osewalrus (osewalrus) wrote,
osewalrus
osewalrus

Does possible withdrawal of big insurers from Obamacare spell doom? History of USF suggests not.

News that United Health, the largest health insurer in the country, may pull out of the Affordable Care Act health insurance exchanges has started the usual stampede of predictions that Obamacare is dying (this time for sure!). While I am not an expert in health insurance, telecom provides me with a little experience about government subsidy programs and how even something that looks like a big deal to us normal folks may not be tempting to the biggest providers.

In my case, it's the Universal Service Fund, which collects about $8 billion a year, but is increasingly uninteresting to major carriers like AT&T and Verizon. This has not, however, caused any appreciable collapse of the fund. I elaborate why big boys pulling out is not a particularly good indicator of the underlying economics of a government subsidy program below.


USF and Lifeline provide a valuable lesson for those freaking about the big boys leaving the exchanges.


Government programs come with lots of checks to avoid fraud. This is a side effect of everybody assuming that any government program is a fraud boondoggle. To quote Leslie Fish's 30+ year old song about Welfare (The Paper Sea): "For every dollar saved we spent a hundred on the chore/of adding to the paper sea."


This means, for really big companies, federal programs may simply not be profitable *enough* to attract the biggest companies. They make tons of money in other lines of business. The government program is often peanuts for them, even if it looks like big money to us little people. But this does not hold true for smaller and mid-size providers. For these kind of providers, a government program offering subsidized services can often be a boon. This is exactly what happened with AT&T, Comcast, and other large carriers with regard to Universal Service Fund -- particularly on the Lifeline side.


20 years ago, the big recipients of both high cost funding (which pays for telephone service in rural areas) and Lifeline (which subsidizes phone service for the poor), were the big incumbent telcos, aka AT&T, VZ, predecessors to CenturyLink, Windstream (for its ILEC side) and lots of small rural LECs. (LEC=local exchange carrier=phone company). Cable providers were not eligible.

As time went, the largest providers dropped out of the program. With funding levels capped, the pot was comparatively smaller due to inflation. Furthermore, the non-stop chant that USF was "rife with fraud" meant more and more accountability mechanisms. So not only was the pot dropping, the hassle kept growing. Increasingly, therefore, the larger companies have found it not worth it and have been dropping out. Additionally, even as the cable operators have been offering VOIP services which might be eligible, the big guys had no interest because it was too much of a hassle to get certified as an eligible telecommunications carrier.


But the program did not die. Instead, a number of smaller carriers -- notably a company called Tracfone -- decided it was definitely worth it to jump through the government hoops for the available pot of money (now made comparatively bigger by the amount left on the table by the big boys). Similarly, the mid-size companies like Windstream decided it was definitely worth it to keep taking High Cost money, despite the changes designed to promote broadband deployment.


So the USF program remained quite useful, some might even say a bit more pro-competition, despite disinterest by bigger compeanies. Nor was there anything particularly wrong or nefarious about the bigger companies dropping out. It just wasn't a good fit for a huge company with revenues from so many other sources to focus on this particular source.


So it may be that the largest insurance companies decide they don't need the ACA exchanges. That is hardly doom for the program. Most of these companies sat out Year One because big companies are inherently conservative. The small companies that participated found it quite lucrative, so the big boys dipped in a toe. May not be right for them because, when you have revenues that are as big as the big boys have already, the ACA exchanges are a big hassle for a comparatively small return. By contrast, for smaller insurers, the absence of the big boys makes ACA participation even more desirable.


This is why a functioning industry sector needs a healthy mix of big, medium and small businesses. If consolidation eliminates nearly all the players but the largest and the smallest, you have no one willing to take advantage of new opportunities. Big companies are notoriously conservative about new lines of business, where as new entrants and the smallest companies often lack sufficient scale.




So yeah, as Paul Krugman noted, we have come to the end of unmitigated good news on Obamacare and now we get the usual issues associated with a complex program. But those looking for signs of a "death spiral" are, I believe, still looking in vain.
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