Making Lemons from Lemonade: How Obamacare is Destroying the Health Insurance Market

Earlier this summer, UnitedHealth announced its exit from the Obamacare exchanges. Last month, Aetna did the same—as had Humana before.

This is why.Lemons 01 - Lemon3

It all comes down to lemons and lemonade.

Perhaps I should explain.

The Bitter Truth About the Obamacare Lemon

Years ago, when the country was still debating the passage of Obamacare, I gave presentations warning of this very development. After all, it was inevitable. Health care administered as a federal government entitlement necessarily would destroy the private health insurance market. It was a given.

I warned that the private health insurance market necessarily could not compete with a taxpayer-subsidized system wielding the power of the federal government. In such a system, the private health insurers necessarily must compete for business with the federal government—the same federal government that is spending taxpayers’ money, that makes the laws, and that issues and enforces all of the regulations that govern the insurance marketplace. In other words, the federal government holds all the cards, shuffles them, deals them, and controls the table. In fact, the federal government owns the table. No private insurers, regardless of wealth and/or influence, can compete with that. They would be fools to try.

And so they do not. As they say, if you can’t beat them, join them. The insurance industry has joined them. And that is very bad for you and me.

The endgame, it must be remembered, was never improved or more affordable care. The endgame was universal, single-payer health care. Health care provided by the federal government, through nameless, faceless bureaucrats, to the favored few, for the good of society. Health care designed to keep those in power in power. Socialized medicine.

Mixed Reactions

While some showed great interest in what I had to say, others did not. With every election cycle, folks were lulled by the talking points of vote-seeking politicians promising to “repeal and replace” Obamacare—even as the law dug its tentacles ever deeper into the healthcare delivery system, forever destroying the status quo. In non-election years, the topic was continually pushed to the back burner as “too complicated,” “boring,” and, again, soon-to-be-solved-when-Obamacare-is-repealed-and-replaced.

Given the very public exits of the nation’s major insurers from the Obamacare exchanges, perhaps a few of you out there are finally ready to hear what I have to say. We shall see

And besides, what could be better in the waning days of a long, hot summer than a story about lemonade?

And so I will tell my story again.

A Simple Lesson Worth Repeating

Kids at Lemonade Stand - $1 cups - Lemonade-Day-2

Back then, I used the example of a lemonade stand. Imagine this:

One kid, an industrious sort, convinces his mom to buy lemons and sugar and make lemonade. It is hot out, so he buys bags of ice. And cups. He builds a lemonade stand. He sits down with his parents and figures out that each cup of lemonade costs him 25 cents to make. And so as any good entrepreneur, he sells cups of lemonade for $1 each. Folks buy his lemonade. After all, it is hot out, and they all want to support the young boy’s entrepreneurial spirit.

The boy next door, who is new to the neighborhood, sees this and decides to join in on the action. Having seen the first boy’s example, he dives in head first, realizing that there is a real market in their neighborhood for lemonade on a hot summer day.

There is a difference between the two boys, however. The second boy’s dad owns a sugar factory, and his mom grows lemons for a living. His uncle runs the local convenience store, where he gets cups and ice for free. And he makes do with an old card table from the garage, thereby relieving himself of the expense and trouble of building a stand.

He sets up shop right next door to the other young boy. He, too, sells his cups of lemonade for $1 each—for a time.

At $1 each and 25 cents in overhead and costs, the first boy makes 75 cents’ profit on each cup of lemonade sold. At $1 each and zero overhead and costs, the second boy makes $1 profit on each cup of lemonade sold.

Eventually, the second boy tires of sharing his business with the first boy. After all, no one wants two cups of lemonade at once.

And so he drops his price to 75 cents. He gets more business.

Noticing that his business is falling off, the first boy likewise lowers his price to 75 cents. At that price, the first boy makes 50 cents’ profit per cup, while the second boy makes 75 cents’ profit per cup.

Eventually, the second boy again tires of competing. He lowers his price to 50 cents. Reluctantly, the first boy follows suit. At this price point—50 cents per cup—the first boy makes a profit of 25 cents per cup, while the second boy makes 50 cents’ profit per cup.

You know what happens next: The second boy again tires of competing, so he lowers his price to 25 cents per cup. The first boy now has a serious problem: Does he lower his price to 25 cents—and thus make nothing, but keep his customers—or pack up his stand and go inside?

Let’s say he chooses the first option. He is now merely breaking even, while the second boy is making a profit of 25 cents per cup. If he chooses the second option, he will lose his customers. He decides to keep at it and break even while he considers his next step.

The second boy now wants to see the first boy gone. So he lowers his price to 10 cents per cup.

Now the first boy has a serious problem. He must choose: Should he sell his lemonade, which is already made and chilled, at a loss, or should he pack up and go inside? If he chooses the former, he will lose money. In fact, the more lemonade he sells, the more money he loses. If he chooses the latter, he will be stuck with pitchers of lemonade in which he has already invested, and all of his customers will go to the second boy. He will lose their business, perhaps forever.

