David R. Henderson  

The Pre-Existing Elephant in the Room

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When Republicans advocate, and have advocated, delaying or even ending the individual mandate to buy health insurance, I am, and have been, with them. I don't like the government initiating force against people.

But no one should kid himself that if the Republicans succeeded, that would be a major victory over ObamaCare. Because the elephant in the room is ObamaCare's ban, in the individual insurance market, on charging health insurance premiums to people that reflect their risk. The specific risk not allowed to be priced is "pre-existing conditions." Enforcing this ban, which I'm confident that Obama will be able to do, essentially removes much of the insurance element from insurance. It makes no more sense than requiring that life insurance companies charge the same rate to someone who has cancer as to someone who does not.

It's this ban on pricing for pre-existing conditions that likely explains the sticker shock that so many people who buy individual insurance have suffered in the last few weeks. See here for one instance. It's this ban that should have told everyone right away that Obama's extravagant claim, "If you like your insurance, you can keep it," had to be wrong.

So even in the extreme case that the Republicans succeed in delaying or ending the individual mandate, even in the extreme case that they also delay more than Obama has done, or even end, the employer mandate, even in the extreme case that the Republicans do both of these plus rein in or end the huge subsidies for individuals to buy insurance, much of the damage of ObamaCare is done. By preventing insurance companies from pricing for pre-existing conditions, Obama has almost destroyed the market for individual insurance. He has taken one of the few parts of the health care that worked pretty well--the market for individual insurance--and badly wounded it. Unless this part of ObamaCare is repealed, we will still have a mess on our hands.


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COMMENTS (25 to date)
Ted Levy writes:

"It makes no more sense than requiring that life insurance companies charge the same rate to someone who has cancer as to someone who does not."

Better: "It makes no more sense than requiring that life insurance companies charge the same rate to someone who is 80 as to someone who is 20."

[Some cancers if removed early to do impact longevity]

sourcreamus writes:

It is my understanding that the ban on denial for pre-existing conditions predates Obamacare. The ban has been in place since HIPAA passed in 1996. What that law said was that no one could be denied coverage due to a pre-existing condition provided they had coverage in the past for longer than 18 months and no more than six months of being uncovered.

Dan S writes:

I hope you realize that Republicans are not actually proposing getting rid of the individual mandate alone because they think it would be good policy. They're doing it because 1) "Obamacare" (square quotes) is very unpopular among the Republican base, while the pre-existing condition pricing ban is very popular even though it's part of the bill, and 2) they realize that Obamacare cannot work without BOTH the mandate AND the pre-existing condition pricing ban, so if they kill the one, they have basically killed the whole law, or at least rendered it unworkable.

Everybody already knows this, which is why both of those things are in the bill in the first place. If you think the Repubs are actually doing this because they think it would be good policy, you're being played.

Taeyoung writes:

Democrats have been grossly irresponsible over Obamacare since the very start, but I am disappointed in what the Republicans have been doing the past few months.

This is a slightly different point from the point you are making, but at some point, they should have realized that there are hundreds of thousands, probably soon to be millions, of people who have already been harmed by Obamacare and that repealing the individual mandate will do nothing to help these people. The people who have lost insurance coverage because of Obamacare aren't going to be getting their coverage back even if Obamacare is repealed. By and large, the people whose employers have cut their health coverage because of Obamacare aren't going to get that health coverage back. And the people who have lost their jobs because of Obamacare aren't going to get those jobs back.

Republicans needed to be proposing not an alternative but a bridge -- something to get us out of this mess. Clearly, they think the status quo ante was better (and I agree), but repealing Obamacare won't do a thing to return us to status quo ante. Republicans need a proposal that will actually fix things. But it seems like Republicans haven't spent any more time than Democrats have, thinking up a Plan B for when Obamacare inevitably collapses under the weight of its own internal contradictions.

What a mess.

