David R. Henderson  

Trump on Obamacare

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Many people say they are humbled when others bestow honors on them. I've never understood that. When I get honors, I feel proud, if I think I deserve them. I get humbled when I make mistakes.

I've consistently made one mistake with regard to Donald Trump: I've underestimated him. Very early on, I thought he had no chance to win the Republican nomination. (Although I did win what I regarded as easy money by betting Tim Kane that Trump would not pull out before Jeb Bush did.) Second, I thought he would lose the general election to Hillary Clinton. I did not predict anything close to a landslide for Hillary. But I did predict that it would be a decisive win, that he would win fewer than 240 electoral votes, and that the networks would announce it at 8:01 p.m. PST.

In the days ahead, I'll give my comments about what to expect from a Trump presidency. But they will be very tentative. I don't think anyone knows, maybe not even Trump. I'll also give my thoughts on some other election outcomes, here in California (two of which I was involved in) and elsewhere.

But for now, I want to address an issue that Trump has already made some statements about: repealing Obamacare. Here's what Wall Street Journal reporters Monica Langley and Gerard Baker wrote after an interview with Trump:

Mr. Trump said he favors keeping the prohibition against insurers denying coverage because of patients' existing conditions, and a provision that allows parents to provide years of additional coverage for children on their insurance policies.

The BBC mistakenly referred to these as "the two pillars of the bill." Only one of them--the prohibition against denying coverage--is a key provision. The coverage for "children," that is, people up to age 26, is a small part of Obamacare.

As I've written on Econlog before, there are two key provisions of health-insurance regulation that destroy health insurance as health insurance: the combination of guarantee issue and community rating. Either one of them on its own does not destroy insurance. Together they do, by taking the insurance out of insurance. With guaranteed issue alone, the part of Obamacare that Trump says he wants to keep, health insurance could still function as insurance. Insurers could say, "Sure, we'll insure you even though you have cancer. That will be $50,000 a year." That is what would happen if he didn't keep community rating. With community rating--that is, people being charged the same regardless of risk--insurance could still be insurance. Insurers could charge everyone the same but simply deny coverage to those who are too high-risk.

So it's guaranteed issue that Trump says he wants to keep; he has not addressed community rating. My fear, though, is that he meant he wants to keep both and that possibly he, or the reporters, didn't see the clear distinction. Both provisions are, unfortunately, enormously popular, with Republicans and Democrats. They're also popular with the general public. One data point: a self-employed guy I know who buys health insurance for him and his wife now pays approximately twice what he paid before Obamacare and it's for worse coverage. When I explained to him that it was due to these two provisions, he responded that he likes both provisions but he wants to pay less.

By the way, more recently, Megan McArdle has written an excellent piece on this.


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COMMENTS (22 to date)
Tom Nagle writes:

Unfortunstely, Trump is as ignorant as the general public about how the economics of most things work, including insurance. And there are rumors he may appoint equally ignorant or dangerous people to his cabinet: e.g, Ben Carson, MD for Sec of HHS, John Bolton for Sec of State,

Andrew_FL writes:

Risk is something of a misnomer when speaking of something that's already happened.

David R. Henderson writes:

@Andrew_FL,
Risk is something of a misnomer when speaking of something that's already happened.
That’s a true statement, but I’m not sure whom or what you’re addressing. My point is that a pre-existing condition makes you have a high risk of needing treatment. It’s still risk; it’s just very high.

Joe McIntyre writes:

I think that is why the individual mandate is so important. It (theoretically) balances out the risk pool by in bringing healthier people who might otherwise go uninsured.

That's why Krugman and others use the "stool" metaphor. Without the mandate, the system is unworkable.

AS writes:
he responded that he likes both provisions but he wants to pay less.

This is why democracy is doomed: median voters think they can get a free lunch and don't see the unseen costs of a policy.

BC writes:

Maybe, one way out of this (politically) is to keep community-rating and guaranteed-issue on the exchanges, but allow insurance companies to sell non-community-rated policies off-exchange as a separate, additional product. That way, high-risk customers could still buy the old Obamacare product with all its popular protections. An example would be network ride-sharing Uber, which is completely different from a taxi and thus falls under a different regulatory regime.

Alternatively, healthy people could be given discounts on their premiums, but it would still be illegal to boost (non-discounted) premiums for high-risk customers. For example, in the financial industry, brokerage commissions used to be regulated, so brokerages lowered effective commissions by offering rebates called "soft dollars". (Soft dollars could only be spent on research-related items, so it was not exactly the same as lowering commissions.)

Of course, economically, these are indistinguishable from eliminating community-rating, but we are talking about reconciling economically irreconcilable political preferences.


@Joe McIntyre: the individual mandate is extremely politically unpopular. We could just as easily argue that we need to eliminate community-rating to satisfy the voters' desire to eliminate the individual mandate.

