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Warnings From The Golden State

 Trend-setting California has issued national wakeup calls about the shaky state of public pensions and the soaring costs of health insurance for those covered under the Affordable Care Act.

 

CalPERS, the nation’s largest pension fund for state and local employees, on July 18 reported a miniscule return on its investment folio of 0.61 percent in the fiscal year that ended June 30. The next day Covered California, which provides health care coverage under the ACA, often called Obamacare, announced that insurance premiums will rise an average of 13.2 percent next year.

 

These back-to-back jolts have implications beyond the Golden State. Because California is so diverse and populous (39.5 million people) with a budget larger than all but five countries in the world, it often foreshadows the future for other states.

 

The present is bad enough. Most public pension funds need a 7.5 percent annual return to keep assets intact, an ambitious target. No fund that has reported in 2016 has exceeded a 1.5 percent return, the worst overall performance since the Great Recession ended in 2009. [Pension fund returns lagged well behind assumed rates of returns in fiscal year 2015 as well (see Bird’s eye view).]

 

Pension plans use income from market investments to make payments to retirees. When the funds fail to meet their targets, their assets decrease. CalPERS lost $7 billion in the last fiscal year, reducing assets to $295 billion and prompting a memorable understatement from Ted Eliopoulous, the pension fund’s chief investment officer.

 

“We have some challenges to confront,” he said in a conference call. “We’re moving into a much more challenging, low-return environment.”

 

This environment is a global phenomenon that affects most U.S pension plans. In New York State, for instance, the nation’ third largest pension plan did worse than CalPERS, reporting a 0.19 percent investment return that reduced assets by $5 billion. New York City’s five public retirement funds reported returns of 1.46 percent, prompting a warning from State Comptroller Thomas DeNapoli that additional contributions from government or employees may be needed by 2018.

 

The dismal performance of pension fund investments figures reflects a slowdown in global growth and a sluggish recovery of the domestic economy from the Great Recession, with U.S. growth this year averaging only 2 percent. Private investment funds are doing slightly better than most public pension funds but hardly lighting any bonfires. The price return of the Dow Jones industrial average in 2016, with dividends reinvested, is 2.4 percent.

 

The chances of rapid improvement in the rate of return, at least in the short term, are slight. To prod the economy in the absence of significant inflation, the U.S. Federal Reserve has kept interest rates low while central banks in Europe and Japan have resorted to negative interest rates in attempts to spur economic growth.

 

Meanwhile, on the health care front states face the challenge of forthcoming rate increases in health insurance policies issued under the ACA. Covered California announced that premiums will rise an average of 13.2 percent next year in the Golden State, more than three times the increase of the past two years. Peter Lee, Covered California’s executive director, said the increases were driven by two of the biggest plans, Blue Shield of California and Anthem, which sells Blue Cross plans. The average of the rate hikes, which vary by region within the state, are 17 percent for Anthem and more than 19 percent for Blue Shield.

 

In some states the increases are much higher. The insurance commissioner in Mississippi approved a 43 percent increase for Humana, fearing that it would otherwise leave the state. At a contentious hearing in Pennsylvania, according to The New York Times, Obamacare policyholders assailed Highmark, one of the state’s largest insurers, for seeking a 41 percent increase in premiums that the company said are needed to offset losses.

 

Analyzing 14 states, the consulting firm Avalere found that the cost of a silver or middle-level Obamacare plan will increase 11 percent next year. The increases will be higher in rural counties in which many customers have only a single insurer and therefore no option of switching to a cheaper plan. The Kaiser Family Foundation reports that 650 counties, most largely rural, will have only one insurer in 2017.

 

Across the country, insurance companies and consumer advocates are swapping horror stories. Jamie Court, president of Consumer Watchdog in Santa Monica, said insurers are limiting access to doctors and hospitals at the same time they’re raising rates. “We’re paying more for less,” he told the Los Angeles Times. But insurance companies say they are losing money hand over fist on ACA policies. They say people in poor health sign up for health insurance in far greater numbers than the young and healthy customers needed in the insurance pool to keep rates low. A significant number of these younger people have opted to pay the penalty that the Affordable Care Act imposes on people who lack health insurance.

 

“The marketplace has been and continues to be unsustainable,” said Joseph R. Swedish, chief executive officer of Anthem, one of the nation’s biggest insurers. Aetna announced on Aug. 15 that it will offer ACA plans next year in just four states, down from 15 this year, after second-quarter losses of $200 million.

 

California has been notably successful in implementing Obamacare, with 1.4 million people enrolled through Covered California. The percentage of Californians without health insurance dropped from 17 percent in 2013, the year before the Affordable Care Act was passed, to 8.1 percent at the end of 2015. California also has pioneered in attempts to reduce out of pocket costs, said Anthony Wright, executive director of Health Care California, a consumer advocacy group. One of the examples he cited is a benefit devised by Covered California that enables consumers who do not face surgery or hospitalization to receive preventive and primary care before paying a deductible.

 

While acknowledging that “rate increases are never good news,” Wright noted that many with policies issued under Covered California will be partly insulated from their impact by federal subsidies. Some policy holders also will be able to switch to cheaper policies. Eleven insurance companies compete for customers in the Golden State, and the Covered California website simplifies comparison shopping.

 

Nationally, the premium hikes and the withdrawal by companies from the ACA, are a sign that the six-year-old law, for all its success at insuring the previously uninsured, is showing signs of strain. By now the ACA was supposed to be firmly imbedded in the fabric of the safety net that includes Medicare and Social Security.  Instead, Obamacare remains a political flashpoint. The public is evenly divided, according to Gallup surveys, while most Republicans, including presidential nominee Donald Trump, want to repeal the law. On the liberal side of the spectrum, Vermont Sen. Bernie Sanders campaigned against Obamacare in its present form and prodded Hillary Clinton, now the Democratic presidential nominee, into making proposals that would expand the law.

 

Echoing Sanders, some liberal Democrats espouse a “public option,” or government-run health care system, an idea discarded when Congress passed the Affordable Care Act in 2008. At the time President Obama recognized there was insufficient support for the public option in Congress, even though it then had a Democratic majority. But in a recent article in the Journal of the American Medical Association, Obama urged Congress to revisit the public option in parts of the country with “limited insurance market competition.”

 

The popularity of the public option will be tested this year in Colorado. Amendment 69 on the November ballot would replace the state’s Obamacare exchange with a government-run system.

 

Eventually, the question of whether the Affordable Care Act is reformed, repealed or muddles along in its present form will depend on who controls Congress and the White House after the elections. Even if control remains divided between the two major parties, as it is now, there is likely to be pressure for changes to keep premiums and prescriptions affordable.

 

Before the election, the Obama administration faces a decision over proposed rate increases in Affordable Care Act premiums. Federal officials defer to insurance commissioners in 46 states to review rates while in four states – Missouri, Oklahoma, Texas and Wyoming – the federal government does the rate review. Insurance companies in these four states have proposed premium hikes ranging from 34 percent in Missouri to nearly 60 percent in Texas. The deadline for action is November 1, the start of the next open enrollment period and a week before the election.

Regardless of what the administration decides about rate increases in these states, and no matter what happens in the elections, states will face expensive challenges on public pensions and health care in 2017. Difficult decisions lie ahead.