After reiterating his promise to repeal and replace the Affordable Care Act, President-elect Donald Trump has indicated that he may keep two of the law’s most popular provisions. One is straightforward enough — children up to age 26 being allowed to stay on their parents’ plan. The other — preventing insurance companies from denying coverage because of preexisting conditions — offers a perfect illustration of why Trump and most of the other Republicans critics of Obamacare don’t understand the health insurance market.
Let’s say that in the beautiful new world of “repeal and replace,” insurers are required to sell you insurance despite the fact that your kid has a brain tumor. Insurance companies know what to do with that. Their actuaries can calculate that kids with brain tumors typically require (I’m making this number up) about $200,000 a year in medical care. So they’ll offer to sell you a policy at an annual premium of $240,000.
At this point your response will probably be that such an outcome is not fair. When the law says insurance companies can’t discriminate on the basis for preexisting conditions, surely what it means is that they have to charge roughly the same price for health insurance, irrespective of your preexisting condition. In the language of insurance, that’s called “guaranteed issue at community rates.”
Unfortunately, in the states that have tried guaranteed issues at community rates, the insurance markets have collapsed. That’s because if you guarantee everyone the right to buy health insurance at community rates, then some consumers will game the system. The young and healthy ones won’t buy any health insurance at all — they’ll go without until they are diagnosed with diabetes or a brain tumor or get hit by a truck crossing the street. And when that happens, they will immediately call up Aetna or Anthem and exercise their right to buy health insurance at the low community rate, irrespective of their medical condition. It won’t be long before insurance companies begin losing a ton of money and are forced either to raise premiums through the roof or stop writing policies altogether.
So how do you prevent that kind of gaming of the system by consumers? Well, that’s easy. You require that everyone buy some minimal level of insurance at the beginning of every year, so they can’t buy insurance only after they get sick. Let’s call that an” individual mandate.” But because you can’t expect poor people to pay $1,000 a month, they will require subsidies to keep their out-of-pocket costs to something like 10 percent of income. To pay for the subsidies, a new tax will be required.
So let’s review what just happened. To guarantee that people with preexisting conditions can get affordable health insurance, you need to have rules requiring guaranteed issue and community rating. To keep insurance companies in business because of guaranteed issue and community rating, you need to have an individual mandate. And because poor people can’t afford health insurance, you need subsidies. Combine all three, and what you have, in a nutshell, is ... Obamacare.
Yes, it’s more complicated than that, but not much. It’s possible to allow insurance companies to charge twice or three times as much to people who are older or sicker. You can let healthy people buy somewhat more bare-bones “catastrophic” policies to satisfy their obligation under the individual mandate. You could even avoid community rating by sending sick people into “high risk pools,” where their premiums would be subsidized by a tax on everyone else’s health-care premiums.
But at the end of the day, once you decide that everyone, regardless of age or medical condition, should be able to buy health insurance at an affordable price, you have essentially bought into the idea that young and healthy people have an obligation to subsidize the older and sicker people in some fashion. And once you do that, it’s sort of inevitable you end up where every health-reform plan has ended up since the days of Richard Nixon. You end up with some variation on Obamacare.
Of course, if you want to scrap guaranteed issue, scrap community rating, scrap the individual mandate and scrap the subsidies, as Republicans propose, then you end up where the country was in 2008: with a market system that inevitably gives way to an insurance spiral in which steadily rising premiums cause a steadily rising percentage of Americans without health insurance.
There are no easy solutions here, no free lunches. You can’t have all the good parts of an unregulated insurance market (freedom to buy what you want, when you want, with market pricing) without the bad parts (steadily rising premiums and insurance that is unaffordable for people who are old and sick).
At the same time, you can’t have all the good parts of a socialized system (universal coverage at affordable prices) without freedom-reducing mandates and regulations and large doses of subsidies from some people to other people. Anyone who says otherwise — anyone promising better-quality health care at a lower cost with fewer regulations and lower taxes — is peddling hokum.