Detroit Bankruptcy Could Flood Obamacare Exchanges, Increasing Costs

Cities dumping their retirees onto exchanges could hurt insurance exchanges’ viability

July 29, 2013

The retirees that cities like Detroit are trying to push into Obamacare’s health insurance exchanges could drive up the premiums in the exchanges and swell costs to the federal government, experts say.

Detroit, which has filed for bankruptcy, is trying to reduce its liabilities by pushing retirees who are too young for Medicare onto the federal healthcare exchange set up through the Affordable Care Act, the New York Times reported on Sunday. The retirees could then buy their own insurance with help from federal subsidies.

Detroit’s move comes as part of its bankruptcy proceedings, but it is not the first city to try to push its retirees onto the exchanges. Rahm Emanuel, Chicago’s mayor and a former chief of staff to President Barack Obama, sent a letter in May to former Chicago employees announcing his intention to phase out health benefits for early retirees, forcing them to go to the exchanges for health insurance.

The structure of incentives within Obamacare encourages cities to drop health benefits for retirees who do not qualify for Medicare yet, experts say.

"It’s a pretty obvious thing—there’s no penalty on the employer if they were to drop retiree coverage," said Ed Haislmaier, a health care expert at the Heritage Foundation. The federal government provides subsidies to people who earn under 400 percent of the poverty level, reducing the cost of health insurance, he said.

"Essentially what you’re trying to do is shift costs to the federal government," said Andrew Biggs, a local government pension expert at the American Enterprise Institute.

Public retirees typically have only a low to moderate income, even with their pension, meaning many will qualify for subsidies from the federal government, Biggs said.

"It’s almost a godsend to state and local governments because they can do it [and] argue that they are still providing good, affordable coverage," said Merrill Matthews, a health care policy expert at the Institute for Policy Innovation.

These retirees could ultimately end up causing the price of health insurance within the exchanges to rise.

"You’re adding more people who are going to be using the healthcare system," said Sally Pipes, a healthcare expert at the Pacific Research Institute.

"These tend to be expensive people," Haislmaier said, since those being pushed onto the exchanges are usually 55 to 65 years old. "It doesn’t present a very attractive risk mix."

The number of people, and especially young people, who enroll in the exchanges will ultimately determine how these retirees entering the system will affect insurance costs, Pipes said.

The Obama administration is hoping to get about 7 million people total, and 2.7 million people under the age of 35, to enroll in the exchanges to make the insurance pool big enough to keep premium costs down and the exchanges viable.

Obamacare’s structure further amplifies the costs of these older retirees for younger insurance buyers, Haislmaier and Matthews said, which could make it even harder for the government to get younger people to enroll.

The market-set ratio of premium costs for people in their early 60s to people in their 20s is about five to one, according to Haislmaier and Matthews. However, Obamacare mandates that this ratio be no more than three to one, meaning that while insurance for older people is slightly lower than what it would be in an unregulated system, younger people pay more to compensate.

Premiums likely will not rise in the first year because of the influx of young retirees, Matthews said, but the conditions are set for premiums to "skyrocket."

While there are not many cities in as dire straits as Detroit, cities across the country are being squeezed by pension and healthcare liabilities, said Ted Dabrowski, vice president for policy at the Illinois Policy Institute.

"They are going to look at how they can pass costs on to the federal government and reduce pressure on their own budgets," Dabrowski said.

If Chicago and Detroit are successful in unloading their liabilities, many other cities and states could quickly follow, Matthews and Biggs predicted.

"I don’t just think it’s going to be the Detroits of the world that are going to do it. … It either makes sense or it doesn’t make sense," Biggs said.

Matthews noted that the federal government was expecting some of this kind of cost shift from the local to the federal level but not nearly what could be coming.

The biggest barrier for cities and states to make this shift will be contractual obligations, Biggs and Haislmaier said.

"The legal protections for retiree benefits are not as strong as pension benefits," Biggs said.

Cities could simply try to buy their retirees out of their current contracts in order to push them onto the exchanges, offering cash to pay for the part of the insurance that the federal subsidies do not cover, Haislmaier suggested.

However, it is unclear how the retirees will respond to these changes.

Chicago workers are suing to block Emanuel’s proposal to push them onto the federal exchanges.