Volume 4: Health Insurance, Part II
What is Obamacare: How many legs does a good stool need?
“Obamacare is really I think the worst thing that has happened in this nation since slavery.” – Ben Carson
“Five days from now…millions of Americans who don’t have health insurance because they’ve been priced out of the market or been denied because of a pre-existing condition, they will finally be able to buy quality, affordable health insurance.” – Barack Obama
It is impossible to write about the Patient Protection and Affordable Care Act (“ACA” for short) without touching politics. Democrats have favored governmental enforcement of a right to health care for at least fifty years. Republicans have opposed governmental action at the federal level, believing the solution is best found by the market. Health insurance reform, almost by definition, will have winners and losers. Any discussion of the federal government actively increasing access to care will be a political issue.
To avoid the politics as much as possible, we will rely on our usual methodology. Look at the data, use it to build a theory, test the theory. My view is that, given a basic set of goals, any working health insurance system must have certain specific features. I think I’ll be able to demonstrate this. We’ll then look at the details of how the ACA implements this system, as well as its other features.
What is the 3-legged stool of a stable health insurance market?
How does the Affordable Care Act create the stool?
What else is in the Affordable Care Act?
What is the 3-legged stool of health insurance?
It is my opinion that, in the United States, in 2016, all people in this country should have a right to some level of health care(1). I can make an economic argument for this: better health care leads to a healthier work force, which leads to economic growth. I can make a selfish argument: if people aren’t able to get this care, communicable diseases would spread, and that is bad for me(2). I can make a moral/practical argument: we have the resources to provide this care and therefore we can and should provide it(3). The 1986 Emergency Medical Treatment & Labor Act(4) codified the principle by requiring hospitals provide “stabilizing care” regardless of ability to pay. We can debate endlessly what should constitute “some level of healthcare.” But if you disagree with me on the basic principle, then your position is that poor people with treatable conditions should literally die on the streets. Otherwise, your concern should be about how to provide this care and how to pay for it, fairly and efficiently.
The easiest way to do so is to have the government handle the bulk of the problem. There are two basic ways a government-based health insurance system can work. In a Single Payer system, the government provides health insurance to its citizens, but care is provided by private entities (doctors, hospitals, etc). This is basically how Medicare works, as well as Canada’s system(5). In a Single Provider system, most providers work for a governmental organization. This is what the UK’s National Health Service (“NHS”) is. We’ll discuss how the US could or should move to a Single Payer/Provider in a later volume, but it would be very difficult and disruptive. So we’ll start with how to have a successful hybrid public-private system such as exists here today.
In Volume 2, we saw how an unregulated (or poorly regulated) private health insurance system will devolve into a death spiral. But there are some countries (Germany and Switzerland) that have had success by properly regulating their private insurance markets, so we know it’s possible. There are three basic provisions that are required to have a stable system. Just like any other stool, without these three legs your system will collapse(6).
The basic problem is what to do with people who are currently ill or have serious, ongoing conditions. Let’s say this group of people has “pre-existing conditions”. According to the Kaiser Family Foundation, almost half of all US healthcare spending is spent on the top 5% of users(7). Insuring this group costs 10x as much as the average population, which makes it unprofitable for insurers. If they have a choice, no insurance company would be willing to insure people with pre-existing conditions at any reasonable price. So, for-profit insurance companies create a strong screening process, denying coverage to those most likely to get sick. But what happens to the people who are denied coverage(8)? The answer is, generally, a two-step process.
First, because they can’t afford it, they do not get care, for both their pre-existing condition and new medical issues. Generally, treating health problems earlier results in both better outcomes and lower costs. When people don’t use preventative care, the system has higher costs for worse outcomes.
Then, when the issue becomes urgent, they seek emergency care. If you have ever looked at a doctor’s bill, at the top is usually an exorbitantly high price for your service. Lower, there will be the discount that the insurance company negotiated with the provider, and the net price is fairly reasonable. But the uninsured do not get access to this discount, and because these people aren’t in jobs with health benefits, most are especially unable to afford the initial, exorbitant price. So, when faced with major medical bills, they tend to declare bankruptcy. The hospital gets pennies on the dollar, but they have already experienced their own costs for the care given(9). To make this up, they raise the prices for everybody else. Bringing the uninsured “in the system” would save us all money.