Bitter Marketplace Lessons 

My point is this: The second boy necessarily controls the situation. Is he smarter or more industrious than the first boy? No—quite the opposite. All he did was copy his neighbor. Is he more willing to work? No. The difference is that he has no overhead. He gets his sugar, lemons, cups, ice, and stand for free. The first boy, in contrast, struggles under the realities of any free market, including overhead, expenses, and the necessity of making a profit.

There is also a second dynamic at work. As both boys lower the price of their lemonade, both can get away with selling smaller cups. After all, since their customers are paying less,Lemonade Stand 01 - images they expect less. At only 10 cents per cup, they actually don’t expect much at all.

The first boy realizes this, but refuses to reduce the size of his lemonade cups. After all, he promised everyone a large cup. He promised to quench their thirst. And he is selling lemonade to his neighbors, his parents’ friends. He wants to please them. He promised his parents he would do just that. His parents believe in him, and trust him to do the right thing. To make sure, they will ask their neighbors about his service. He doesn’t want to let them down.

In contrast, the second boy just moved into the neighborhood. He doesn’t know the people buying his lemonade. Since his parents both work—Mom in the lemon fields and Dad at the sugar plant—no one is watching what he does. And so with each price reduction, the second boy uses smaller and smaller cups. Eventually, he is not selling enough lemonade to quench anyone’s thirst.

A Simple Lesson in Supply, Demand, and the Power of the Profit Motive

Even so, realizing that they are only paying 10 cents per cup, the thirsty public gladly buys more cups of lemonade. After all, who would expect to have their thirst quenLemonade - Tiny Cup of Lemonade 01 - article-0-1B826914000005DC-349_634x818 - CROPPEDched for a dime? They order 2, 3, 4 cups of lemonade before even tasting it.

This makes the second boy very happy. It also makes him a lot of money.

The more dime cups of lemonade the public buys, the more money the second boy makes—and the more money the first boy loses. And the more lemonade their neighbors buy. It is the reality of the marketplace.

Eventually, the second boy will not be able to make enough 10-cent lemonade. He will demand more lemons, sugar, and ice, as his customers clamor for more lemonade. If his parents don’t give it to him, he will pitch a fit, and his customers will feel cheated. His parents can thank themselves, because they created this situation by giving their son everything for free. He can also blame himself for lulling his customers into believing that a tiny cup of lemonade for 10 cents is a good deal.

With time, the first boy will be forced from the market. Eventually, he will sadly pack up his stand and go inside.

At that point, the second boy realizes something: To his delight, he has now conditioned his customers to be grateful for very little lemonade. And they are now asking for more, aware that its supply is suddenly limited. Finally, he is the only kid in the neighborhood selling lemonade.

And so he raises his prices. His cups are first 25 cents, then 50 cents, then $1, the $5 each. And yet he keeps the size of the cups small. He is now making money hand over fist.

Barriers to Market Re-entry

You may think: At that point, the first boy will come back out and start selling lemonade, this time for $5 per cup.

Think again. First, the boy promised his neighbors a large cup of lemonade for $1 per cup—not a small cup for $5, which is where the market now is. Second, he has learned his lesson: The second boy, with no overhead or expense, holds all the cards. As soon as the first boy invests in more lemonade and returns to his stand, the second boy will again lower his prices until the first boy is again run out of the market with pitchers of lemonade on hand that he has paid for and made but cannot sell.

And so the first boy will stay out of the market. He simply can’t compete. He can’t take the risk of investing, only to be forced out of the market a second time by the same market dynamics that are out of his control.

But the young man is industrious, and not a quitter. He will move on to another source of income not requiring the lemons, sugar, ice, and cups that the second boy gets for free. He will move on to a project where he can fairly compete—like mowing his neighbors’ lawns. After all, the second boy’s family doesn’t own a lawnmower shop, so unlike the lemonade stand, the two boys can compete fairly mowing lawns. Neither boy can afford to drop his price below the costs of fuel and lawnmower maintenance. Both boys have very real overhead and a need for pricing that takes that into consideration.

The Moral of the Story

The analogy should by now be obvious.

The first boy represents a free market healthcare system wherein there is real overhead and concrete costs (sugar, lemons, cups, ice, and a stand), individual oaths to do the right thing (promises to sell a certain size glass of lemonade and thereby quench everyone’s thirst), and a systemic commitment to quality with built-in oversight through feedback (parents talking with their neighbors).

The second boy represents a taxpayer- or government-subsidized service. Since no one is paying for sugar, lemons, cups, ice, and a stand, price goes down, initially, as all competitors are driven from the market. Once a market monopoly is established, prices skyrocket as both quality and service plummet.

Wait. This is an important point: Someone actually is paying, just not the boy selling the lemonade. The ones paying are his mom, dad, uncle, and the employees of all of their companies who are able to sell less sugar, lemons, cups, and ice because he is using them in his lemonade business. There is, however, a complete separation between those who pay for the system (the boys’ family members and their companies), those who provide the service (the second boy), and those who consume the product (the neighbors buying the lemonade). That is key. It is also like any taxpayer-funded system of benefits, where all facets of the relationship are separate. As a result, there is no accountability or incentive to produce and sell an exceptional product.

