Earlier this month, Bryan Dowd, a health economist at the University of Minnesota, wrote a column for The American that raises an interesting question. Given that protection against becoming uninsurable or paying extremely high insurance premiums is obviously valuable, why would we need to mandate that individuals purchase medical insurance?
As Dowd explains, there are two stories we’re generally told as to why we need a penalty or tax to induce people to purchase medical insurance. If we prohibit preexisting condition clauses, the first story goes, many people will only purchase medical insurance when they need expensive medical care, thus driving up the cost of medical insurance for everyone. The second story is that the uninsured will clog hospital emergency rooms once they get sick, and the insured will be forced to pick up the tab.
On the face of it, these two stories are logically inconsistent. If people without insurance are able to get care anyway (that insured people then pay for) then why are preexisting conditions a barrier to sick people receiving care? Conversely, if people without insurance are denied access to care, then why isn’t the threat of being denied care sufficient to frighten people into purchasing health insurance prior to getting sick? Perhaps the real problem is the sheer cost of health insurance; perhaps the majority of healthy people who don’t buy health insurance simply can’t afford it.
The problems associated with being uninsured are not limited to people who choose not to buy health insurance. The recent recession brought virtually everyone to the realization that even if they have generous large-group insurance through their employer, they are only one layoff with a preexisting condition away from potentially being uninsurable, and that for people who don’t qualify for Medicaid or have large savings accounts, a major illness without insurance will mean reduced access to care or financial ruin. Consumers in the individual insurance market face similar risks.
Dowd argues that what consumers want is a package deal that would include the following elements:
(1) protection against becoming uninsurable and against huge and sudden premium increases (an idea John Cochrane has described as “health-status insurance”);
(2) and the ability to switch plans, in case another plan offers better service or lower prices, etc.
In theory, insurance exchanges can provided something like this package deal, yet Dowd explains some of the challenges involved in doing so:
[B]oth the federal and state governments that try to run exchanges soon will discover the difficulties involved. Exchanges need a risk adjustment system so that plans that enroll sicker people do not have to charge higher premiums for that reason alone. There also needs to be an incentive for healthy people to remain in the exchange when other consumers get sick. The problem is not that the healthy will go without insurance, but that they will be offered lower cost coverage outside the exchange. ObamaCare tries to prevent this by requiring insurers to charge the same premium for the same product inside and outside the exchange, but insurers do not have to sell policies in both markets, and the difficulty of determining whether two insurance products are “the same” is likely to make that part of the law difficult to enforce.
This is an interesting prediction. The ACA might create a flourishing market of lightly-regulated medical insurance plans outside the exchange. If this really does prove to a problem, perhaps these plans will eventually be prohibited by law.
A better approach would have been to make sure that the policies in the exchanges are a good buy for all enrollees. From a purely statistical perspective, healthy people are more likely to be young and poor, while sick people are more likely to be older and wealthier. If we had designed exchanges that limited the extent to which younger, poorer enrollees were asked to subsidize the premiums of older, wealthier enrollees—while still providing protection against being uninsurable or astronomical premium increases—the mandate and all its accompanying baggage might have been unnecessary. Penalties for late enrollment (as in Part D of Medicare) or discontinuous enrollment in the exchanges provide another fair and workable alternative to compulsory coverage.
I’d like to see Dowd’s ideas become part of the conversation regarding how we might replace ACA.