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One weird marketing metric could create a second Obamacare death spiral

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No, this isn't about the dysfunctional healthcare.gov website, the security holes you could drive an aircraft carrier through, the disconnect between the still-unbuilt back end that connects enrollments to insurers, the millions of cancelled policies, the premium and deductible sticker shock, or the shrinking provider networks.

It isn't even about the abysmally low conversion rates (percentage of unique visits that convert into sales) that we reported last month.

It's about another, potentially scarier, marketing metric: cost per sale.

$56,819 per sale?

There are two traditional measures of direct-response marketing's effectiveness, both online and off-.

One is cost per lead, which is what you get when you divide the marketing cost by the number of responses. Another is cost per sale, which you get by dividing that same marketing cost by the number of actual purchases.

The sign of effective marketing, or a very good product, is that the cost per lead and per sale are very low. Obamacare's costs per sale are high – ridiculously high – particularly in the 14 states that set up their own exchanges, according to the Kaiser Family Foundation, ACASignups.net, HHS and IRS figures.

This is because those states received big grants – in the low hundreds of millions of federal tax dollars – to set up their exchanges, but gained just a few thousand enrollments.

Your tax dollars goofing off

Look at the results state by state, and it's obvious that if your tax dollars are at work, they're spending lots of time hanging out in the break room

  • Hawaii got $205 million over three years to build its exchange. The exchange drew only 3,416 applications (less than 40 percent of the enrollment goal). That's $56,819 per sale.
  • With $133.6 million in grants to build its exchange, the District of Columbia enrolled 5,090 (12 percent of enrollment goal), for a $26,242 cost per sale.
  • It took $180 million in federal money to convert Massachusetts' already-working Romneycare exchange to Obamacare. The converted exchange produced 8,139 enrollments – 3 percent of the state's 250,000 goal – at $22,214 per sale.
  • Kentucky, whose exchange is supposed to be a showcase of Obamacare success, has reached only 22 percent of its enrollment goal, at a relative bargain-basement $5,208 per sale.
  • In the only three states that actually reported meeting their goals – New York, Rhode Island and Connecticut – costs per sale are still high, at $1,707, $7,406 and $3,247 respectively.
  • The National cost per sale – which takes into account all spending on state exchange grants, healthcare.gov, navigator grants and IRS implementation – was slightly higher than New York's, at $1,789.

Now, these figures don't include January signups, nor can they include a hoped-for, last-minute, beat-the-deadline rush in early March. But Hawaii, for example, added only 1,420 signups in January, bringing it to 56 percent of goal. Even if the state's exchange hit 100 percent, its cost per sale would be $22,778 – almost as high as Washington, DC's.

They also don't take account of the fact that between 20 and 30 percent of "signups" are people who haven't activated their insurance by paying the first premium. Subtracting them would drive the costs per sale higher, but we'll be kind and forgo that, mainly for the sake of avoiding the extra arithmetic.

Another kind of death spiral

All this suggests that a second kind of death spiral may be in the offing.

The first is the death spiral of insurance companies you've heard about, with a disproportionately high percentage of older, sicker insureds driving up claim costs and a shortage of young, healthy ones who can be overcharged to pay for their care. But that's not what we're talking about here.

The state exchanges face another kind of death spiral, one directly resulting from their high cost per sale.

That's because by next year, the state Obamacare exchanges are supposed to be self-sufficient. Their funding will come not from your tax dollars, but from a 2 to 3.5 percent excise charge on each policy people buy through them. The more policies they sell this year, the more excise money to run on next year. And they're not doing so hot at selling policies this year. As Investors Business Daily explains:

As enrollment lags, so do revenues. Just three...nonfederal exchanges claim to have reached their enrollment goals. The rest are far behind.

California and Washington are only about halfway to their enrollment goals...Maryland, Nevada and Oregon aren't even 20% there. And Minnesota's enrollment numbers have yet to reach the state's worst-case scenario.

In Hawaii, just 4,000 had enrolled by early February, a far cry from the governor's prediction that 100,000 would do so in the first two years.

As a result,

California, for example,...faces a $78 million shortfall next year and a $34 million deficit in 2016...Executive Director Peter Lee told the state finance commission that Covered California... faces a "long-term sustainability" problem.

Minnesota's MNSure, meanwhile, is looking at deficits equal to 11% of revenues next year and 13% in 2016.

Washington state next year may have to make severe cutbacks, including stripping out money budgeted for marketing as well as computer and software upgrades.

Hawaii is debating whether to have the state take over its exchange, amid warnings that the "business model will not survive."

As AP recently reported, Rhode Island and Oregon also face looming budget shortfalls. Oregon is contemplating a 20% budget cut next year after suffering a disastrous rollout in October.

"If these state exchanges raise the insurance tax to cover their budget gaps," IBD concludes, "that will only raise insurance costs, which will likely drive still more people away."

Which means the second death spiral could very well end up accelerating the first one.

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