David R. Henderson writes:

@Ted Levy,
Yes. Thanks.
@sourcreamus,
I know that the pre-existing condition part was expanded in some way. It did apply to the employers with the 1996 law. The big change, IIRC, was with individual insurance contracts. Do you have a cite for your point? I would appreciate it.
@Dan S,
Obviously, I'm addressing myself to those Republicans and others who do care about the policy issue. No one is "playing" me. The ones who don't care will ignore what I wrote.
@Taeyoung,
A bridge is a great idea. Thanks. Any ideas for one?

Michael W writes:

I get all the contradictions and assumptions (whether you agree with them or not), but I've no idea what repeal of the law achieves from a societal standpoint.

If we allowed health insurers to go back to charging for pre-existing conditions, aren't we just moving that cost around? Unless we're proposing to 'put people out in the snow' and deny medical care because there's no ability to pay (and highly unlikely to pay for an expensive procedure at any point), isn't removing the pre-existing conditions restriction pushing the cost to taxpayers purely? It would seem prima facie that assigning this cost to 'health care' is better than spreading it among all taxpayers and thus making it invisible and thus uncontrollable.

Yes, the cost of insurance will go up but it seems that it's only because we actually are going to pay the real cost of healthcare in this country (as bloated as it is). Might this not have the effect of pushing costs down as consumers pushed back on these new, more accurate, prices?

I'm self-employed and am lucky to have military retirement coverage but if I had a business of less than 50 I see little motivation to provide health coverage of any kind. I'd rather just pay them more and encourage them to shop for their healthcare like they do anything else. I realize that's not going to happen, sadly. So, again, unless we're going to change the implicit societal contract we've made and begin to deny healthcare to save life, limb or eyesight I see no way around mandatory insurance.

I'd like to see a discussion of these bigger issues rather than another version of 'I hate government.'

Taeyoung writes:

Nope. That's what think tanks are for (except they seem not to have been doing it).

I would guess, though, that the best way forward is to amend the law to permit much more limited-coverage plans (including annual caps) to satisfy the legal requirement for coverage. Those wouldn't be ready in the near term, though. Medicaid is probably the only coverage system that could accept them on a short term basis -- maybe give them extraordinary access for the 6 months or however long it takes, while capped limited-coverage plans are being set up.

People with exotic coverage requirements will naturally migrate to expensive no-cap plans which will break. Before they break (which will not be immediate), the Federal government should set up uninsurable pools for them (or make them eligible for Medicaid or something).

It's all stuff the administration and the legislature would have to be working out with the insurers.

Dan S writes:

David,

I apologize. I got a bit too snappy back there. I just got the impression that you were giving the Congressional Republicans the benefit of the doubt and they didn't deserve it in this case, since I think they know exactly what they are doing.

David R. Henderson writes:

@Dan S,
Thank you. The problem, and I might have contributed to, is talking about the Congressional Republicans as "the." Some of them, such as Justin Amash and Rand Paul, really do seem to be genuine on this.
@Taeyoung,
I do have some thoughts. I'll express them in the next few days.
@Michael W,
If we allowed health insurers to go back to charging for pre-existing conditions, aren't we just moving that cost around?
No, you're putting the cost on the people who are creating it. And, as a bonus, it reduces average premiums because it's the reverse of adverse selection.
@Michael W,
I'd like to see a discussion of these bigger issues rather than another version of 'I hate government.'
That's why I wrote this post. If you can't see that I have discussed some of these issues on this post and on this blog, that is your issue, not mine.

Michael W writes:

@David H, Thanks for the response. I'm not challenging your assertions (and am very sympathetic) but it's rare that I see any discussion of how society will handle increasing costs of paying for old/indigent/uninsured/uninsurable. I'm frugal with my (nearly) free care (and very much in favor of raising tricare premiums) but as with all things 'free' the urge is to consume more and not less.

If Medicaid or the like is to grow, and there is no compulsion among lawmakers to limit quality/quantity of care we (society) pay in the end anyway.