BC writes:

A little off topic, I noticed in my own Obamacare renewal that there are no PPO plans, only HMOs, offered for next year, at least in Massachusetts. PPOs allow one to see out-of-network doctors without a referral, usually with higher co-pays, co-insurance, and premiums.

Does community-rating and guaranteed-issue make PPOs relatively more untenable than HMOs? I could see how it might. People could buy cheaper HMO plans until they developed a condition that required seeing an out-of-network doctor, then switch to a PPO plan during next open enrollment. Are there other reasons why Obamacare and PPOs may be incompatible?

PPOs remain available in the employer market, which is less impacted by Obamacare. The fact that Obamacare has completely eliminated PPOs for individuals, even as an option, to me is quite damning of the law. It demonstrates exactly why people don't trust government healthcare: it removes the ability of people to choose their own doctor and receive treatments even if they are willing to pay a higher price for the option. If the option isn't even available, no amount of subsidies can fix the problem.

Ben writes:

So what's the solution? Making sick people pay for their own health insurance at market prices that they're highly unlikely to actually afford?

And like you said, these parts of Obamacare are popular demonstrating that a more private system is impossible in a democracy. So do we keep this quasi-private-public system that costs an insane amount or do we move closer towards a more centralised, public healthcare system that has been shown to save a fortune in Europe?

R Richard Schweitzer writes:

Let's begin with the idea of dealing with RISK (not care-cost spreading).

On risks we have Flood Insurance, which is a transfer to taxpayers of particular (different) predictable risks. [Federal Reinsurance}

On non-standard Life insurance, particular risks (attributable to known physical conditions) are "insurable" actuarially. They are segregated by types of conditions as well as ages. They may be further segregated by periods (term, whole life). [commercially reinsured to further spread the risks]

Windstorm Pools. Here insurers form pools of risks, usually with state participation [FL e.g.]bringing in the state's taxpayers as risk participants. Most such pools operate by imposing assessments on property insurers as well.

So, if the intent is to stay within the insurance concept (transfer and spreading of risks) a more appropriate program to provide for "pre-existing condition" risks might be to create a pool of such risks, segregated by ages and kinds of conditions. Share those risks with the federal taxpayers (reinsurance)and assessments to the broader base of all insurers.

If the electorate sufficiently desires this coverage availability, that is probably the optimum course.

Thomas Sewell writes:

If they're going to keep no pre-existing conditions (not saying it's a good idea), then the most straightforward way to do that is for the government to explicitly subsidize a high risk pool as a budget line item.

Anyone who demonstrates they can't get a "regular" insurance product can join the high risk pool. Keep the welfare health care cases off of the regular insurance market and make them an explicit government expense, rather than pretending it's free by pushing the cost across everyone else being responsible and insuring themselves. At the same time, you can also establish requirements around the high risk pool to keep people from dropping existing insurance to join it, etc...

Alternately, you can setup add-on subsidies based on what a particular pre-existing condition riders costs and offer to pay that to insurance companies, but then you end up with a whole bunch of bureaucracy around figuring out how much each one should cost, so maybe not worth it.

Another alternative, you can offer better tax credits for charitable health care for pre-existing conditions and rely on hospitals and drug companies to treat people based on that.

BC writes:

I like @Thomas Sewell's idea of subsidizing a high-risk pool separately from the regular individual insurance market. Why should those on the individual market (and not the employer market) be solely responsible for subsidizing the high risk individuals?

The high-risk subsidies could at least partially be paid for by levying a tax on the (voluntarily) uninsured since those are the people that might themselves receive high-risk subsidies in the future should they develop a pre-existing condition. In effect, uninsured would be required to insure against the risk of developing a pre-existing condition. (This may sound like the current individual mandate, but the difference is in how the fine/tax is computed and how it's spent. The current individual mandate fine amount is set to incentivize people to buy health insurance and bears no actuarial relationship to the cost of subsidizing high-risk pools, which don't even exist now.)

Justin Bowen writes:

Sorry to interject here, but I figured that this might be the place and time to ask this question.

I've seen this study before but have yet to receive an educated response to my question regarding the study's methodology and what conclusions might be drawn from it in terms of possible, if any, policy changes.

There is a comment under the study that calls into question the methodology that appears to be a valid concern. Any others?

Also, if the results are valid, what does that say about long-term American health care and health insurance costs? If the results are valid, are we shooting ourselves in the foot by attacking obesity and smoking?

Mark Bahner writes:

My apologies for following Justin off-topic, but it's an area of interest to me (computer models that reach strange conclusions, because they ignore other relevant information).

Justin, imagine a society with 100% obese people who all die of massive heart attacks on their 30th birthdays. Lifetime healthcare costs are low for that society, but consider that, if they graduated at 22 years old, they only worked 8 years of 30 years of life. Plus, their children aren't grown when they die. Such a society would collapse. But lifetime health care costs would be very low!

