David R. Henderson  

The Perverse Effects of the Pre-Existing Condition Pricing Ban

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Health economist John C. Goodman once said, at a talk I attended when Obamacare was being debated, "Would you want to be a patron of a restaurant that didn't want you as a customer?"

He was getting at the fact that Obamacare would set up incentives for health insurers to avoid the sickest people because they would not be able to charge for pre-existing conditions. Under the individual insurance that existed before Obamacare, beneficiaries (my daughter was one) could buy guaranteed-renewable health insurance. If they developed a condition while insured, they could still buy health insurance at a premium that applied to the whole pool they were in when they originally bought insurance. If they developed a serous condition, why would insurers take them? Because, by contract, they had to. Why would they treat them well? Because they had an incentive to treat everyone in the pool well and could be caught for discriminating against people in the pool.

Obamacare looked good because insurers could no longer charge for pre-existing conditions. What to do? According to a study by Michael Geruso of the University of Texas, Timothy J. Layton of Harvard Medical School, and Daniel Prinz of Harvard University, health insurers under Obamacare have figured out how to game the system: how, in Goodman's terms, to be the restaurant that turns away customers they don't want. Here's a segment of their abstract:

We first show that despite large regulatory transfers that neutralize selection incentives for most consumer types, some consumers are unprofitable in a way that is predictable by their prescription drug demand. Then, using a difference-in-differences strategy that compares Exchange formularies where these selection incentives exist to employer plan formularies where they do not, we show that Exchange insurers design formularies as screening devices that are differentially unattractive to unprofitable consumer types. This results in inefficiently low levels of coverage for the corresponding drugs in equilibrium.

The study is "Screening in Contract Design: Evidence from the ACA Health Insurance Exchanges," NBER Working Paper #22832, November 2016.

Cato Institute health economist Michael Cannon lays out some of the implications in a recent op/ed titled "How ObamaCare Punishes the Sick," Wall Street Journal, February 28, 2017 (March 1 for print edition.)

A long excerpt:

Predictably, that triggers a race to the bottom. Each year, whichever insurer offers the best MS coverage attracts the most MS patients and racks up the most losses. Insurers that offer high-quality coverage either leave the market, as many have, or slash their coverage. Let's call those losses what they are: penalties for offering high-quality coverage.

The result is lower-quality coverage--for MS, rheumatoid arthritis, infertility and other expensive conditions. The researchers find these patients face higher cost-sharing (even for inexpensive drugs), more prior-authorization requirements, more mandatory substitutions, and often no coverage for the drugs they need, so that consumers "cannot be adequately insured."

The study also corroborates reports that these rules are subjecting patients to higher deductibles and cost-sharing across the board, narrow networks that exclude leading cancer centers, inaccurate provider directories, and opaque cost-sharing. A coalition of 150 patient groups complains this government-fostered race to the bottom "completely undermines the goal of the ACA."

It doesn't have to be like this. Employer plans offer drug coverage more comprehensive and sustainable than ObamaCare. The pre-2014 individual market made comprehensive coverage even more secure: High-cost patients were less likely to lose coverage than similar enrollees in employer plans. The individual market created innovative products like "pre-existing conditions insurance" that--for one-fifth the cost of health insurance--gave the uninsured the right to enroll in coverage at healthy-person premiums if they developed expensive conditions.

There are lots of links in the above, so, if you want to know more about what's behind his reasoning, do a Google on the title of his article.

He also warns policy makers who are hesitant about repealing the pre-existing condition rules:

If anything, Republicans should fear not repealing ObamaCare's pre-existing-conditions rules. The Congressional Budget Office predicts a partial repeal would wipe out the individual market and cause nine million to lose coverage unnecessarily. And contrary to conventional wisdom, the consequences of those rules are wildly unpopular. In a new Cato Institute/YouGov poll, 63% of respondents initially supported ObamaCare's pre-existing-condition rules. That dropped to 31%--with 60% opposition--when they were told of the impact on quality.

