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You are here: Home / Anderson On Health Insurance / Revisiting the three legged stool

Revisiting the three legged stool

by David Anderson|  February 24, 201711:28 am| 7 Comments

This post is in: Anderson On Health Insurance

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Paul Krugman has used the three legged stool analogy to describe the ACA several times.  It is an analogy that is vivid in its description and useful in its implications:

Yes! The Court (minus the three stooges) understood that the ACA is designed to work via the “three-legged stool” of guaranteed issue and community rating, the individual mandate, and subsidies. All three elements are needed to make it work, which is why it was obvious to anyone who paid any attention that the lawsuit was nonsense.

There is a problem with this analogy.  It is too specific.

There are three legs of the stool.  Two can stand without modification.  Guarantee issue with community rating stands as a firm leg.  It means that anyone can get a policy at a standard rate.  In the ACA, that standard rate is based on the county or zip code of residence and age of the applicant.  Subsidies also are a firm leg.  They help people who can not afford the standard rate pay for the standard rate.

The third leg of the stool is a pool participation mechanism.  The individual mandate is a specific type of the third leg.  There are other mechanical techniques that can fundamentally perform the same needed function of getting people who think that they will be relatively healthy and low utilizers into the insured risk pool.  100% subsidy for the premium and auto-enrollment with an opt-out performs the same function as the mandate in getting healthy people in the pool.  It would force a lot more healthy people into the pool at a higher expenditure for a given level of actuarial value coverage.  Late enrollment penalties like those used in Medicare that are long lasting and significant are another approach to get healthy people in the current period into the pool.  Multi-year contracts that extend the zone of uncertainty and risk theoretically perform the same function.

All of these techniques are ways to minimize the cost gap between not being covered at all and being covered at a minimal level while participating in the pool.  They attack the same problem from a variety of angles but they are functionally similar to each other.

So the actual three legged stool of the ACA is community-rated guarantee issue, subsidies and pool participation mechanism.  Keep this in mind as we again talk health reform over the next year.

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7Comments

  1. 1.

    Baud

    February 24, 2017 at 11:39 am

    Late enrollment penalties like those used in Medicare that are long lasting and significant are another approach to get healthy people in the current period into the pool.

    Out of curiosity, how many people sign up late for Medicare?

    And Krugman isn’t wrong to the extent he was describing how the ACA actually works, as opposed to how a generic health reform law might work. I know you essentially said that, but I thought it was worth emphasizing.

  2. 2.

    rikyrah

    February 24, 2017 at 11:46 am

    thanks for breaking it down for us.

  3. 3.

    Major Major Major Major

    February 24, 2017 at 11:48 am

    How does Boehner’s saying that congress is just going to make Obamacare slightly worse, rebrand it PersonalResponsibilityCare, and call it a day change your outlook?

  4. 4.

    Fair Economist

    February 24, 2017 at 12:14 pm

    However, mandates are certainly the cheapest pool participation mechanism for the government, which is creating particularly large headaches for the Republicans trying to scam the public with one of their lousy “replacements”. No PPM = market collapse, any other PPM = huge cost increases. It’s quite possible they’ll do some really inferior PPM (like the continuous coverage provision) which will produce both effects – huge cost increases, but the market collapses anyway because they’re not huge enough.

  5. 5.

    Hoodie

    February 24, 2017 at 12:54 pm

    There’s no problem with the analogy for the context in which it was being used. Krugman was talking about the ridiculous legal arguments for severability, with the mandate being the ppm that was included in the legislation. Yours describe theoretical alternatives that were not in the legislation.

  6. 6.

    DanF

    February 24, 2017 at 1:36 pm

    Why we lose –
    Liberals: “Well, technically, the third leg can be made of poplar if the other two are made of oak.”
    Conservatives: “See? Liberals know Obamacare is a mess!”

    I appreciate nuance as much as the next person, but Krugman really isn’t wrong in his assessment.

  7. 7.

    Stillwater

    February 24, 2017 at 2:27 pm

    So the actual three legged stool of the ACA is community-rated guarantee issue, subsidies and pool participation mechanism. Keep this in mind as we again talk health reform over the next year.

    What other pool participation mechanisms are out there? One I’ve thought about is that for every year an individual doesn’t pay into the pool by declining to get insurance they pay a penalty on the back-end reflected in increased price once they sign up. But that doesn’t really work for low-income folks (for one thing) and also penalizes the current market-participants in the form of allowing free-riding.

    Any others?

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