This brings us to the first leg of the stool: Guaranteed Issue and Community Rating. Guaranteed Issue says that applicants can not be denied health insurance based on their health condition(10). Community Rating means premium rates depend on the population, not individual health conditions. When a policy maker says they want to keep prohibitions against pre-existing conditions, these rules are what they mean. But even with these rules, the system will still move to a death spiral. Healthy people will wait until they are sick to buy insurance, since it can no longer be denied to them. The average person with health insurance becomes more expensive to insure and premiums will increase. As premiums move higher for everybody, more healthy people will go without insurance, and the cycle repeats. We clearly need a way to keep the healthy people in the system.
This is the Individual Mandate, the second leg of the stool. An Individual Mandate, generally, requires people to carry health insurance(11). Out of all the provisions of a successful public-private health insurance system, the Individual Mandate is the most controversial and unpopular. Why should you have to buy health insurance if you don’t want it?
But an insurance mandate shouldn’t be a new concept to you. If you own a car, you are required to carry car insurance(12). The idea is simple. Anybody can get into an accident, even the best drivers. Accidents cause damage to cars, people and property. Damage costs money to repair. Drivers of cars in accidents are liable for the cost of repairing this damage. Some accidents cause damage with catastrophic repair cost; most people can’t afford these costs and would go bankrupt if forced to pay them. So drivers are required to carry car insurance, which solves this problem. In case I’m not being pedantic enough:
Anybody can get sick, even the healthiest people. Sickness causes damage to your body. The damage costs money to repair. People are liable for the cost of repairing this damage. Some sicknesses cause damage with catastrophic repair cost; most people can’t afford these costs and would go bankrupt if forced to pay them. So people must carry health insurance, solving this problem, which otherwise hurts society as a whole(13).
This brings us to our third leg. We have required insurance companies to take all comers, and required all people to carry insurance. But, we have done nothing to ensure that this insurance is affordable. Given that the people who don’t currently health insurance tend to be of below average income, this is a real problem. The solution is Subsidies; the government pays money towards the purchase of health insurance. These Subsidies are usually progressive based on income, but you can envision systems where they are the same for everybody.
This is the 3-legged stool of a stable public-private health insurance system: Guaranteed Issue + Community Rating, Individual Mandate, Subsidies. The system will not work if any of the legs are removed:
A system with Community Rating but no Mandate will death spiral as people wait to buy insurance. Subsidies would slow down the spiral, but not prevent it.
Community Rating and Mandate without Subsidy will require people who legitimately can’t afford insurance to buy it. The math doesn’t work.
Mandate and Subsidy without Guaranteed Issue means that you are requiring people with pre-existing conditions to buy health insurance and even helping them to pay, but nobody will sell to them. This is nonsense (even if it is subsidized).
How does the Affordable Care Act create a stool?
At its core, the ACA is a straightforward implementation of our stool. But, because the goal was to affect the existing system as little as possible, the actual manner in which it builds the stool has a few complexities.
Guaranteed Issue + Community Rating:
Guaranteed Issue is created in a straightforward manner in the individual market. Insurance companies are required to both 1) accept for coverage any individual who applies and 2) accept renewals for any current policyholder, with limited exceptions(14). Community Rating creates specific factors that may be considered in determining premiums, and creates maximum premium “bands” for these factors(15). So far, so good.
The Individual Mandate is not as simple. Rather than a requirement to hold insurance, the ACA’s Individual Mandate is a tax, collected by the IRS(16), against those who do not hold coverage(17). However, given that the penalty ($695, with adjustments for inflation) is less than the cost of buying insurance, some healthy people will voluntarily remain uninsured and pay the penalty. This is a problem – it worsens the insured pool(18).
The Subsidies in the ACA scale progressively, based on household income and size, residency and cost of plans. Generally, subsidies are available for families earning up to 400% of the Federal Poverty Level (FPL). For example, a family of 4 living in Brooklyn will receive some subsidies up to approximately $97,000 in household income(19).
This is the core of the ACA. It’s not perfect– the Mandate is somewhat weak, and the subsidies are a bit low – but at first glance we appear to have created a stable 3-legged stool. It should help us to our main goal, providing access to health care for everybody, as well as a way for them to pay for it. While the government is more involved in regulation, we are still in a system based on private insurance.
What else is in the Affordable Care Act?
As you may have heard, the ACA is a long law – 1900 pages(20). Not all of this is related to the strict creation of the stool and some of it goes beyond health insurance and into health care(21).