Once all of the competition is eliminated, price skyrockets. As competitors try to enter the market, the subsidized system can simply manipulate any number of factors to drive them back out. After all, they hold all the cards, because they are subsidized by taxpayer dollars—so-called “free money,” as it were. They, personally, have no overhead. They also have no incentive to keep you healthy and happy.

The Bottom Line

We had the healthcare system we now say we want. Did it have seeds? Perhaps a little pulp? Was it sometimes bitter? Yes, yes, and yes.

Did it quench our thirst? Yes, more often than not.

Did it need fixing? Most certainly.

Was it better than this $5, 2-ounce cup of lemonade that is Obamacare? Most definitely.

Let’s face it: We screwed up healthcare.

Now, the question is: How do we fix this?

More on that later.

Oh, and welcome to Obamacare. I’m sure you’re going to hate it.

Those are my thoughts. Please let me know yours.





Growing Profit by Bleeding Loss: The New Accounting of Obamacare




It’s all UnitedHealth’s fault. Sort of.

Modern Healthcare is a leading publication of the healthcare industry. Recently, Modern Healthcare published an article entitled “UnitedHealth posts major gains despite $200 million of additional ACA losses.”

Needless to say, the article caught my attention.

As bad as the headline is, the details in the article are even worse.

According to the author:

  • “UnitedHealth Group . . . grew revenue by more than 28%, even though the conglomerate continued to bleed money from the Affordable Care Act’s exchanges.”
  • “UnitedHealth’s profit increased 11% in the second quarter to $1.75 billion” despite “an additional $200 million of losses from the ACA’s public exchanges.”
  • UnitedHealth “has now lost approximately $1.3 billion in 2015 and 2016 from the new marketplaces.”
  • “Despite those losses, UnitedHealth raised premium prices and controlled costs in other areas to solidify its fundamental business.”
  • “Earnings from UnitedHealth’s operations totaled $3.2 billion in the quarter and $6.2 billion in the first half of this year.”
  • Finally, having made its excess profit despite record losses, “UnitedHealth has pulled out of most of the exchanges for 2017.”

Keep in mind that UnitedHealth currently insures almost 48 million Americans.

And yet they are pulling out of the Obamacare exchanges. After making record profits from the confusion and insurance industry . . . um, flexibility (I’m being nice) it created.

It gets worse.Worried Woman 01 - 131568-566x848r1-ExcessiveWorry

A spokesman for UnitedHealth recently opined—out loud, and in public—that the only way the Obamacare exchanges will survive is with “a massive new infusion” of taxpayer money.

Keep in mind that Obamacare and its regulations already established a so-called “risk corridor” to subsidize insurance behemoths, like UnitedHealth, that lost money in the exchanges (as everyone knew they would). It was the only way to get the politically powerful insurance industry on board as supporting the passage and implementation of the very law that would destroy their industry. Tricky business, that: getting smart folks to help forge the instrument of their own death.

Everyone knew that the Obamacare exchanges would fail. And so, in exchange for their public support, the country’s largest—and most profitable—insurance companies demanded a bailout. It was classic quid pro quo. It was also the classic pay to play scheme. Only this time, the payer is you. And you don’t even get to play.

Welcome to health insurance administered by the federal government.

Needless to say, the insurance industry got just what it asked for in the risk corridor.

Only like all bailouts, now it seems what they got was not enough. Now they want more—of your money. And the federal government has signaled that it is more than willing to oblige. And remember that this time around, they have the power of the federal Internal Revenue Service and Department of Justice on their side. You will pay—dearly—for their . . . um, miscalculation (again, I am being nice, which isn’t easy).


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How can this be?

How, you may ask, can one of the nation’s largest insurance conglomerates support the passage of Obamacare over the wishes of its insureds, intentionally lose billions of dollars in the exchanges as a result, yet still make record profits?

And how can they legitimately make up for those losses—all of which were of their own doing—by increasing premiums paid by, and decreasing coverage provided to, those they insure?

And having cashed in on the legislated risk corridor, what right do they have to return to the well and demand even more taxpayer dollars to subsidize their mistake if not their misconduct?

Finally, having done all that, how can they simply exit the system, leaving some 48 million Americans with few options other than substandard Obamacare offered through an obscure and unaccountable middleman, if not the federal government itself?

Do those 48 million Americans have any idea where they will go? Does UnitedHealth even care?

I think we know the answer to both questions:  No.

Worried Man 04 - worried-1

Welcome to the future.

Welcome to government-controlled healthcare administered by nameless, faceless, and unaccountable bureaucrats, working in concert with equally unaccountable insurance and Wall Street fat cats, none of whom cares about you or your care.

None of what is about to happen will make sense to good folks like you and me. None of it will be right, or fair. None of it will improve your health—quite the opposite.

And there is not one thing that you or your doctor can do about it.

And who do you think footed the bill for UnitedHealth’s “major gains” despite their record losses under Obamacare?

That’s right: You and me, that’s who.

And who do you think will provide the “massive new infusion” of cash that UnitedHealth now demands?

That’s right: You and me, that’s who.

Welcome to Obamacare. I’m sure you’re going to hate it.

Those are my thoughts. Please let me know yours.