SHIELDS: Obamacare And The 2008 Crash

Editor’s Note: A guest post by Stewart R. Shields, an investment advisor and insurance expert at Bruce Shields & Associates in Mandeville, Louisiana. Stewart specializes in both personal and group benefit insurance strategies along with group retirement plans such as 401(k)s, group medical, business succession strategies, and retirement strategies.

Looking over the current state of affairs with the Affordable Care Act and all its market ramifications, you may begin to notice striking and dangerous similarities with another fairly recent series of unfortunate events that came to a head in 2008. Bear with me a bit as we step back to another past crisis to lay the foundation for this analogy.

On September 30th 1999, the New York Times published a piece called “Fannie Mae Eases Credit to Aid Mortgage Lending” that read, in part:

“In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.”

The goal of the program (pressured by the Clinton Administration, HUD, and certain members of Congress named Chris Dodd and Barney Frank among others) was to compel private banks to generate more mortgage lending to minority groups that largely could not get such loans. The government agencies and applicable Congressional committees claimed that banks were engaged in racial discrimination, sometimes referred to as “Red Line Lending” or “Redlining” where banks would draw a “red line” around areas on a map that were largely racial minority communities and then not engage in lending inside those boundaries or charge much higher rates to secure loans. You can read more about this in a 1998 piece from Helen Ladd.

Now, on the surface some folks would look at this and make the knee-jerk proclamation that it was based on skin color. But, the fact is that banks make business decisions based on stability and sound lending practices, and many folks who lived in those areas simply did not have the financial wherewithal to reliably pay back such loans (based on the normal standards) because of their assets, income, and credit.  The false narrative effectively being sold to the public however was that the banking industry had one set of rules for some people and another set of rules for everyone else based on race. As banks came under increasing fire, threats of audit by Congress and the Federal Reserve, and media scrutiny for the seemingly baseless charges of “institutionalized racism”, in swept Franklin Raines, the CEO of the federal government owned Fannie Mae, to provide them an out.  (from the article)

 “Fannie Mae, the nation’s biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.”

And furthermore:

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae’s and Freddie Mac’s portfolio be made up of loans to low and moderate-income borrowers. 

Remember, this is 1999. Nine years before the infamous crash of 2008.  And finally in the same article, we get this gem:

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

Over the next 9 years, lending practices took on a whole new form and as quickly as Fannie Mae would pick up subprime loans, they would be packed into securities that were sold on public exchanges.  When the whole thing crashed in 2008, the government stepped in a bailed out the industry and then gave us the infamous Dodd-Frank legislation (yes, the same two Congressmen that played a large role in initiating the whole affair) which has served to largely strangle the small and mid-sized banks, leaving mainly the biggest banks behind to become even bigger. Perhaps that’s why the biggest banks favored the bill and the smaller ones fought it tooth and nail…but I digress.

It should also be noted that there were extensive battles between Fannie Mae and the Bush administration, who was extremely concerned with the GSE’s (Government Sponsored Entity) fiscal viability in part because of its high-risk mortgage purchasing habits and (to say the least) less than stellar accounting practices. In fact, Fortune Magazine did an incredibly comprehensive piece in 2005, which a favorite line for me personally from the story reads:

A key tenet of the Street’s defense of Fannie is that the $9 billion restatement doesn’t really constitute an economic loss. It’s just an accounting issue, “technical in nature,” as one analyst said.

The other view, of course, is that the $9 billion represents losses that Fannie should have taken–but didn’t–since 2001. And that in avoiding those losses, Fannie’s top executives collected millions in bonuses they didn’t earn.

$9 billion in losses would be a pretty substantial amount, yes?  But regardless of all the common sense about bad lending practices and the mounting losses that were being hidden through creative accounting techniques, the Beltway defenders of Fannie and the correlated expansion of loans to high credit risk borrowers continued to cry out Kevin Bacon’s famous line from Animal House, “ALL IS WELL!” as the streets of Faber collapsed around them.

Lo and behold…we know the rest of this story.  A snippet of the damage can be observed in this 2010 article from CNN Money where a reported record of 3 million foreclosures occurred in 2009 following the bust. And what was the moral of the story? Why, Wall Street banks were greedy and underhanded, of course! Certainly some of it was complicit, don’t get me wrong. But being complicit in a scheme where Washington DC politicians orchestrated the stage for political purposes while promising “All is well!” is a fact that cannot go forgotten.

