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Obamacare's Worst-Case Scenarios

Administration officials are saying that will be “functioning smoothly” by the end of November. And maybe they are right, in which case all the fuss about broken websites will become a historical footnote.

But what if administration officials are wrong? What if it’s December and Obamacare’s official online portals are still barely functional? 

It's easy to assume that Obamacare would simply unravel. As the argument goes, the only people willing to put up with such a slow, cumbersome process for enrollment would be the people who need health insurance the most—in other words, people with serious medical conditions. If that happens, health insurers would likely have to raise rates, because they rely heavily on premiums from relatively healthy people to subsidize the high medical bills of the sick. The higher rates could scare off even more customers in the future, creating the infamous health insurance “death spiral.”

The fear is rational. Something like this happened in New Jersey, Washington state, and a few other places that tried to reform health care in the past. And nobody questions that a poorly functioning website would cause serious problems, particularly for people who need to find new insurance by January. But, according to experts and industry sources I consulted over the last week, the law would probably be more resilient than commonly assumed. The damage would be real, these experts say, but there's a good chance it would fade with time.

One reason is a series of Obamacare provisions few people know exist and even fewer understand. They’re known among health wonks as the “three Rs”—reinsurance, risk adjustment, and risk corridors. (Catchy, right?)  In effect, these programs will reimburse insurance plans that end up with more sick people (or fewer healthy people) than they originally expected to enroll. 

The primary purpose of these mechanisms is to make sure insurers can’t target healthier consumers in order to get competitive advantages over one another. (An example would be structuring benefits or doctor networks in ways that discouraged diabetics from joining a plan.) But two of the tools, reinsurance and risk corridors, should also protect insurers if they end up with a skewed risk pool because Obamacare's enrollment mechanisms aren’t working very well. As Adrianna McIntyre, a health policy analyst and blogger at The Incidental Economist, explained last week, “Insurers wouldn’t recoup all losses, but the risk corridor program provides their bottom line with a substantial buffer." 

As that quote suggests, some insurers might still lose money from low enrollment, because they had set prices for this year assuming a mix that included more healthy people. They could respond by increasing rates for 2015, in order to make up for the losses they saw in 2014. Insurers that took bigger losses, or feared bigger losses in the future, might drop out of the market altogether. 

But as long insurers were confident that enrollment would run more smoothly in 2015—in other words, as long as they believed fixing the website were a matter of “when” rather than “if”—they’d also have strong incentive to restrain rate increases and give the system an extra year to stabilize. Why? For the very same reason insurers kept prices relatively low this year: They want to grab customers coming into the marketplace for the first time. “I wouldn’t assume they’ll try to recoup so many losses in 2015,” says John Holahan of the Urban Institute. “There will still be pressure to compete and [insurers] may not be as badly off as you think, at least if the risk corridors work.” 

The other factor that will likely prevent a death spiral, at least of the traditional sort, is the law’s subsidies. You’ve heard all about these tax credits: They are worth hundreds of dollars a year to some people, and thousands of dollars a year to others. They are available to people with incomes below 400 percent of the poverty line, which works out to about $94,000 for a family of four and $46,000 for an individual.

What you may not realize (because few people do) is that the subsidies, by design, protect people from rising premiums. The law basically dictates what these folks pay for the typical, “silver-level” Obamacare plan, no matter what the insurer charges. This is critical. It means that rising premiums won’t affect the willingness of those people to enroll—which means, in turn, they’d still have incentive to sign up next year, as long as the technological bugs were gone and Obamacare online was working. (Subsides were a missing element of those ill-fated reform experiments in New Jersey and elsewhere.)

All of these predictions contain pretty high levels of uncertainty, with potential for variation from state to state. National Review’s Yuval Levin, one of the few experts to grasp this complexity, is skeptical of the law generally and thinks it suffers from other, potentially fatal flaws. (His take on this same question is worth reading in full.) But when it comes to the website problems and their impact, he speaks for all smart observers when he says “No one can know how all this will go … This could be worse than it seems or not as bad as it seems.”

Again, nobody should be under the delusion that the consequences from a ongoing troubles with would be trivial. Subsidies wouldn't protect people making more than 400 percent of the poverty line; the losses for some insurers could be significant. If insurers end up drawing heavily on risk corridor funds to offset their losses—and if higher premiums raise the cost of those federal subsidies—the government would end spending more money for every person that gets insurance. (That may not be the same thing as spending more money overall, but that’s a subject for another time.) Most important, if enrollment is difficult then many fewer people—we’re probably talking millions—would be getting insurance in 2014. That's a seriously big deal.

But as long as bad press doesn’t make the law's defenders too skittish, the program would most likely survive an uneven first year and eventually function normally—giving even these millions a chance to get the insurance they desperately need. "I am most concerned about 2014—just surviving all of the bad press and opportunities for those opposed to ACA to get their licks in,” says Charles Roehrig, a health economist at the Altarum Institute.  “As long as ACA survives into 2014, I think time is on its side.”

Update: I added some context to the item, to make clear how the law's critics feel and to empahsize the inherent uncertainty of predictions.