This is the real reason ObamaCare is sputtering

UnitedHealth is leaving the health care exchanges. That's not a sign of terrible policy — it's a sign of inadequately funded policy.

America's biggest health insurance provider decided ObamaCare just isn't worth the trouble.

UnitedHealth Group Inc. offers plans on the health care exchanges of 34 states, but announced on Tuesday it will pull out of all but "a handful" in 2017. Over 12 state regulators have already confirmed the insurer will leave their exchanges.

UnitedHealth warned this would happen, and the reasons for it are pretty straightforward: While the company is doing fine overall, its business on the exchanges is projected to lose it $650 million in 2016. Other companies are making similar complaints, and a recent study by McKinsey found insurers in the individual marketplace — which includes the exchanges — faced losses in 41 states in 2014, and profits in just nine.

So ObamaCare may have a brewing problem. But the fix is actually very straightforward: We need to increase the generosity of its subsidies.

Sometimes a policy was just a bad idea from the get-go, and spending more will just throw good money after bad. But sometimes a policy was a perfectly workable idea, and we just didn't spend enough on it. Let's walk through why ObamaCare is an example of the second case.

ObamaCare had two separate goals. The first is to slow the growth in health care prices. That's a long, multi-decade project to change the ecology of the health care market. But there are early signs of success.

The second goal is to help people who previously couldn't afford care. Before ObamaCare passed, fully 25 percent of Americans routinely went without seeing a doctor, and 23 percent went without filling a prescription, because it was too expensive. The equivalent rates for Canada are 4 and 5 percent, respectively.

While the first goal will lower spending over the long-term, the second will obviously increase it over the short-term, and we have to pay for it somehow. We could have just had the government do so directly. And to a large extent we did by expanding Medicaid. But for various reasons, policymakers chose to carry out part of that expansion by making insurers like UnitedHealth pay for the new care. So they created the exchanges, and included a regulation in ObamaCare that private insurers couldn't deny people coverage and care based on pre-existing conditions.

Now let's think through the basic business model of an insurer like UnitedHealth. Their revenues are the premiums customers pay for insurance coverage. Their costs are the care their customers get. The problem for UnitedHealth and other insurers is that entering the exchanges brought new customers, many of whom were sicker than average: Exchange enrollees appear to cost about 22 percent more than people who get insurance through their jobs. That means more sick people are getting help. Which is good! But it also means UnitedHealth's costs went up more than their revenues. They then have to hike premiums, which drives away even more customers, leading to the dreaded "death spiral."

ObamaCare tried to get insurers enough new premium-paying customers who were healthy — and thus wouldn't bring many new costs — to balance the finances. With what's known as the individual mandate, the law required everyone to have insurance, and it also provided subsidies for customers on the exchanges so they could afford the higher premiums. But the subsidies may not have been enough: They aren't sufficiently generous, and the incomes at which people are eligible for them phase out too quickly. So lots of people who aren't poor enough to get subsidies, and who aren't sick enough to desperately need coverage, and who don't get employer-provided insurance, are just staying out.

The obvious fix is to increase the generosity and eligible threshold for ObamaCare's subsidies.

Critics of ObamaCare won't like that idea. They'd rather lower the costs of premiums, and their preferred way to do this is by making insurance coverage more stingy — think higher deductibles and more cost-sharing. ObamaCare actually forced insurers to increase the generosity of coverage, and critics complain this encourages over-consumption of care, driving up prices.

But that story doesn't fit the data: Roughly 19 percent of Americans account for 80 percent of all spending in the health care system. Just 5 percent account for half of all spending — and those 5 percent are people with $40,000 or more in annual health care expenses. If we have an over-consumption problem, it isn't in routine care — it's in big-ticket procedures, expensive devices and drugs, major surgeries, and aggressive end-of-life interventions. To save money in health care spending now, at the prices we have now, your only option is to get people to use less of that kind of care.

If everyone in American society has access to care — as, you know, basic decency would demand — they're going to want it when faced with serious illness. One way or another, the money to pay for that care has to be ponied up. The debates we're having about health care — single-payer vs. ObamaCare vs. whatever jury-rigged consumer-driven system conservatives are touting — are simply debates about what route that money will take. Will it go straight from the government to health care providers, or will it go from the government to customers to private insurers to providers? Even the conservative schemes involve tax credits and government-subsidized high risk pools to make insurance more affordable. They save money by just subsidizing less, and thus leaving more people unable to afford care.

I don't know about anybody else, but that strikes me as a bit morally problematic.

Of course UnitedHealth is only one player in ObamaCare's exchanges, so its departure certainly doesn't spell doom for the reform. But it will leave 1.8 million Americans enrolled in the exchanges with only two insurers to choose from, and another 1.1 million with just one. That's a blow, and evidence ObamaCare's exchanges are not yet financially healthy. "Something has to give," Larry Levitt, an ObamaCare expert at the Kaiser Family Foundation, told The Hill. "Either insurers will drop out or insurers will raise premiums."

Another option is for policymakers to suck it up and just increase the subsidies.


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