I haven't seen anything on the blog about the need to change this implicit societal contract of requiring society to pick up the eventual tab. Not that I think it would change, but we need to have that conversation before we can ever have a reasonable discussion on healthcare for old people, indigent, chronically ill, etc.

I'll keep reading and learning.

Dan S writes:

I agree that simply saying "the" Congressional Republicans is an overgeneralization, so I guess a better way of expressing my point is this: this post frustrated me because I felt like, here you are giving actual, thoughtful, honest advice to Republicans in Congress (and others who care to join in the debate) about how to make America's healthcare system work better. Specifically you're advising them that it might not be a good idea to eliminate ONLY the individual mandate without eliminating the pre-existing condition pricing rule, because that would leave America's health insurance market just as, if not more, broken. And yet, by and large I don't think the Republicans in Congress (not all, but far too many) are actually interested in making Obamacare work better by reforming it and don't want thoughtful honest advice on how to do so. They want Obamacare to fail hard in the hope that they might repeal it and/or score political points, even if they have to engineer its failure themselves, and they know that eliminating the individual mandate will have this effect. So I think you really ought to be calling out "the" Republicans on this, and acknowledge that even if you don't like Obamacare, the Democrats were at least responsible enough to ensure that the bill had both legs needed for it to work.

Brad writes:

As the healthcare bill was being formulated, many democrats wanted the so-called "public option", but couldn't find the votes. They settled for what we have now - Obamacare. But the designers of the law knew it would eventually fail. Senator Reid has hinted that Obamacare is a baby step toward single payer system. See here.

No one should be shocked and dismayed as the law, and more importantly, insurance markets begins to fail. This is by design.

Steve J writes:

Agree with Michael W.

It makes no more sense than requiring that life insurance companies charge the same rate to someone who has cancer as to someone who does not.

But that is exactly what most employers do today. Everyone in the pool pays the same amount. That is the great thing about employer provided insurance - you can get it even if you have health problems. So you say the existing system is better yet the existing system is the exact thing you say makes no sense.

So once I develop cancer when are they allowed to increase my rates? Immediately, the next calendar year, when? What exactly was the point of paying all those premiums in the years I didn't have cancer if they can raise my rates when I do get it? Or do I only pay more if I lose my job and have to get insurance on the open market?

Your ideas about pre-existing conditions seem to make sense but you have a lot more explaining to do.

wd40 writes:

The Republican platform also had restrictions on insurance companies denying insurance to people with pre-existing conditions. Here is part of their platform (possibly changed recently).

Ensure access to patients with pre-existing conditions.

States would subsidize high-risk pools for people with pre-existing conditions

Insurance companies could not terminate people with costly medical history

As you implicitly point out, such a plan would create adverse selection as high risks would opt in for insurance and low risks would opt out, thereby undermining the insurance market. However, there is a solution to this problem--forcing people to buy insurance from the time that they are very young. This is known as a mandate (to be workable, it would have to be higher than the proposed levels of taxation for not buying insurance). That is why the Republican platform was unworkable and why Obamacare at least tries to confront the issue through a mandate which you do not like (because it reduces freedom).

There is a problem with allowing insurance companies to charge the expected costs for people with pre-existing conditions. This destroys the market for insurance for people who have pre-existing conditions before they are 21 unless their parents have bought an insurance policy for them before their birth. In the absence of this market, individuals are not insured against enormous health expenses that arise from their bad luck when they are born.

Forcing everyone to buy insurance eliminates the adverse selection problem as everyone is insured. Of course, adverse selection still sneaks in as people can still buy different levels of insurance.

Tom West writes:

Isn't all of this simply pussy-footing around the basic question: "Is medical care a basic human right in any society that can afford it?"

Obviously, Libertarians and a significant portion of the American populace are going to say no, and pretty much every industrialized society outside of the USA has decided yes.