Comments and Sharing

COMMENTS (11 to date)
mariorossi writes:

I don't quite understand why guaranteed-renewable insurance is much better then comunity ratings. How could you police against discrimination? Wouldn't it be trivial to offer a slightly better rate in a new pool to healthy clients and progressively worsten the components of the "original" pool so that it makes sense to make the terms worse and worse? Surely you cannot force insurers to offer a single package to all clients...

The main difference between comunity rating and guaranteed-renewable seems to be that as a patient you are stuck with a single insurer for the rest of your life. Is that really going to increase your bargaining power? I don't see the mechanism. Mandatory coverage was the ACA mechanism to insure you have get a minimum service.

Maybe a better system would have insurer offer one-off contributions to a health saving accounts on diagnosis of a long term illness.

It makes no sense that insurers can avoid paying for the cost of long-term treatment. You could then maybe comparison shop the one-off payments (e.g. one company offers x money in case of MS). If you charged insurance companies up front, when the illness is found, you'd get fewer issues, maybe. A true insurance covers all losses from an event: I don't think pay as you go really counts as insurance in that sense...

Hazel Meade writes:

The problem is that there is no way the Republicans can get a bill that repeals the exclusion on pre-existing conditions rules past the Senate. The Democrats will filibuster it and it will set up a public relations battle in which Republicans will be forced to take the politically unpopular position defending the insurers right to deny people coverage for pre-existing conditions. No matter how much logical sense it makes, the voters are stupid and will not understand it. It would be a political bonanza for the Democrats and there is no way it would pass. The D's would fight it to the bitter end, including shutting down the government to stop it, and it would only enhance their popularity.

Khodge writes:

The problems that plague Obamacare seem to be outliers. As bad cases make for poor law, healthcare outliers also make for poor law. Grand schemes like Obamacare and Medicare work to grow the government, not solve the problems.

If healthcare funding is regulated so that collision (often encouraged by government) is no longer the norm, pre-existing conditions, care for the indigent, and other exceptions can be treated with tailored solutions. Note that insurers can offer better drug pricing by making their prices proprietary and confidential.

MikeP writes:

The problems that plague Obamacare seem to be outliers.

It's exactly the opposite. The problems that plague Obamacare are in the very heart and soul of the legislation.

1. In its heart, actuarially indefensible premiums, e.g., making the young pay more while the old pay less and making men pay for women's care.

2. In its soul, the mistaken belief that insuring people who can't afford insurance is cheaper than treating them in emergency rooms and clinics.

These two are not outliers. These impinge upon every participant in the insurance market, making health care more expensive in premiums and in taxes.

The solution is, as you note, to tailor solutions for the 25% of people who, due to poverty or preexisting conditions, can't afford insurance or care rather than totally mess up the market now and in the future for the 75% who can.

AlanG writes:

the big problem is that high risk pools are indeed high risk with potentially high costs. Has any priced the costs of new drugs or the ongoing medical interventions that are needed for these patients? Even if you don't have a serious disease but might require one of the biotech injectables (Enbrel, Humira, etc.) you are looking an an Rx cost of about $1800-2400/month. Does this fit into a high risk pool or not? If we define it as only those suffering from very rare conditions maybe a capital budget can be established to pay for it, otherwise it becomes unmanageable very quickly. My understanding is that the states would establish the pools but the Federal government would pay for it. So do we have 50 different standards for what a high risk pool is?

People complain about Obamacare premiums and restrictions but these are popping up all over the place in group policies as well. A lot of group policies prohibit ER use if urgent care clinics have not been visited first (other than real emergencies such as a heart attack). Premiums are increasing based on utilization as well (my Medigap policy premium from my former employer went up by 20% this past year because of the Rx drug utilization which spiked up beyond what they expected).

Also consider what happens if one moves to any area where your current insurer doesn't offer individual policies. Under Obamacare one can make the transition but under the older system, one would have to find a new insurer and be subject to their requirements. When my daughter moved to Oakland, Aetna told her that they didn't offer single policies there and that if she had any medical issues she should go to the ER. What wonderful advice!

