David R. Henderson  

Cannon on How to Fix Obamacare

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Health care economist John C. Goodman once asked a great question in his discussion of health insurance regulation and Obamacare: "Would you want to eat at a restaurant that doesn't want you as a customer?" John applied that to proposals to require a combination of guaranteed issue and a ban on pricing for pre-existing conditions. The two are both major parts of Obamacare. Together, they mean that insurance companies can't legally charge higher prices to higher-risk people and can't turn them away. This means that unless they figure out ways around this, they will know that they will lose money on high-risk people.

Sure enough, as Cato Institute economist Michael Cannon discussed last year--see my blog post on this last year--insurance companies have figured out how to deal with this: make their insurance unattractive to high-risk people. He reported on an NBER study, since revised, by Michael Geruso of the University of Texas, Timothy J. Layton of Harvard Medical School, and Daniel Prinz of Harvard University that finds just that.

Since then, Cannon has posted more on this. In a January 4 article in Health Affairs, Cannon reports interesting survey data whose bottom line is that when people think that the ban on pricing for pre-existing conditions results in what it actually does result in, the public's view on the ban switches from strongly positive to strongly negative.

In a January 5 article in Health Affairs, Cannon considers how to deal with this problem, short of completely repealing Obamacare. Here's a key paragraph:

Congress can make coverage more affordable and access to care more secure by repealing or letting consumers opt out of Obamacare's preexisting conditions provisions and other health-insurance regulations. A study conducted by McKinsey and Company for the Department of Health and Human Services estimated that the preexisting conditions provisions are the primary reason individual-market premiums are rising so rapidly. Repeal or an opt-out would free the vast majority of exchange enrollees to purchase low-cost, guaranteed-renewable coverage--or even lower-cost preexisting conditions insurance--at any time of year. In addition to greater freedom, those consumers would gain something else they currently lack: sustainable, long-term protection against the cost of illness.

Will his solution be great for everyone? No, for obvious reasons. People with serious pre-existing conditions will find their premiums rising by a lot. So here's Cannon's next paragraph, in which he deals with that problem:
A minority of exchange enrollees would be unable to find or afford coverage at actuarially fair premiums. As a matter of political reality, reform will include some form of subsidy for this group. One option is a high-risk pool. High-risk pools likewise exhibit quality and affordability problems--in part because they too suffer from government pricing errors. Yet, a voluntary insurance market combined with government high-risk pools need not be perfect to outperform Obamacare. The more direct, transparent, and equitably financed a high-risk pool's subsidies are, the more politically sustainable those subsidies will be. Moreover, any imperfections of a high-risk pool are as much a feature as a bug. To the extent that government pricing errors lead to suboptimal quality in high-risk pools, they create incentives for people to purchase insurance in the voluntary market.




COMMENTS (11 to date)
Jason S. writes:

As long as we confine ourselves within the bounds of political reality, it seems to me a functional reinsurance program is superior to both community rating and high-risk pools. If an insurer ends up with an unusually sick pool, then they receive a subsidy. If they get an unusually healthy pool, they pay a tax. Then everyone can stay within the voluntary market without community rating or guaranteed issue. It's curious to me that Michael Cannon frequently criticizes the reinsurance aspect of PPACA, but maybe he'd be open to keeping it if reformed and community rating and guaranteed issue were repealed.

Hazel Meade writes:

As a possible option for high risk pools, maybe insurers could be allowed to implement some aggressive programs to incentivize proper management of chronic diseases in exchange for lower insurance rates. For example, remote monitoring to make sure patients are taking prescriptions and following exercise and dietary guidelines. Some people might find these things intrusive, but they could opt out and accept the higher cost insurance if they didn't like it. Let the insurers design those systems and decide how much to reduce rates. Then at least some of the patients with chronic conditions could escape the very high insurance rates if they were vigilant about following the doctors orders.

Larry writes:

Reinsurance is much simpler and solves the problems. O need to treat expensive patients differently.

Any fixes better come soon or the public will get impatient and go for Medicare 4 All.

Thomas Sewell writes:

Wouldn't reinsurance as described remove the incentives for insurance companies to push people toward risk and cost reductions for things which are in their control?

If companies get paid the same regardless of what happens in their insured pool, it seems they'd stop caring. In fact, if they are getting paid a percentage profit, they may make more money with a "sicker" pool population which requires more procedures, longer hospital stays, etc...

