America's Bitter Pill

by Steven Brill

  One aspect of Obamacare that did not seem to be bothering Amgen’s Bradway or any other drug company CEO was the new law’s provision for an independent panel that would vet the comparative effectiveness of different drugs, devices, and treatment protocols. This was the rule that the drug and device industries had fought so hard to water down, in part by requiring a large board that included industry members, and in larger part by requiring that Medicare could not make any decisions about whether to pay for various treatments or drugs based on the panel’s findings.

  Comparative effectiveness had been one of Peter Orszag’s pet issues when he was Obama’s budget director. On January 28, 2014, the same day that Bradway held his conference call and Obama delivered his State of the Union address, Orszag, who now worked for Citigroup, weighed in with an op-ed article at Bloomberg News in which he criticized what the comparative effectiveness panel had done in the nearly four years since Obamacare had become law—which was not much.

  Entitled “The Vital Medical Research Obama Isn’t Pushing,” Orszag outlined the intended purpose of the panel this way: “So-called comparative effectiveness research is needed to find out, for example, whether spinal fusion surgery works better than the alternatives in relieving back pain, or whether proton beam therapy is worth the extra cost to treat prostate cancer.”

  However, he wrote, citing a recently released Center for American Progress study, in the nearly four years since Obamacare had become law, “So far, only 37 percent of [the comparative effectiveness panel’s] research funding has gone to comparing two or more treatments.… A full 25 percent of the budget has been dedicated to ‘communications tools and education initiatives.’ Communication and education are important, but right now the crucial objective should be generating the raw information to be communicated.”

  Worse, Orszag wrote, “out of the 284 studies the [panel] has funded to date, only 34 (or 12 percent) address” any of the subject areas that the Institute of Medicine had identified as the highest priorities for such research. In fact, according to the Center for American Progress report that Orszag cited, there had been no studies done of the effectiveness of expensive medical devices such as neurostimulators for back pain and artificial knees, and only 3 percent of the comparative effectiveness panel’s funded studies were directed at drugs. The president needs to put the panel “back on track,” Obama’s former budget director wrote.

  OBAMA GOES BETWEEN TWO FERNS

  With the rebuilt website improving steadily, the Obama team could now turn to what they were good it—campaigning, in this case for sign-ups.

  Anne Filipic was ramping up for the final push, targeting her “Get Covered, America” campaign to eleven states, including Ohio, Texas, and Florida, where the numbers of uninsured were highest and the likelihood that the Republican-controlled state government would run its own campaigns was lowest.

  Filipic had arranged “partnerships,” she told me, with 2,300 civic, religious, union, and healthcare organizations across the country. Using the demographic targeting data from Civis, the Chicago-based company founded by the Obama campaign whiz kids, her people would end up having conversations with 670,000 consumers, reach 2.5 million by email, draw 1.85 million unique visitors to its website, and stage 22,000 rallies, meetings, and other outreach events.

  And then there were the White House–run efforts. They culminated in a promotional coup that began, according to Politico, with a plea that Valerie Jarrett, communications director Jennifer Palmieri, and press secretary Jay Carney made to Obama on February 12, 2014. Jarrett had met the day before with actor Bradley Cooper, who suggested that Obama should go on Between Two Ferns, the online mock interview show hosted by comedian Zach Galifianakis, to push Obamacare to Galifianakis’s mass audience of young invincibles.

  Obama was game. The gig was planned for the following month, in the run-up to the March 31 deadline.

  “THE BEST DAY IN THE HISTORY OF THE AFFORDABLE CARE ACT”

  On February 12, 2014, the same day Obama was recruited for Between Two Ferns, HHS secretary Kathleen Sebelius announced startling enrollment figures for the prior month. As of the end of January, more than 3.3 million people had signed up on the state or federal exchanges, with 1.1 million having signed up in January alone. Rather than the pace dropping off after the December 24 deadline (for insurance coverage starting January 1, 2014), it had actually picked up, and was likely to accelerate more as the overall enrollment deadline of March 31 approached.

  “Yesterday, politically, was the best day in the history of the Affordable Care Act,” journalist Mark Halperin said the next morning on MSNBC’s Morning Joe. “They are now in a stronger position to get this implemented than they ever have been.”

  That February 12 surprise overshadowed the bad news from the day before—when the Obama administration announced that most of the employers who would have been subject to the mandate requiring them to provide health insurance to their workers would be granted yet another delay. In July 2013 they had been given a free pass for 2014. Now the mandate was lifted for most employers for 2015, too. That would knock a total of $19 billion (in expected employer penalties) off the revenue CBO had projected for Obamacare.

  The deadline was changed not by Congress, which had ostensibly been guided by the CBO’s scoring in voting for the law, but by a unilateral Obama administration decision.*22

  With that change, and others, I now counted nearly $100 billion in negative changes by executive fiat since the CBO had scored the law as being deficit neutral. And that didn’t include the $200 billion in costs put aside when the Democrats had scrapped the doc fix, but promised to put it into another law.

  Two months later, the CBO would announce that it was no longer going to score changes in the rules and schedules related to Obamacare because there were so many and they were so interrelated with other revenue and expense drivers.