And now for something completely different…err…similar…

In 2010 the Affordable Care Act was passed after years of proclamations from certain groups in Washington DC that the healthcare industry just wasn’t fair, and too expensive, etc… Sounding familiar yet?

The only answer of course was to pass (in secret, mind you) a massive 3000 page federal law requiring everyone to buy coverage under threat of IRS penalties and that insurance carriers cover everyone regardless of having a pre-existing condition and no prior coverage. And many of the big health insurance carriers got on board! Why? Just as with the banks in 1999, there were promises of massive government subsidies and protections from what would look eerily similar to the risky bank portfolios over-weighted with subprime loans. In this case however, it was a much more high-risk, risk-pool of insureds.

Remember, insurance is simply a device that intends to limit, indemnify, or otherwise mitigate the risk of financial loss due to a peril that COULD happen. It’s not a piggy bank you can access at will, regardless of sound personal fiscal responsibility.

No matter the type of insurance, actuaries have a job to price such risks based upon the likelihood of occurrence(s) given a certain population of insureds. Just like the risk managers and loan officers of banks did before government mandates prescribed otherwise, insurance actuaries would price healthy folks the cheapest as they presented the least risk to the viability of the overall risk pool. Think of these folks as the ones with credit scores in the 700-800s. They got the cheapest loan rate at the banks just like the heathiest folks got the cheapest rates from insurance companies. Then there were those who had some issues but nothing serious, so they paid a little more. Then you had folks with major ongoing problems that presented an almost certain loss to the insurer (akin to a credit score in the 400-500 range). Those folks were priced out. Was it a perfect system? No. No system is. But most would content that it was certainly as close to reasonable as one could get. But many states had high risk pools for those folks who couldn’t get coverage otherwise. Yes, they were expensive, but at least there was an option, and that option was still typically much less expensive than paying some of the hospital bills outright sans coverage.

Enter “Obamacare”. Now, insurance wasn’t really insurance anymore. Anyone regardless of health condition could secure coverage at the same rates as healthy folks without a stich of medical underwriting or questions. Sounds nice, right? But then reality hit like an Acme anvil dropping on Wile E. Coyote’s head.  Instead of premiums lowering as President Obama assured the public, non-group premiums exploded almost overnight due in very large part to the flood of previously uninsurable populations. Let’s not forget all the new (and in many cases unnecessary) services that EVERY policy had to provide coverage for, such as maternity, which previously was at the option of the insured to add to a policy if he/she chose to.  Forbes Magazine covers much of the initial shock here.

2015-2016 fared even worse. The younger and healthier populations were not signing up in the numbers necessary to balance out against the older and less healthy populations, and a great many folks who were going through the exchanges were being shunted to Medicaid programs instead. For those who did sign up successfully, there was the possibility of a tax payer subsidy if their income fell under certain guidelines. In other words, a new federal means-tested welfare program. Yes. That’s what it is. Welfare. Like it or not.

Of course there were heralded promises of “If you like your plan, you can keep your plan,” from President Obama, and then came the claims that premiums would drop substantially because of this legislation. But just like in the years leading up to 2008, there were a plethora of naysayers who recognized that such a system was unsustainable and would have to fail at some point (sooner than later).  Nevertheless, the ACA was designed away from even a shred of public scrutiny, and shortly after came then House Speaker Nancy Pelosi’s famous quip “We need to pass the bill so you can find out what’s in it.”

Unlike the banking industry however, most folks seem to have a far more personal and sensitive relationship with their health coverages. The lack of popularity for the ACA was palpable in a great many public polls including this one from CNN in March of 2010 where only 39% of respondents approved of a bill that almost no one knew what was contained within.

Then came the enrollments after a disastrous launch of healthcare.gov that saw crashes and inaccessibility by millions of folks. A full timeline of the events were tracked here by The Hill.

During all this, something else was happening that went largely overlooked. In order to facilitate folks buying new plans on the exchanges, the feds turned not largely to the well established regimen of licensed life and health insurance producers of this country, but to these new “Navigators” as they were called. Essentially, what the ACA did was by-pass the insurance departments of all 50 states and created an army of unlicensed and unregulated health insurance sales people, undercutting the producers who had spent years building their practices. Forbes covered this a bit in a 2012 article that discusses how the compensation for licensed agents was cut drastically thanks to the new MLR (Medical Loss Ratio) requirements companies had to contend with that demanded at least 80% -85% of premiums be spent on medical care. What this has led to apart from cutting the pay for its agents by almost half, it also makes it harder for companies to retain profits that are used to create greater cash reserves to maintain fiscal stability.