All I see is complaining about the ACA (and I did not think it was a particularly good solution but at least it did offer a workable approach for those who were did not have a group plan) but very little in terms of practical solutions. Maybe all the commenters have group plans that they are happy with (or are health and don't need much medical care). I can tell you that my wife and I are paying $14K this year for Medicare/Medigap/Dental coverage (that's just premiums and does not include any co-pays which will add more to the overall bill) so if you think that you get a free ride from Medicare, think again.

I'm interested in solutions, not complaints.

MikeP writes:

To be fair, there is one consequence of Obamacare, albeit entirely unintended, that has actually been beneficial.

By forcing up the costs of insurance so dramatically -- again, due to requiring the healthy to pay higher premiums than they should -- Obamacare has driven policies toward higher deductibles and copays. That is a big plus. Anyone who compares the maximum costs of high deductible and low deductible plans recognizes that the yearly maximum costs are very close to each other, but the yearly minimum costs are far better with the high deductible plan. So more paying decisions end up in the actual health care consumer's hands, and market function improves dramatically.

AlanG writes:

MikeP writes, " So more paying decisions end up in the actual health care consumer's hands, and market function improves dramatically."

In the absence of transparent pricing and quality measures why is this a good thing? I keep seeing statements like this one all over the place and of course is is the mantra of the current Republican white paper. Do you believe that we will see Dr fees and associated lab and diagnostic costs posted on the Internet? Last year I had a lumbar MRI done and I tried to get some pricing from a couple of radiology practices (insurance covered the whole thing but I was interested whether the information was available) and none of the three practices would tell me.

With respect to quality, how do you know about the quality of your doctor or the lab service (I've encountered a number of lab errors over the years that required a second round of tests).

We have this information for almost every other consumer good besides healthcare.

It's been well documented that the US with its current healthcare system doesn't have as good outcomes as most countries in Europe. How do you reconcile this since we pay more per capita?

A writes:

The discussion about perverse effects is useful, but how did you arrive at your policy conclusions? The counterfactual seems to be extremely high costs for those who can afford continued coverage, and no coverage for those who cannot. Reduced average quality and guaranteed access don't seem obviously worse than the state of affairs before the pre-existing clause.

WalterB writes:

AlanG: demand for transparent pricing and quality measures are an expected result from more consumer control. Your clinic had no fear of losing your business, so it didn't bother coming up with a price for you.

MikeP writes:

It's been well documented that the US with its current healthcare system doesn't have as good outcomes as most countries in Europe.

The US may have worse outcomes under the most simplistic of metrics, but it does well when a little thought is put into what you are trying to measure. In particular, you really want to measure the quality and quantity of health care that the health care system actually supplies.

For example, the US has the highest survival rates of high-mortality illnesses in the world. And when death due to injury is factored out, the US has the highest life expectancy in the world.

And, really, if you want to compare, say, Japanese and Swedish outcomes against American outcomes, you actually need to be compare them against Japanese American and Swedish American outcomes.

How do you reconcile this since we pay more per capita?

Even though the evidence is resounding that the US has the best health care in the world, I think we do pay more per capita than we should. But this is largely due to the fact that most health care dollars are spent by private parties, such as employers who don't feel entitled to skimp, who are not the actual consumer.

Hazel Meade writes:

I wonder if wait times are factored into these metrics at all. How can waiting weeks or months to see a doctor in Canada not impact quality of care?

That said, I wonder if Canada uses some sort of filtering to bump up people who are considered a high probability of a positive test result for cancer or other diseases. It's possible that the waiting lists act as a filter against defensive testing if they push people who GPs think are really sick to the front of the line. That could reduce costs without impacting outcomes too much.

America's problem is that everything is covered by third-party insurance so neither the doctor nor the patient has any incentive to care what anything costs. The people who control the purse strings often have their hands tied so they can't say no.

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