Ken asked a good question yesterday:
The Senate Republicans are staging some kabuki where they vote on a bill guaranteeing coverage of pre-existing conditions, in case the court overturns the ACA.
Now I have a vague memory from David’s posts, and a vaguer one from the original analysis for the ACA, that requiring insurance companies to cover everything but not requiring people to buy insurance is a Bad Thing, both for the companies and for consumers. Is that the case?
There are a couple of things that we need to unpack here. The first thing is what is insurance and how does that get operationalized?
Insurance should be protection against catastrophic financial hits. An insurance contract can be narrowly written. An insurance contract can be broadly written. The ACA has insurance contracts be broadly written in terms of what is covered. The ACA requires insurers that offer qualified health plans (QHPs) to cover (with cost-sharing) ten categories of essential health benefits (EHB) including in-patient, outpatient, and professional claims, prescription drugs and rehab services. If someone is sick, their treatment is highly likely to fall into one of the EHBs. This broadly written contract means that people are paying for services that they will never use. Men will be paying premiums that partially cover labor and delivery. Women pay for premiums that pay claims for prostate exams. Broadly written contracts do increase premiums for people who could a priori like a narrowly written contract.
So what happens when there are no subsidies nor mandate (both are means of reducing the cost spread between being insured and uninsured coming at the problem from opposite directions) but a requirement that insurers have to write policies for anyone who wants one?
On the first pass, a lot of reasonably healthy or prospectively presumed to be healthy people look at their new, much higher gross premiums compared to their previous after-subsidy net premium and they leave the market. Total claims barely go down while premium revenue collapses. Insurers then have to significantly raise premiums driving more people out. It is a nasty death spiral.
Secondly, insurers might be able to segment the market by changing what is in the insurance contract. They could write policies that cover three PCP visits, the list of $4 generics sold at Walmart or Target and then have a $25,000 deductible before comprehensive coverage for hit by a meteor diagnoses kicks in with exclusions for knee replacements or other anticipated and deferrable procedures. That might be low premium and attractive to people who are truly worried about hit by a meteor type event. Or they can exclude maternity coverage or write a rider saying that anyone who wants maternity coverage will need to pay more in premium and the insurer will not pay for a single maternity related claim until a year waiting period has been fulfilled.
Very quickly, the market unravels into two segments. The first chunk is for people who have high likelihoods of being sick and/or expensive. The only policies available are full of holes. The only people in the market are extremely sick. Premiums are very high, exclusions are common and the total out of pocket expenses between premiums and deductibles are large.
The other end of the market has very low premiums, massive amounts of prospective and restrospective underwriting, large exclusions and short contract spans. These policies might be fairly cheap but they place people under massive reclassification risk as soon as someone has bad luck.
As you allude to, the Senate can’t pass any such thing as a law on its own; it takes both the House and president signing it before it becomes law. This is, as you noted, is pure bullshit created just for attention and to comfort/con the stupid to think they are covered – just like the rump’s signing statement. Meaningless.
Ah yes, “death spiral”. I knew that the Bad Thing had a name. Thanks for the analysis and reminder that “healthcare is hard”.
There go two miscreants
David, I appreciate your posts; you have definitely improved my understanding of insurance generally. One minor gripe I have is the use of the term “underwriting”. I realize it has a specific meaning WRT insurance, but I think to the general public it has positive connotations (e.g. — Underwriters Laboratories). For a purchaser of insurance that is exactly backwards!
Ah, yes, the “3-legged stool” – 1) Guaranteed issue/community rating/no pre-existing-conditions exclusions; 2) Requirement to sign up or pay a fee/penalty/tax; 3) Subsidies for those who can’t afford the premiums.
Some of the courts have tried to saw off #2 and making the fee/penalty/tax $0 hasn’t yet destroyed the ACA. (The 6:3 SCOTUS will probably make things worse in the case they’re hearing in November.)
Is that surprising? Is the 3-legged stool too simplistic? Is the human desire for coverage, community pressure, etc., enough to keep the system stable even with the free-rider problem (people not signing up until the last minute)?
What’s the biggest problem in the future sustainability of the PPACA from the insurance industry perspective?
Naively, perhaps, I think from the customer/patient/sheep-to-be-fleeced perspective, the biggest problem is the cost and what exactly is covered – it’s still too expensive for people in the bottom 50% to get health care. The cutoff for significant subsidies should be eliminated or be much higher (assets over $1M excluding owner occupied housing? You pay higher taxes, but you too get a subsidy).
Plus, there’s the fight-with-the-insurance-company-to-have-my-claim-be-paid problem. If Democrats can solve that, they’ll be in power for the next 100 years…
Thanks as always.
In the Republican dream-world, healthy people get cheap health insurance, while people with pre-existing conditions are subsidized by high-risk pools. This has almost never worked in practice, because funding the high-risk pool requires explicit new taxes.