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March 7, 2017

The Republican Replace Plan Is Unlikely to Lower Health Insurance Costs

 

For seven years Republicans have complained that the Affordable Care Act makes health insurance unaffordable for millions of Americans. The two primary drivers of those high health insurance prices were (1) abandoning actuarial standards and (2) requiring people to have very expensive, comprehensive coverage. The Republican bill addresses the second problem but ignores the first.  

President Obama and the Democrats do not believe a health insurer should be allowed to decline coverage to applicants in the individual (i.e., non-group) market, even if that person has a costly medical condition. Nor could insurers charge more for that condition. So Democrats imposed those provisions in Obamacare. 

But they were warned that doing so would encourage individuals to remain uninsured until they need medical care, and then drop that coverage after their condition is treated. So Democrats included the mandate to have health insurance to keep people from gaming the system. However, it didn’t work because the penalties were fairly low. 

Many of us warned at the time that young and healthy people would likely stay out of the insurance market until they needed care. And if you’ve followed Obamacare’s travails, you know that’s exactly what happened. 

The health insurance pool gets smaller and sicker as healthy people drop out because of the high premiums and you get the “death spiral.” Obamacare insurance exchanges are collapsing because they are in a death spiral. 

Death spirals cannot be fixed. You have to abandon the pool and start a new one—hopefully adopting basic actuarial standards. 

That’s what most Republican plans did. That’s what House Speaker Paul Ryan’s “A Better Way” plan did. That’s what Dr. Tom Price’s plan did. Health insurers could decline covering an uninsured person with a major medical condition. But that person could enter a state-based high risk pool, a safety net program to ensure they had access to coverage. 

Remember, Medicare, Medicaid and the 165 million Americans with employer-coverage are largely unaffected by this change—only some 3 million people who are uninsured and uninsurable who want to buy individual coverage. 

But in the past week or two, Republicans apparently abandoned actuarial principles—just as Obamacare did. Under their new plan, if a person wants to buy coverage in the individual market during an open enrollment period, insurers have a 12-month “look back.” If the person has been uninsured more than 63 days in that period, the insurer will charge the applicant 30 percent more than the standard premium for the next 12 months. Apparently, that 30 percent increase will happen even if the applicant is perfectly healthy. 

While there are elements in the Republican plan intended to mitigate people gaming the system, I think they will be largely ineffective—just as they were in Obamacare. And it may be even worse. 

If you are young and healthy, why not wait until you need care to get coverage?  You will have to pay 30 percent more, but that’s cheap—most risk pools charged people 50 percent more or higher. 

You avoid paying any premiums for several years, but then only pay 30 percent more for one year if you need coverage. And once the condition has been treated, you can cancel your coverage and go back to being uninsured. 

Moreover, insurers, wanting to avoid the adverse selection potential, would likely offer the skimpiest policies in the individual market—policies intended to encourage the sickest people to choose a competitor’s more comprehensive policy. 

I don’t know why Republicans made a last-minute decision to toss out actuarial principles, but if their goal is to make health insurance more affordable, they will likely fail.


 

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