signed up as possible in order to reduce their doubtful revenue totals. If young adults shun the exchanges and essentially nothing changes, hospitals could respond by looking to reduce expenses, which would wind up being both a good and bad thing, depending on what sector you were in.
It'd be great news for Cerner , which we looked at recently as a beneficiary of hospitals needing to go digital and improve efficiency. Cerner provides a myriad of health care software including electronic-health record cloud-software and revenue cycle management software that helps hospitals manage their expenses. Everything these days is about efficiency and saving money to which Cerner is poised to benefit.
Yet, the downside is that if hospitals don't see that influx in insured patients they could scale back their purchases of higher priced medical equipment. Here, I think of a company like Intuitive Surgical whose da Vinci robotic surgical system is cutting edge in technology (no pun intended), but can cost upwards of $1.5 million per machine. I proposed once before that hospitals could use their cost savings from having more insured persons walking through their doors to buy medical equipment that would differentiate themselves from other hospital operators. Unfortunately, the reverse could prove true and tight cost controls may wreak havoc on innovation and high-end medical device sales like those of Intuitive Surgical.
Ultimately, we're now just one day from finally getting some concrete answers. My suggestion is to closely monitor how many young adults sign up for health care on the exchanges or a privatized platform as that'll be the key to determining the long-term success or failure of this overhaul.
Editor's Note: A previous version of this article incorrectly referred to the ACA as a bill and also stated that 10 million should gain access to health insurance under the law. The Fool regrets the errors.
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The article The Success of Obamacare Hinges on Only One Factor 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 owns shares of, and recommends Intuitive Surgical and WellPoint. It also recommends UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.