  STILL A FLAWED MARKET

  On February 13, 2014, The Wall Street Journal published a long feature under the headline “For Many, Few Health Plan Choices, High Premiums on Online Exchanges.” The article provided a different kind of reminder of the healthcare market’s continuing problems.

  A “study shows that hundreds of thousands of Americans in poorer counties have few choices of health insurers and face high premiums,” the paper reported. “Consumers in 515 counties, spread across 15 states, have only one insurer selling coverage through the online marketplaces, the Journal found. In more than 80 percent of those counties, the sole insurer is a local Blue Cross & Blue Shield plan. Residents of wealthier, more populated counties in the U.S. receive lower-priced choices than those living in counties with a single insurer.”

  In some wealthier areas, such as near the Colorado ski resorts, prices were also unusually high. But the real message of the Journal story was plain to anyone drilling down into the offerings of insurance companies on the exchanges across the country. For many people, even with generous subsidies, insurance coverage was going to be unaffordable, or at least a major burden. Millions of families would be victims of the compromise that the Democrats had forged. To keep the law’s overall cost down, they could not make the subsidies more generous—a compromise forced by the reality of the larger compromise they were making: creating a law that extended coverage by buying it in a market where the underlying prices for medical care were by far the highest in the world.

  For example, suppose a couple we’ll call the Johnsons, each sixty-three years old, lived in Florida, and their kids were out of the house. Suppose, too, that they ran a small boat-chartering business that made them $62,000—just below 400 percent of the poverty line for a family of two adults. That meant that they would qualify for a subsidy of $9,024 to pay for their insurance.

  But even with that $9,024 subsidy, they would pay about $5,000 a year in premiums (depending on the plan they chose). On top of that, they would still have a deductible of about $12,000. That meant the Johnsons’ total medical costs (premium and amount
s paid to meet the deductible) could take $17,000 ($5,000 in premiums, plus $12,000 in deductibles), or 27 percent, out of their $62,000 in pre-tax income. To be sure, that would happen only if the Johnsons suffered enough medical mishaps to reach their deductible limit, and it does not account for the fact that Obamacare offered them a lot of preventive care for free, with no deductible. But if they did reach that deductible limit, it seemed a stretch to call a law requiring them to pay 27 percent of their income to comply with the mandate the “Affordable Care Act.”

  Yet the news would get even worse if the Johnsons made even $50 more than what we just postulated was their $62,000 income. That’s because of a little-noticed quirk in the law that industry insiders called “the cliff.”

  An income at 400 percent of the poverty line was $62,040 for a family of two like the Johnsons. Up to that amount, they would get a subsidy. But if they earned any more than that, even a dollar more, they would get no subsidy. In other words, earning an extra $50 would cost them their entire $9,024 subsidy. They would be “taxed” $9,024 on an extra $50 of income.

  That meant that insurance and out-of-pocket costs (again, assuming they had enough in medical bills to hit their deductible) would cost this family, now making $62,050, an unaffordable $26,000. After taxes, that would probably be half of their disposable income. And even if they enjoyed perfect health and never had to pay a penny toward their deductible, their premiums would still be $14,000 a year—a huge expense (22 percent of their income) for a family earning just over $62,040 before taxes.

  Only a small percentage of people signing up for the exchanges were likely to fall over that steep a cliff, though many would likely face the crunch—27 percent of income—that the Johnsons would face even with a subsidy. Those going over the cliff would mostly be older people, like the Johnsons, in expensive healthcare states whose income was just over 400 percent of the poverty level. Younger people, to whom insurance companies were charging lower rates, or people in lower healthcare cost states, where all premiums are likely to be lower, were less likely to qualify for substantial subsidies if they had incomes approaching the 400 percent of poverty line, and, therefore, would not lose much if they went over the line.

  Yet in a program that was hoping to sign up seven million people in just the first year, this could leave tens of thousands on the exchanges who would come close to or fall over a steep cliff. That would be a lot of families, and a lot of anecdotes for the president’s opponents when those people realized what had happened to them later in 2014 or in 2015, when the government would complete a check of how their incomes matched up to their subsidies.

  That, too, presented a looming problem. Even with all the progress that had been made, the Obamacare website’s system for verifying the incomes that people list in order to get subsidies was gummed up, much the way Larry Summers had predicted it would be in those White House meetings during 2009. It was likely to take months or years for the government to notify those receiving subsidies that they seemed to have understated their incomes, either innocently or deliberately, and must submit additional documentation or face demands for the subsidies to be returned to the IRS.

  “I’m already advising some clients who may be at or near the cliff to watch their incomes toward the end of the year,” said Barry Cohen, who was Sean and Stephanie Recchi’s insurance agent, when I asked him about this in February 2014. “Maybe they can stop working overtime or take a month off. If not, they could get hammered with huge tax bills that they never expected.”