How about instead, we completely deregulate the insurance market and allow competition across state lines, then if you want a welfare system for people who can't get/afford health insurance, you setup something separate for that, paid for directly by State governments. We could call that program medi-something-or-other and stop screwing up everyone else's insurance market.

Alan Goldhammer writes:

Obamacare was always a kludge and designed only to help those who did not receive heath insurance from an employer or the government (Medicare). Both my daughters had policies when they worked as independent contractors for periods of time. For them it was access to affordable insurance. The number of people on obamacare has always been a fraction of the population.

High risk pools will only work if it is done at the federal level. Several states have tried it in the past and the programs quickly ran out of money. Allowing the sale of insurance across strategies already takes place to a fairly large extent and we are seeing a consolidation within the insurance industry.

The only real solution is a government run program along the line of Medicare (disclosure, I am on Medicare and it works well) or a regulated insurance market as in Germany, Holland and Switzerland.

Alan Goldhammer writes:

Adding to my earlier comments, a good primer on health care systems in other parts of the world can be found in TR Reid's very good book, "The Healing of America: A Global Quest for Better, Cheaper, and Fairer Health Care." Reid was a Washington Post foreign and domestic correspondent and he and his family used several of the foreign healthcare systems he writes about while he was on detail. Though the book came out in 2009, it's still relevant as the systems he writes about have not been changed much.

One proposal I have always thought might work in the US is the voucher system proposed by Emanuel and Fuchs. It uses a VAT to provide a basic insurance policy using already existing private sector delivery vehicles to all. It eliminates Medicare, Medicaid and employer funded plans. Individuals would be able to purchase after market plans for added benefits should they want them.

From recent personal experience, I can tell you how difficult it can be to manage even a modest size insurance program. All it takes is a couple of NICU hospitalizations to run up bills of several $100K. Even the best underwriting sometimes comes up short and a program that is in the black one year can easily lose money in the next. Reinsurance can help buffer things but doesn't stop every loss.

robc writes:
Reinsurance can help buffer things but doesn't stop every loss.

That is exactly how reinsurance should work. Just like insurance just helps buffer things but doesn't stop every loss. In bad years, even with insurance, health care costs can be costly. But it buffers.

Same for reinsurance. You still lose out, but the really bad years are just bad, not really bad.

robc writes:
Reinsurance can help buffer things but doesn't stop every loss.

That is exactly how reinsurance should work. Just like insurance just helps buffer things but doesn't stop every loss. In bad years, even with insurance, health care costs can be costly. But it buffers.

Same for reinsurance. You still lose out, but the really bad years are just bad, not really bad.

Matthias Görgens writes:
The more direct, transparent, and equitably financed a high-risk pool's subsidies are, the more politically sustainable those subsidies will be.

That sounds a bit too optimistic. Often opaque stuff lasts the longest in politics..

Jason S. writes:

Thomas - Reinsurance doesn't get rid of the moral hazard problem of community rating, but then, neither do high-risk pools. In an ideal world, we'd abolish all regulations, tax exclusions, and subsidies and Americans would go back to getting health care via physicians kept on retainer by mutual-aid societies. But that's outside the realm of the politically realistic. Perhaps you could set up some incentives to shuttle higher-risk consumers into managed care plans with referral requirements, etc. Reduces the cost impact of moral hazard.

michael pettengill writes:

Every single person has a high cost preX:

every year you are a year older and a worse insurance risk.

If everyone bought the low risk insurance at birth that is renewable until death, the pool will quickly require high premiums for everyone, including new born infants in perfect health.

The common solution is creating new insurance pools based on age, ie, every year, a new pool is created, limited to only those born that year.

That means the previous no PreX pool is now a high risk pool of those with costly PreX. New borns could buy in, but they will instead buy into the newly created, cheaper, no PreX pool.

That also means, insurance premiums must increase every year, by design.

Unless anyone who requires more than a fixed cost of care is euthanized to stop the policy holder from renewing. Buy a policy at birth, drop it at 21 when the insurer requires euthanizing all policy holders who renew??

I consider any young person who declares they should not be required to pay the cost of old people to be promising to commit suicide, or calling for the government to euthanize them at age 30 or whatever they deem old at the time of statement. Only by death before getting old can any young person bare no cost of a old person.

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