P.S. These are my last comments on this issue on this blog. I'm happy to discuss it on my blog.

Andrew_FL writes:

@David R. Henderson

That depends on the condition. Sometimes it's a high risk, or sometimes it's a certainty-certain conditions will require treatment.

I don't think this undermines the point you were making, and I'm sorry if I gave the impression I was trying to.

Roger McKinney writes:

I'm an analyst for an HMO and I can assure you we will provide any form of insurance the state demands, for a price. We all lots huge amounts last year for guessing wrong that a lot of young healthy people would pay premiums. But the real problem is the rapidly rising costs of doctors and hospitals. Healthcare costs have always risen by ten to twenty points above the CPI thanks to excess demand chasing state-limited supply.

But I'm more interested in why Mr. Henderson thought Trump would lose. Ray Fair's Yale model predicted a Trump win back in July. I have never trusted polls and followed economic model forecasts for the past three decades and have never been surprised.

As for Trump winning the primary, you have to be a Tea Partier to get it. We were so angry with the Republican establishment that Trump was just the most handy Molotov cocktail.

Thaomas writes:

Dave,

Could you expand on the idea that community rating prevents insurance from being "insurance." Here is my problem with that (possibly mis) statement. Under community rating some people will get cancer and need hundreds of thousands of dollars of treatment and some will catch colds and need none. It sounds like "insurance" to me that both people pay the same rate.

Now there are problems with having insurance. Maybe doctors, knowing I have insurance proscribe treatments that are not cost effective. Or maybe know I have insurance, I go to the doctor when I have a cold anyway and use up more service than is covered by the co-pay. But I do not see how community rating adds to these problems. Exactly the same thing seems to occur with employer "provided" insurance.

David R. Henderson writes:

@Thaomas,
Could you expand on the idea that community rating prevents insurance from being "insurance." Here is my problem with that (possibly mis) statement. Under community rating some people will get cancer and need hundreds of thousands of dollars of treatment and some will catch colds and need none. It sounds like "insurance" to me that both people pay the same rate.
Sure I can. Under community rating, people are charged the same regardless of risk. With the typical insurance contract,by contrast, risk affects the premium. Consider life insurance. Does a life-insurance company charge the same annual premium for $100K in insurance to a 90-year-old man and a 25-year-old man? No. The reason is that the risk is different. Similarly for health insurance for a 20-year-old man and a 60-year-old man.

CougarNation writes:

A big problem - the individual mandate is no mandate at all as the penalty is far lower than the cost of insurance.

Politicians seem intent on having guaranteed issue, community rating and the mandate chase each other around in a circle rather than letting the market operate.

R Richard Schweitzer writes:

@David Henderson
on his @ Thaomas:

"Risk" (which is risk of cost or loss) in this field also involves (a) frequency of events and (b) severity. There is in addition the costs of administering claims (claims admin costs) which vary, inter alia, by types of disorders and the tracking measures available.

The transfers and attempted spreading of COSTS rather than risks through HealthCare Contracts which differ from Insurance (risk transfer contracts)create the distortions that hobble appropriate risk assessments.

the optimum "social" provision would call for "pooling" separate contracts for each type of pre-existing condition further classified by age and other applicable categories. That would have to take into consideration the fact that some forms of pre-existing conditions are also indicative of risks of development of other conditions. The individual contracts would be administered by insurers and the xs costs would be reinsured politically - if that is what the public wants as a "social" condition.

Floccina writes:

The PPACA subsidizes low income people anyway so why force community rating and have the 3 to 1 rule?
I think the answer is to tax people without them knowing that it is a tax, which seems dishonest to me

Dick White writes:

Just saw Jonathan Gruber of MIT explaining how Obamacare has saved money for policyholders, on net. His argument is 150 million are covered by employer plans which plans are paying lower premiums because of OCare. It's only 7 million who are on the exchanges and many of these are on exchanges that are doing well for customers though he acknowledged some problems with this pool.
Gruber's thesis is based on the "data" and he cites the Kaiser Institute annual survey. Can this be possible? Is there one or more reasonably objective evaluations of OCare based on pricing, deductibles and co-pays "data"?

David S writes:

I'll propose another option for dissection:

Have guaranteed issue and a universal pool, but have the price go down following a time in pool curve. So the first year, you pay 2x the normal pool cost, the second year is 1.5x, etc.

That way you provide incentives for people to be responsible and have insurance their entire lives, while still allowing for the fact that irresponsible behavior will happen.

The only other thing I will say is that if you want lower health care, you need more doctors. The government cannot do anything but force someone else to cover your costs, or force you to do without. "Increasing the insurance pool" without increasing the number of doctors was obviously going to increase cost enough to price out a number of people equal to the added pool size.

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