But no worries! The federal government told these insurers that they (you know, us, the tax payers) would cover the insurance companies’ losses due to the high risk nature of the pools they now had to maintain. This is why the private companies were all on board with Obamacare, remember?

Well… that didn’t work out so well. And as of 2016, major players in the markets were in the hole to the tune of $8 BILLION. Is this starting to sound familiar again?

A few weeks ago I received an email from Humana, a major US health insurer, that waived goodbye to Obamacare exchanges as of 2018. In a piece from The Washington Times just a few days ago:

  Humana, a major health insurer, said Tuesday that it will pull out of the Obamacare marketplace after this year, delivering yet another blow to a program that was already on life support. The Louisville, Kentucky-based company had already cut offerings for this year and pulled out of hundreds of counties last year. It said Tuesday that it tried everything it could to make money but early returns from the just-closed enrollment period weren’t promising.

This had been well predicted nearly a year as the losses for every major carrier began to mount, including Humana, as reported by Bloomberg in January of 2016

And last year in April 2016, the nation’s biggest health insurer, United HealthCare, and CEO Stephen Hemsley announced:

 … UnitedHealth will leave most states by 2017 because the markets for these exchanges are relatively small and also have higher risks for the company over the short-term. As such, he said UnitedHealth (UNH) could not serve these exchanges on an “effective and sustained basis.”  It shouldn’t come as a huge surprise. UnitedHealth had previously said that it lost $475 million on the ACA exchanges last year and could lose another $500 million this year.

A lot of folks outside the industry wondered what on Earth was happening when the 2016 enrollments began and the options available to them on the exchanges had dwindled to near nothing.  Then came the revelation for them in one such article from the Washington Post where the title said everything you needed to know, Health insurers get only 1.6% of $6 billion they are owed for costly ACA customers.  Funny enough, the Post ran another article with the same warning the year before in 2015. The disturbing part is that $8 Billion does NOT include fiscal year 2016, which according to some sources could almost DOUBLE the un-reimbursed losses to nearly $15 Billion as per this recent story from CNBC.

And finally we have the CEO of Aetna, Mark Bertolini, just days ago pronounce (correctly) that “Obamacare is in a Death Spiral.”  Yet in the meantime, Kevin Bacon takes the form of former head of CMS (Centers for Medicare and Medicaid) Andy Slavitt screaming “ALL IS WELL!” via Twitter.

If the pattern between the two sagas isn’t obvious by, it never will be.  Government declares there is a “problem” that can only be fixed by… more government. The problem either never existed or was overblown and made inexorably worse by government. System crashes. Tax payers are on the hook to bail them out. Government sweeps in to save us from…well…them.

While the banking/housing crisis is largely behind us except for the Dodd-Frank Legislation, the final chapters of Obamacare are not yet written.  There are two arguments that could be made at this point.  One is, the politicians who lobbied for this were frankly too ignorant to comprehend what blatantly obvious and deleterious effects this law would have (which I grant you, is rather tempting to entertain). The other is they knew exactly what they were doing and this was the plan all along so that the industry would fall into a “death spiral” and finally give certain political factions the ammo it needed to ram through a universal, single-payer, governement system. “Medicare for All”

If you doubt that, just take President Obama’s own words (then, a Senator) about wanting Single Payer and how something like the ACA would be the transitional step.  Should the private sector insurance markets fail because of government mandates just as the housing markets did, rest assured those who forced the legislation upon us will declare the “Greed and Malfeasance of the Evil Insurance Companies” to be the culprit. And the only way to fix it is by letting government take them over.

But this time, the circumstances are different. In 2008, the Democrats controlled Congress and won the White House. They had Carte Blanche to do as they pleased. This time the Republicans have it all. And it will likely be on this single issue alone where they either sink or swim.  Repealing the law will take time. No question. It took years to embed this into the private sector and will take the same to unravel so as to cause as little disruption and economic impact as possible.

We are just now learning the provisions of the newly unveiled Republican answer to Obamacare. While there are some positive provisions, there seems to be more left in tact from the original bill than it repeals.  This bill will undoubtedly be carved up and rebuilt in several facets as it makes it way through committees and debate.  I’m tempted at the moment to reserve judgement until a final version is put to the floor to vote. No matter what, unless the tentacles of government are cut completely from the system, the problems will likely fester and grow.  However, another part of me is tempted to let the ACA play out another year or two, because by then the individual insurance marketplace for new business will be almost completely gone and a full reset will have to be at least entertained. The question is, can the industry survive until then? As of right now, the answer looks bleak.

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