House Freedom Caucus (HFC) members have taken a lot of grief—along with some praise—for refusing to vote for the Republican leadership’s American Health Care Act (AHCA). But they likely saved Republicans, who repeatedly claimed they wanted to lower health insurance premiums, improve access and increase choices, from having to explain why they failed to keep their promises.
The individual health insurance market under Obamacare is collapsing because President Obama and the Democrats decided to cast aside standard actuarial practices. The failure was not only predictable, many of us predicted it.
In a standard insurance market—any type of insurance—actuaries look at the risk an applicant brings to the insurance pool and (1) charges a premium based on that risk or (2) rejects the application because the risk is too high.
Obama thought it was immoral for a health insurance company to decline an application from an uninsured person with a major medical condition—even though that is how insurance is supposed to work. So Obamacare requires health insurers to accept anyone who applies for individual coverage regardless of a major medical condition (guaranteed issue), and insurers cannot charge a higher premium for that medical condition (community rating).
(1) A mandate to have health insurance and a penalty if a person didn’t;
(2) Limiting the time a person could apply for health insurance or switch to a different policy or insurer;
(4) Creating a system of back-end cross subsidies to health insurers to stabilize the market and minimize premium increases.
However, too many young and healthy people chose to remain uninsured, which left the pools smaller and sicker than predicted, driving up the premiums, which led to even more young and healthy people dropping out (including my wife). It’s called the “death spiral.”
Along comes the Republican plan, which abandoned earlier proposals to allow insurers to underwrite once again and create a system of state-based high risk pools as a safety net. The AHCA retains Obamacare’s guaranteed issue and community rating provisions.
So, in order to mitigate gaming the system, the GOP plan:
(1) Drops the mandate to have insurance but still includes a penalty if a person didn’t;
(3) Provides subsidies so that the cost of coverage wouldn’t be an obstacle; and
(4) Allows a system of state-based cross subsidies, known as the State Stability Fund, to stabilize the market and minimize premium increases.
You can see the problem.
To be sure, there are some differences. The AHCA allows insurers to charge older people more, and the subsidy program is different (and I would argue better).
However, gaming the system under the Republican plan would likely be easier than under Obamacare.
Under Obamacare, uninsured people have to either pay the penalty every year or find some way to avoid it.
Under the Republican plan, a person could remain uninsured for years with no repercussions, find out he needs surgery, sign up for coverage during open enrollment, pay the 30% penalty in addition to the premium, and when the surgery is over drop the coverage and go blissfully uninsured for years again.
But here’s the most important question that no one has addressed: Would health insurers even sell policies under the GOP plan?
Health insurers have lost hundreds of millions of dollars since 2014 selling policies on the individual market, and especially in the Obamacare exchanges. Most major health insurers are abandoning the exchanges, and in some cases the individual market. And now we learn that Anthem may pull out of the exchanges in 2018.
My guess is that if the AHCA plan were to become law with the guaranteed issue provision, most insurers would continue their exodus from the individual market or exchanges.
News reports leading up to the scheduled AHCA vote claimed that Freedom Caucus members were trying to fix these problems by removing the guaranteed issue and community rating issues, along with Obamacare’s provision allowing children to remain on their parents’ policy until age 26, and the “essential health benefits” mandate that requires insurance to cover a number of benefits many people don’t want—or can afford.
Reports said the HFC was able to get some concessions on the essential health benefits, but not guaranteed issue and community rating, and so several HFC members refused to support the bill.
There were a number of good provisions in the AHCA. Cutting $1 trillion in Obamacare taxes and dramatically deregulating Medicaid were huge steps forward, and fair-minded people could argue that those and other benefits outweighed the bill’s problems.
But none of those changes would have reduced premiums and increased insurance options, which is what Republicans said was their primary goal, leaving them with the embarrassing task of explaining why individuals had even fewer choices at higher premiums.