ObamaCare Rollout

Punts on Income Verification and Employer Insurance Checks, Setting Stage for Insurers to Call Mistakes “Fraud” and Rescind Policies

naked capitalism by Lambert Strether 4:15 am

By lambert strether of Corrente.

Obama’s career transition from selling hope and change to selling insurance seems to be, at least so far, a wee bit rocky. Kudos to WaPo’s Sarah Kliff and Sandhya Somashekhar for breaking the story of the newest #FAIL, which required them to process 600 pages of dense HHS prose on July 5; a classic Friday document dump, with bonus points for the holiday weekend, and super double bonus sparkle pony points for following hard on the heels of another huge #FAIL, Obama’s triage of the employer reporting mandate (chirped White House apparatchick Valerie Jarrett: “We are full steam ahead for the Marketplaces [exchanges] opening on October 1.” Right onto the rocks, Val!). Kliff and Somashekhar write:

After encountering “legislative and operational barriers,” [nice…] the federal government will not require the District and the 16 states that are running their own marketplaces to verify a consumer’s statement that they do not receive health insurance from their employer. …

“The exchange may accept the applicant’s attestation regarding enrollment in eligible employer-sponsored plan . . . without further verification,” according to the final rule. …

While initial regulations had proposed an audit of each consumer who reported an income significantly lower than what federal records indicated, the final rule scaled that back to an audit of a statistically significant sample of such cases.

For individuals who are not part of that sample, “the Exchange may accept the attestation of projected annual household income without further verification,” it said.

This really is an epic #FAIL, technically, politically, and morally. Let’s take a look at how ObamaCare was supposed to work:

Simplifying drastically — really! — ObamaCare is designed to toss citizens consumers into buckets depending on their (projected) income (MAGI) and whether they get insurance from their employer. There’s a big bucket labeled “Medicaid” that ObamaCare forcescitizens consumers into if they’re too poor, and there are several other buckets labeled “Exchange” (sometimes “Marketplace”) that have different subsidies attached, depending again on income, and what percentage of their income employer insurance (if any) represents. The ObamaCare Exchanges (“marketplaces”) were supposed to be implemented online, and even though comparisons to Expedia or Travelocity were beyond absurd, there was and may even still be some remaining hope that we’ll end up with something like TurboTax. And the exchanges were going to do all this figuring in real time: Log on, fill out a form, get tossed in a bucket, sign up.

So first, let’s talk about the technical #FAIL: You can see right away from that description that the Exchange system (I’m going to stop calling them marketplaces even though that’s what the HHS PR people want) presents a massive systems integration problem. You as a citizen consumer must (1) prove your identity (integrate credit reporting agencies), (2) your citizenship (integrate DHS), (3) your income (integrate IRS), (4) state Medicaid eligibility requirements (integrate each state), and (5) the insurance, if any, your employer offers you (integrate employer reporting); ObamaCare needs all that to throw you into the right bucket. Even leaving aside the fact that all this data is going to be dirty, as we know from the NSA scandals, it’s all kept in databases whose schemas differ and must be mapped to each other, and which need to be connected together with complicated and expensive Intertubal plumbing. Not easy.

So, when a project gets out of control, you see managers triage requirements to get something, anything, out the door, and remember: Obama’s committed to the October 1 date (“We will implement it”), and so something, anything, will go out the door. (My favorite quote, from ObamaCare’s wrangler at HHS: “Let’s just make sure it’s not a third world experience.”). We’ve seen triage in the Colorado and Connecticut exchanges already. We’ve already seen Obama triage the small business SHOP exchanges. Last Tuesday, we saw Obama triage the employer reporting requirement (point (5) above). And last Friday we saw Obama triage the income verification requirement (point (3) above). You enter both the cost of your employer insurance and your income on “the honor system, ” as Kliff and Somashekhar put it. You throw yourself into your own bucket!

It’s hard to know exactly why the ObamaCare exchange system is turning into such a technical disaster, besides just being hard. I might speculate that 600-page rules take a great deal of time to write, and you can’t deliver the software until you’ve got the rules. That would explain why the RFPs were a nightmare:

I saw the RFP to be the company to develop and maintain the NYS Exchange. What a train wreck! The company I was consulting for decided not to even pursue it in the end because it was a textbook lose-lose RFP. If you lose, you lose. If you win, you lose. Most of the requirements were “TBD” and they were essentially asking for a cost commitment to an ill-define / under-defined / NOT defined scope.

In addition, when Obama changed the Exchange application form as a PR exercise back in May, that required the states to rewrite their software:

The [Connecticut] state agency spent weeks reprogramming its Web site after the federal government shrank the insurance application from 21 pages to three.