What will be interesting is how many Americans saying 'yes' now will change their minds when they find even semi-sorta universal coverage has significant costs.

Mark Bahner writes:
Obviously, Libertarians and a significant portion of the American populace are going to say no, and pretty much every industrialized society outside of the USA has decided yes.

A related (but admittedly off-topic) question is: "What country has the best health care system in the world, and why is it the best?"

Then a second question would be: "How could that country's health care system be made even better?"

Mark V Anderson writes:

Our system pre-ObamaCare has lots of problems. The one that Democrats are so fond of pointing out is the number of people without insurance. What I don't understand is what is the point of totally re-formulating our health care system to give health care to a minority of the citizens. Fixing the problem of those without insurance (or actually without healthcare) is a welfare issue, so why can't we solve it with welfare? Add a new medical welfare system; don't change our whole system.

Having said that, I realize there is absolutely no political backing for this. Every politician wants to make political points above anything else; solving an actual problem is way down the priority list.

Kathryn H writes:

Sourcreamus is flat out wrong. In California, for instance, insurance could be denied not only to individuals but to small companies with employees who have pre-existing conditions. I have bought insurance for small tech companies for years - one sick kid can completely derail a policy. And California is relatively generous in its application of HIPAA. If your company shuts down or you were otherwise ineligible for COBRA, there was no way to transfer into CA's high risk pool. Maybe NY is more protective of sick individuals than CA is, but I know for a fact that TX is not, nor FL. People who could not get insurance due to pre-existing conditions were not well served by the individual insurance market, and were not necessarily negligent or stupid about maintaining insurance coverage (or their own health). Mandated participation is a necessary partner to universal coverage and universal coverage is a necessary partner to a healthy society. If you don't like how the ACA does it, come up with some better suggestions than pretending that what was in place was working.

Shayne Cook writes:

To Taeyoung:

"Republicans needed to be proposing not an alternative but a bridge -- something to get us out of this mess."

I don't claim to be Republican, but I've made a suggestion or two - as follows ...

1.) Change tax law to allow a 100% tax deduction for all actual health care expenditures - for individual taxpayers only. Repeal the tax deductibility for business/employer paid health insurance.
Notes and Justification:
By 100% tax deduction for actual health care expenditures for Individuals, I mean either for payments made for medical treatment OR for health insurance OR both. "Health Insurance" will become just that - INSURANCE. Not the pre-paid health care monstrosity it is now, and under ACA.
By 100% tax deductibility, I mean a line item on the first page of the IRS 1040, "Adjustments to Gross Income" section, not on Schedule D "Itemized Deductions". Non-itemizers have health expenses as well as itemizers.

2.) Allow the Individual actual health care expenditure tax deduction, described above, to be transferable. Tax deductions obviously have no value to low/no income folks, and limited value for folks whose health care expenditures vastly exceed their incomes. The transferability feature addresses those people in particular. It allows (and incentivizes) family members, friends, community members, and even employers to contribute to the costs of actual heath care for those individuals. Something not allowed by either ACA, or previous law.
Notes and Justification:
The tax deduction transferability feature also incentivizes anyone to voluntarily contribute to the actual health care costs of those not able to pay. Inasmuch as the progressive tax system stays in place, the tax deduction transferability feature incentivizes the highest income ("rich people") the most to contribute - voluntarily.
The "pre-existing condition" factor becomes a non-issue.

The objective of both of these proposed changes is to get "third-party" payers - currently Government, Business and Insurance companies - far enough out of the health care financing process that they (the "third-party" payers) have strictly limited influence on either patient/doctor health care decisions, or actual health care costs. The real health care decisions are made between patients and their health care providers - with help from family, friends, community members and anyone else who already has a vested interest in the actual health of the patient.

This proposed change is similar in many respects to that proposed by John Cochrane some time ago. I highly recommend reading Cochrane's paper.

