Barclays On The ‘Nightmare Scenario’ For The Health Insurance Industry
One possible outcome from the eventual Supreme Court ruling on Obamacare is the possibility that the individual mandate gets striked down for being unconstitutional, but that the rest of the law, including the requirement that insurance companies take anyone regardless of pre-existing conditions, stays in place.
This has been described as a "nightmare scenario" possibly leading to a health insurance "death spiral".
So how bad could this be, really?
According to Barclays analyst Joshua R. Raskin, the fears are overblown.
First of all, Riskin assigns just a 10%-20% chance of this outcome (mandate ruled constitutional and severable from the rest of the law).
But even this outcome won't be a catastrophe for the industry.
He gives several reasons why, but this is key.
The current mandate is very weak, in our opinion. In 2014, the first year of the mandate, the penalty is the greater of $95 for adults (up to $285 for a family) or 1% of family income, and that rises to $325 per adult in 2015 and ultimately to $695 per adult or 2.5% of family income in 2016 and beyond. Even in 2016 (at $695 annually, just $57 per month, or 2.5% of family income), we estimate that the penalty will pale in comparison to the cost of insurance. We estimate that family coverage could cost as much as $10,000 for even the basic plans on an annual basis (and that is likely very conservative based on the fact that even the CBO estimates the Bronze plans will average $12,000 annually for a family). With that mind, a family would have to earn $400,000 before the penalty equals the cost of insurance (or closer to $480,000 if the CBO estimates are correct). We would be surprised if there were a lot of families earning $400,000 without some form of corporate coverage available.
What's more, even people who totally would refuse aren't under that much of a penalty. There's no risk of criminal prosecution or having a lien put on your property. Thus ultimately, mandate or no mandate shouldn't really affect insurance company economics all that much.
All that being said, this is a low-odds outcome, and in fact the rally in health insurance companies (companies like Aetna and Wellpoint) yesterday was in part predicated on the fact that after the third day of arguments, The Supreme Court does not seem to be in the mood to rule this way.