Weeks, as it turned out, they did not have (which is remarkable, since ObamaCare was passed in 2010).

Second, let’s talk about the political #FAIL. To begin with, the Obama camp has acquired and strenuously burnished a reputation for technical competence, based on their tech-savvy campaigns. Here’s a pleasingly ripe slab of triumphalism (bolding and all caps most definitely not mine):

Reported as early as Feb, 2012 in a Slate article titled “Obama’s White Whale”,project Narwhal, Obama’s top-secret campaign project until then, featuring high tech data integration and data mining techniques, promised to change the ways in which campaigns are fought and won. … Project Narwahl relied on a real time full data integration technology that allowed the campaign to target voters in ways previously only imagined. … As for project Dreamcatcher, the Obama campaign was particularly secretive about this one … Unfortunately for Romney, as we learned just a few days ago, his attempt at anything similar to Narwhal and  Dreamcatcher, project ORCA, was aCOMPLETE FAILURE.

Aren’t we happy we did not get THAT president?

Happily or sadly, alas, however, campaigning is not the same as governing, and the ObamaCare Exchanges are looking a lot like Romney’s Orca. Except that it’s one thing to screw up on election night, but quite another to screw up your “signature domestic initiative,” as well as screwing up the lives of the poor schlubs who are going to get caught up in this mess.

Next, who’s most injured by ObamaCare’s latest debable? That’s right: The states who actually trusted Obama and invested their time and treasure in his program. I hate to quote the National Review, but when they’re right, they’re right:

As with the employer-mandate delay (to which it is the natural follow-up), this decision appears to have come as a surprise to the people most immediately affected by it—in this case the administrators of the state exchanges. The statement quoted above from the spokeswoman of the California exchange suggests [“currently evaluating”] the administrators of that exchange did not know about this new rule the day before it was released. It must come as both a great relief to them and something of a slap in the face, since they and their colleagues in other states have after all spent huge amounts of time and money trying to prepare the technological [sic] architecture for verification requirements from which they have now been released. After this eventful week, they must wonder what other “delays” are coming in low-key announcements late on Friday afternoons.

Yes, yes, schadenfreude, but Obama’s sure making the governors of the states who opted for the Federal exchange — say, how’s that coming? — look awfully smart, isn’t he? And with Rick Perry, that’s not easy. But yes we can!

Even worse, Obama ends up reinforcing the narrative that he’s really a Republican Trojan horse, sent to destroy all faith in the idea that government can ever do anything positive. Here’s the heart-tugging TV ad Americans for Prosperity are going to run starting tomorrow in VA and OH:

The 30-second ad titled “Questions” begins with Julie, a mother of two, who says, “Two years ago, my son Caleb began having seizures. The medical care he received meant the world to me. Now, I’m paying more attention and I have some questions about Obamacare.”

“If we can’t pick our own doctor, how do I know my family is going to get the care they need? And what am I getting in exchange for higher premiums and a smaller paycheck? Can I really trust the folks in Washington with my family’s health care? I think we all deserve some answers,” she says in the spot.

Well, yes, if you’ve got Medicare. But no, since if Obama were able to build a system you could trust, he wouldn’t keep triaging more and more bits of it. The health care policy space is starting to look like SFO’s runway 28L near the seawall.

Finally, I’d like to talk about the moral #FAIL. (The moral hazards of an “honor system” are a topic for another post.) Rather, I’d like to talk about a promise that Obama made, and how triaging the income verification and employer insurance checks could jeopardize it. From Obama’s “train wreck” presser of April 30, although he’s used same talking point over and over again:

[OBAMA:] And for the 85 to 90 percent of Americans who already have health insurance, they’re already experiencing most of the benefits1 of the Affordable Care Act even if they don’t know it. Their insurance is more secure. Insurance companies can’t drop them for bad reasons. Their kids are able to stay on their health insurance until they’re 26 years old. They’re getting free preventive care.

What Obama is referring too, although in childish language — “drop them for bad reasons” — is the practice known as rescission. Ending rescission was supposed to be one of ObamaCare’s great triumphs:

The health insurance industry has decided to end its practice of cancelling claims once a patient gets sick next month, well before the new health care law would have required it, the industry’s chief spokesman said Wednesday. …

The decision to end rescission, as the practice is known, was made during a Tuesday afternoon conference call of chief executives organized by their trade group, America’s Health Insurance Plans, and represents the industry’s latest attempt to build political good will after the bruising health care fight.


ObamaCare will end the practice of rescission where insurers drop ill customers to avoid their mounting bills. This actually fits right in with the conservative critique of health insurance and with policies enacted by George W. Bush.