My proposed changes here differs with Cochrane mainly in that I recommend tax deduction transferability, where Dr. Cochrane recommends "vouchers" to deal with the health care costs for low/no income people or people whose health is such that treatment costs exceed income. (I'd be amenable to both tax deduction transferability and a "voucher" system if it is required.)

David R. Henderson writes:

@Tom West,
Isn't all of this simply pussy-footing around the basic question: "Is medical care a basic human right in any society that can afford it?"

Obviously, Libertarians and a significant portion of the American populace are going to say no, and pretty much every industrialized society outside of the USA has decided yes.

The right to buy medical care is a basic human right. The right to have someone else be forced to pay for it is not.

Canada, where you and I come from, is a country where the governments in many provinces don't let you buy medical care from people who are willing to buy it. The government doesn't guarantee medical care. It simply guarantees that you will be able to line up for it and, when you get it, someone else will pay for it. And it's this requirement that someone else will pay for it that causes you to line up for it.

You say you think people should be responsible for the "costs they create" when they have pre-existing conditions, but aren't most of those due to bad luck?

If so, would you favor a "perfect" market where everyone paid in advance 100% of their expected future healthcare costs? Wouldn't that pretty much miss the whole point of insurance?

I discuss some of these issues in my blog today: http://www.economicsofinformation.com/2013/10/when-value-of-information-is-negative.html

I'd be interested in your answers to the 2 questions I post there.

sourcreamus writes:

What I read here is that previously under HIPAA the ban on pre-existing condition exclusion applies to the individual market if the person had a group policy or COBRA previous to applying for an individual policy.

Musca Editor writes:

Michael W, wd40, and Shayne Cook have all hit upon versions of the same fundamental issue, to wit:

To what extent is it my responsibility to involuntarily pay for someone who has bad luck, particularly from birth, and whose medical care costs (until technology catches up) outstrip his ability to pay?

The idea of insurance is supposedly to provide for a cushion in case of an improbable costly event. You and the insurance company are making opposite bets: you, that the event will occur, and they, that the event won't. As everyone in a voluntary insurance pool joins up understanding that the pool exists to provide for everyone in it, the insurance company can price according to estimated risk, plus profit.

In case of someone born with a serious illness, the probability of the costly event is 1.0. Who pays? Insurance doesn't apply.

This is why economics cannot be value-free: the moral question here is whether I am obligated, as a citizen, human being, etc., to pay treatment costs for someone who cannot pay those costs themselves.

The political problem here is the same as in Medicaid, Medicare, and Social Security. Politicians want to give away something for nothing and be rewarded for it, so they will simply avoid discussion of why those who provide the "something" are morally obligated to do so.

"The" Republicans sadly defaulted on this question, when supposed Ayn Rand fan Paul Ryan defended Medicare so strenuously during the 2012 elections.

The political problem also has another wrinkle. Insurance is the source of a lot of the issues in the market, but any plan that eliminates or reduces insurance's role is going to get lobbied against heavily by the insurance industry, whether be it single-payer or expanding HSAs.

Tom West writes:

The right to buy medical care is a basic human right. The right to have someone else be forced to pay for it is not.

That's a reasonable philosophical point to have, but realistically, as a society, we've pretty much decided (in every practical way that matters) that people have a right to food, meaning that the state has a right to take the resources from another to obtain that food. Obviously Libertarians disagree, but I'd say there's pretty wide social agreement that no-one should starve, regardless of circumstance, even if it involves taking others property to feed him.

It is in this context (the practical one, not the philosophical one), that I suggest the real question is whether the population feels everyone has a right to medical care.

Canada, where you and I come from, is a country where the governments in many provinces don't let you buy medical care from people who are willing to buy it. The government doesn't guarantee medical care. It simply guarantees that you will be able to line up for it and, when you get it, someone else will pay for it.

Agreed.

And it's this requirement that someone else will pay for it that causes you to line up for it.

Definitely agreed. That's the part that I personally accept, but I have a feeling a lot of Americans that support single payer don't understand.

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