  MORE FRIDAY NIGHT REGULATIONS AND MORE PULLBACKS FROM THE LAW

  On Friday night, March 14, 2014, CMS issued 335 pages of new Obamacare regulations, documenting a further retreat from the original law. Grandfathering restrictions on insurance plans that did not meet the law’s coverage requirements were loosened yet again. Now people with those plans had until 2016 before they had to get new insurance or be in violation of the mandate. Also, insurance companies were allowed not to count the additional costs of having to do the extra work related to the website’s problems in calculating administrative costs under the medical loss ratio, meaning they would not be penalized for spending whatever extra money for administration versus paying claims that they could claim resulted from the government’s technology failures.

  Perhaps most important over the long term, CMS also announced in the Friday night filing that it was going to clamp down on insurance companies whose networks were too narrow.

  This meant that two key components of the law now faced additional risk. The individual mandate would be weakened by the exemption given people holding those old, insufficient policies. And the cost savings that could come from narrow networks might be undermined. Both were political necessities given the hostility to the law that the polls continued to report. But each tampered with the law’s financial equilibrium.

  All of these changes fed a new question that was now competing with the drama of how many enrollments the Obama team would end up with on March 31: Would all of these retreats, plus the current enrollment numbers that still showed a disproportionately low number of younger enrollees, force insurers to raise their premiums drastically when they had to start filing their rates for the 2015 year?

  “O-Care Premiums to Skyrocket,” reported The Hill, a newspaper distributed on Capitol Hill. The article quoted unnamed insurance industry officials, one of whom said he expected his rates to triple. That story was widely picked up online and circulated in industry circles.

  The speculation about the premiums was just that. No one really knew what the insurance companies were going to do. Besides, whatever the insurance companies did would have little to do with how they calculated premiums over the longer term. That was because by May 2014—when they would have to start filing their rates for 2015—they would have only four or five months of data about their actual customer base and the claims they had made and were, therefore, likely to make in the future. In subsequent years, they would have lots more data.

  More important, most of the press covering the drama of how high premiums would go routinely linked that question to whether customers, especially the younger, healthier ones, would get sticker shock and decide not to buy. Yet that ignored the core reality of Obamacare and its premium subsidy provision. Under the law, the amount of a premium subsidy was geared to a limit that people with incomes below four times the poverty line could be asked to pay for the second lowest priced “silver” plan available to them.

  So, if the most I could pay for that silver plan was, say, 7.5 percent of my income, and the cost of that plan went up by $100, but my income stayed the same, my subsidy—the government’s cost, not my cost—would go up by that $100. Higher premium rates—assuming the second lowest priced silver plan went up as much as the other plans—were mostly a problem for taxpayers in general, not for these consumers.

  THE FINAL BLITZ

  While guesses about premium increases for year two persisted, team Obama began its final campaign push for year one. A press announcement on March 11, 2014, promised that two thousand phone operators were being added to the crew of twelve thousand to handle the expected end-of-March surge, and that the administration’s “aggressive outreach is helping to make a difference.” How much of a difference? No one would offer a prediction.

  Also on March 11, the edgiest gambit in that outreach effort—Obama’s appearance with Galifianakis on Between Two Ferns—went live. It became a viral sensation, snaring eleven million YouTube views and spiking traffic on HealthCare.gov 40 percent higher than it had ever been.

  Better yet, the site handled the traffic.

  Between Two Ferns was the culmination of a two-month blitz that featured more than three hundred radio appearances by Obama and his team, including Jarrett, and thousands of events organized by his political operation and by Filipic’s Enroll America. This was team Obama’s sweet spot, something they knew how to do.

  On March 11, the Obama administration was suddenly able to get the
up-to-the-minute numbers that Sebelius and Tavenner had told Congress and the press in the fall were not available. On a conference call with Enroll America and other volunteers that day, Obama announced that there were now 4.2 million enrollees, with the number going up by the minute. They had added 900,000 in just the last eleven days, and the surge ahead of the deadline was still to come.

  At about one o’clock on Saturday afternoon, March 15, Obama made a surprise call into the speakerphone at the command center to thank Todd Park, Mikey Dickerson, and their team, and to urge them on for the final push. Using examples of newly insured families, he told them how meaningful their work was. Some of the coders had tears in their eyes.

  By now Park was back in the Maryland control room, all day, every day. Dickerson, too, had come back from Google for the final push. Jini Kim, the Google star who had been working on her own healthcare data analytics start-up, had never left.

  By the beginning of the last week in March, they were nearing 6 million sign-ups for the combined state and federal exchanges. The 7 million target suddenly seemed possible.

  Then the real surge began. By March 24, they were enrolling well over 100,000 a day just on the federal exchange, the same or more than they had done on the December 23 deadline day. Sometimes the phone lines were overloaded, and some people had to wait for a few minutes online. But everything held together.

  On March 31, the last day, 209,000 people enrolled on the federal exchange, nearly double the number that had signed up in all of October and November. By midnight, the total was 4.8 million on the federal exchange.

  The state exchanges, with notable exceptions (Maryland, Minnesota, Oregon) hummed along, too. By midnight they had 2.3 million.

  The grand total was 7.1 million, 100,000 above the original target. That night, QSSI, the UnitedHealthcare subsidiary that was the general contractor working with the surge team and whose office housed the command center, invited everyone down to the building lobby to celebrate. They toasted themselves with champagne outside the Smile Center.