Of course, insurance companies have every incentive for rescission, since they profit by denying care. ObamaCare hasn’t changed those incentives, and back in the day the insurance companies “rescissed” a lot of people. If you got sick, these were the odds. ViaTaunter Media (hat tip SW):

Half of the insured population uses virtually no health care at all. The 80th percentile uses only $3,000 (2002 dollars, adjust a bit up for today). You have to hit the 95th percentile to get anywhere interesting, and even there you have only $11,487 in costs. It’s the 99th percentile, the people with over $35,000 of medical costs, who represent fully 22% of the entire nation’s medical costs. These people have chronic, expensive conditions. They are, to use a technical term, sick.

It should be fairly clear that the people who do not file insurance claims do not face rescission. The insurance companies will happily deposit their checks. …

If the top 5% is the absolute largest population for whom rescission would make sense, the probability of having your policy cancelled given that you have filed a claim is fully 10% (0.5% rescission/5.0% of the population). If you take the LA Times estimate that $300mm was saved by abrogating 20,000 policies in California ($15,000/policy), you are somewhere in the 15% zone, depending on the convexity of the top section of population. If, as I suspect, rescission is targeted toward the truly bankrupting cases – the top 1%, the folks with over $35,000 of annual claims who could never be profitable for the carrier – then the probability of having your policy torn up given a massively expensive condition is pushing 50%. One in two. You have three times better odds playing Russian Roulette.

(Note: Some commenters think this estimate is low.)

So, how does this relate to the “honor system” where citizens consumers declare their own (projected) income (in terms of MAGI) and describe the cost of their health insurance (if any) that their company offers them? It’s very simple. If the pre-triage ObamaCare Exchanges had worked as designed, the exchange would have validated the income figure, and supplied the insurance cost via the company reporting function. However, under ObamaCare as it now stands, the onus is completely on the individual. That means they’re vulnerable to a charge of fraud by their insurance carrier, and the bar for showing fraud is very low. RoseAnne DeMarco:

[Under ObamaCare,] insurers may continue to rescind policies for “fraud or intentional misrepresentation” – the main pretext insurance companies now use to cancel coverage.

Via Tibbits, “Insurance Companies Interpretation of the New Rescission Rules”:

Below is some information taken from a newsletter for Anthem Blue Cross Blue Shield. It will allow you to better understand how the insurance companies are interpreting the new law regarding rescissions.

The federal health care reform law does not allow the plan or issuer to rescind coverage, except in cases of fraud or intentional misrepresentation of material fact as prohibited by the plan or coverage. Examples of when a group may consider rescinding coverage include intentional misrepresentations of marital status or dependent eligibility.

So, where insurance companies used to rescind your policy after you got cancer because you didn’t tell them about the acne you had when you were 13, now they can rescind your policy if (for example) you use your 1040 figures for income instead of MAGI (an accident totally waiting to happen), or if you say your employer’s insurance policy costs 9.53% of your income when in fact it costs 9.32%.

It’s all very well for Obama to promise Americans that “insurance companies can’t drop them for bad reasons.” But if he really wanted that promise to come true, then he shouldn’t have handed writing the bill over to Max Baucus, whose chief of staff, Liz Fowler, on secondment from her job as a Wellpoint VP, wrote the bill that later became ObamaCare, and wrote a loophole into it that the insurance companies are going to be able to drive a truck through — and Obama just gave them the go-ahead.**


* * *
All the players had three years (2013 – 2010) to implement ObamaCare, “the President’s signature domestic initiative,” which is going to cover a pitiable 7 million of the 40+ million uninsured in its first year. LBJ, let us remember, rolled out Medicare for the entire over-65 population in one year, back in the day of steam-powered mainframes driven by punch cards fed to them by guys in white shirts with ties. 

So what’s the difference? The system architecture. Medicare for All has a simple and robust single payer architecture: You determine eligibility in one (1) jurisdiction (the United States) with one (1) eligibility criterion for citizens: Their age (65; should be zero). ObamaCare, by contrast, needs to determine eligibility in 50 (fifty) jurisdictions, with a complex eligibility formula that’s primarily income-based, but involves systems integration from the IRS, DHS, and private credit reporting companies (at least), to throw people into the right subsidy bucket. That’s called a combinatorial explosion, and even the best program and project managers — which ObamaCare’s managers clearly either are not, or have not been given the opportunity to be — have a hard time dealing with them. Let me know how it all works out….

NOTE * There is plenty of scope for disaster, still. We’ve had no user testing worthy of the name on any of the Exchanges.

NOTE ** The eternal question: Stupid and/or evil? On this episode, I’m going with stupid. Because optimism!

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