American Spectator writer David Catron recently warned conservatives and libertarians about having unrealistic expectations about repealing Obamacare.
He listed the many good things that are in House Speaker Paul Ryan’s proposed “American Health Care Act” (AHCA) such as the repeal of both the individual and employer mandates and the elimination of Obamacare taxes. He then went on to criticize conservatives and libertarians, writing that they …
… are kvetching because of provisions like the 30% premium surcharge that the bill would allow insurers to charge patients who wait until they are ill to buy coverage. Countless commentators have conflated this with the individual mandate, but such comparisons are ridiculous. The individual mandate requires you to buy health insurance simply because you are alive, an outrageous assault on personal liberty. The GOP plan’s much-discussed premium surcharge is an incentive based on an individual’s choices. The former eliminates personal choice altogether. The latter incentivizes intelligent choices.
Catron concludes that critics are making “the perfect the enemy of the good.”
As much as I admire Catron, I think he’s wrong here.
Consider an analogy where the health care system is a patient and congressional Republicans are a physician. The patient has headaches, back pain and abdominal pains all of which are side effects of having cancer. The physician tells the patient that he will only treat the pain. When the patient complains, the physician replies, “You are making the perfect the enemy of the good.” The patient replies,” “No, you are treating the symptoms, not the disease.”
In the case of AHCA, the problem isn’t that it forces insurers to take people with pre-existing conditions as long as they pay a surcharge. It’s that, like Obamacare, it forces insurers to take people with pre-existing conditions, period. Obamacare took what had been known as the “individual health insurance market” and forced it onto the heavily regulated Potemkin markets called “exchanges.” The exchanges are now collapsing, and when that collapse runs its course, at best, a few insurers may remain on the exchanges. The AHCA, however, threatens to eliminate the individual insurance market entirely.
A stable “insurance pool” must have a sufficient number of young and healthy people to “cross-subsidize” the older and sicker. Under Obamacare, the young and healthy have an incentive to forego insurance on the exchanges because: (1) the regulations on the exchanges cause the price of insurance to be higher for young and healthy people — higher, that is, than what they would pay in a freer market; and (2) insurers must sell anyone a policy during the exchanges’ annual open enrollment period, even if the purchaser has a pre-existing condition. When not enough young people, generally ages 18 to 34, sign up for insurance, the “insurance pool” is heavily comprised of people who are older and sicker. This causes insurance prices to rise so that insurers can cover their costs. As premiums go up, even more young and healthy people drop out, prices increase again, and the process repeats itself. Eventually, many insurers lose money, causing them to leave the market. This results in less competition, which also causes premiums to rise. The term for this process is a “death spiral.” (For a good history on this, see the late Conrad Meier’s “Destroying Insurance Markets.”)
Obamacare tried to combat this with an individual mandate and premium subsidies. The individual mandate required everyone, including the young and healthy, to purchase insurance or pay a fine. Subsidies applied to premiums helped people pay for insurance on the exchanges and were based on income status. The lower a person’s income, the bigger the subsidy he would get. Since younger people tend to have lower incomes, presumably this would encourage enough of them to sign up on the exchanges.
Unfortunately, these were insufficient.
For the insurance pools on the exchanges to be stable, the Obama administration estimated that 38 percent of the sign-ups needed to be in the 18 to 34 age range. However, people in that age range never amounted to more than 28 percent of the people who participated in the exchanges. Recently Mark Bertolini, CEO of insurance giant Aetna, said the exchanges are in a “death spiral” and for good reason. Going into 2017, the average premium for policies on the exchanges increased a hefty 25 percent. Many of the major insurers — UnitedHealth, Aetna, BlueCross BlueShield, Humana — have either left most of the exchanges or are planning to next year. From 2016 to 2017, the number of people eligible for the exchanges who had access to only one insurer jumped from 2 percent to 17 percent.
AHCA takes the death spiral and kicks it into high gear.
First, in the year 2020, it replaces the premium subsidies with refundable tax credits based on age, with $2,000 for those up to age 29 and $2,500 for those ages 30 to 39. (For a full breakdown of the tax credits, see page 2 of this summary.) Right now, that’s probably more than most people ages 18 to 34 on exchanges receive in premium subsidies. But premium subsidies are based, in part, on the cost of premiums. If premiums keep rising by an average of 25 percent annually between now and 2020, it’s possible that the AHCA’s tax credits will be less than the premium subsidies. For now, though, let’s call that a wash.
Much worse, the AHCA replaces the short-term incentive to purchase an insurance policy with a long-term incentive to not buy one. If you don’t purchase insurance under Obamacare, then the Internal Revenue Service deducts a penalty from any tax rebate you might receive. The AHCA replaces that penalty with a 30 percent surcharge that insurers can charge anyone who has allowed their coverage to lapse for more than 63 days.
It appears that younger people didn’t care much about the individual mandate. Thus, if younger people don’t care about a tax penalty that occurs annually, why will they care about a 30 percent surcharge that they likely won’t face for decades? About 80 percent of health care expenses occur after the age of 40, so most 18-to-34-year-olds can put off worrying about that surcharge for quite some time.
Indeed, thanks to Speaker Paul Ryan and other congressional Republicans, it is much easier to determine the optimal time to purchase health coverage. Say that you are in your late 50s and have knee problems that are going to require a joint replacement. Let’s say that a policy on the individual market would normally cost about $10,000 annually. But, since you haven’t had insurance in a while, the insurance company will add the surcharge, costing you $13,000 annually. If the knee replacement costs about $15,000, then you are getting a pretty good deal. If you have a much more expensive illness like kidney failure, heart disease, or cancer, then that surcharge is a bargain! (And, to top it all off, insurers can only impose the surcharge for one year!) How likely is it that young people will be able to do such a calculation? Well, rumor has it they are a lot of smart whipper-snappers in Silicon Valley, and it probably won’t be long before one of them creates the Paul-Ryan-30-Percent-Surcharge App for your smart phone.
Finally, would insurers even offer coverage in the individual market under these conditions?
They are already dropping out of a market where the federal government is trying, albeit feebly, to provide incentives for people to purchase insurance before they get sick. Under the AHCA, people will have big incentives to avoid coverage until they are very sick. It’s hard to see how insurers make any money in that kind of market.
For insurance markets to work, people need to purchase insurance before they develop a serious illness, and the only way to make that work is to allow insurers to deny coverage to those with pre-existing conditions. Certainly, any bill that replaces Obamacare will need to provide assistance to people with pre-existing conditions, especially those who have bought insurance on the exchanges.
That said, before the unveiling of the AHCA it had been difficult to see how the individual insurance market could be made any worse than it is under Obamacare. Speaker Ryan may have just done it.
Editor’s note: David Catron has replied. Click here.