Politics & Policy

Child-Only Left Behind

How Obamacare destroyed the child-only health-insurance market.

‘For the people who are reliant on it, it’s the whole world.” So says Health Care for America Now (HCAN) communications director Avram Goldstein of the specialty child-only health-insurance market. On September 23, most of that market disappeared, when several major insurers — including Aetna, Cigna, Wellpoint, and United — stopped selling child-only policies.

Fewer than a million Americans are covered by such policies, and the companies listed above will allow current beneficiaries to keep their insurance. The child-only market is used mostly by poor families who can’t afford to insure everybody in their household, or whose peculiar circumstances make it inconvenient for them to cover a child under a parent’s plan. These are the facts that everyone can agree on. The disagreement is over whom to blame for the market’s collapse.

HCAN director Ethan Rome says that insurers’ withdrawal “is immoral, and to blame their appalling behavior on the new law is patently dishonest.” Further, the “decision to avoid sick children flies in the face of a pledge made by America’s Health Insurance Plans (AHIP) to abide by the new law.”

AHIP spokesman Robert Zirkelbach disagrees: “Health plans are complying with all the regulations, and, in fact, have been working collaboratively; some insurers implemented [Obamacare’s requirements] early to make this process as smooth as possible. And we’ve provided feedback.”

Zirkelbach is certainly correct that insurers are not violating the letter of the law. The provision in question changes how insurers may cover the child-only market, but it does not forbid them from leaving that market. Goldstein, however, contends that leaving the child-only market “is certainly not in the spirit of what [insurers] said they would do.”

Insurers say the blame for their withdrawal lies not with them, nor even with the Obama administration’s general desire to extend health coverage, but rather with a single, hastily written provision of Obamacare. As the bill was being negotiated, insurers accepted that it would prevent them from denying coverage to those with pre-existing conditions, but they assumed that other means of managing risk — such as pricing, co-payments, and restrictions on coverage — would still be available. So insurers were surprised to discover that the law essentially required full “guaranteed issue” and banned price discrimination across the child-only market, regardless of clients’ risk profiles.

That has caused a classic adverse-selection problem. An Aetna spokesman explained to National Review that Obamacare requires “guaranteed issue of coverage for individuals under 19, without the regulations needed to protect the affordability of coverage. Under current conditions, those seeking coverage would more often be those who need to consume health-care services immediately for high-cost, known conditions — which would significantly increase the cost of premiums.” Consequently, Aetna will instead issue no new child-only policies rather than force enormous price hikes on current members. The logic is the same for other insurers.

Once you cut through the jargon, the problem Aetna and the rest are facing is simple: A “guaranteed issue” (a requirement that insurers equally insure all patients regardless of pre-existing conditions) can’t work without a mandate that everybody carry insurance. The claim is not political — insurers insist they wouldn’t complain if the guaranteed issue were paired with a mandate — but actuarial: With people able to wait until they need medical care to demand a plan, insurers will find that their products are disproportionately purchased by those who are likely to require medical treatment in the near future. They’ll essentially be overwhelmed by the sick.

But the problem goes deeper than that. It’s not just that the system is expensive, but that it’s inherently unstable and therefore impossible to price. It’s like the classic problem of an information asymmetry in an insurance market from Econ 101 (though, in this case, the problem isn’t that insurers can’t get information, but that they’re forbidden to incorporate the information in pricing). Because parents can buy child-only insurance at the last minute, child-only policies will be purchased disproportionately by already-sick clients. The disproportionately sick clientele will be expensive to care for, which will force insurers to raise premiums. The high premiums will give the healthy even less incentive to purchase coverage in advance, thereby making the client pool even more disproportionately sick. That will raise premiums again, even further, and so on.

This snowball effect creates inherent instability that leaves insurers with no way to properly price plans in advance. As AHIP spokesman Robert Zirkelbach tells National Review, “However well-intentioned, the regulations provide an incentive to parents to wait until after their children get sick to buy insurance,” and this “is going to cause health-insurance premiums to rise for all families, at a time when they are already struggling in a weak economy.”

Goldstein thinks that argument is misleading. “When the industry expressed reservations about the rules, the Obama administration accommodated them,” he explains. “HHS Secretary Sebelius and her staff added in the ability for insurers to create open enrollment periods, so that a child who suddenly developed a health problem could not just rush over and buy a policy that would be guaranteed issue. Instead you have to say during the year, when you don’t know if you’re sick, whether you’ll enroll. They tried to accommodate insurers.”

This is true, but insurers still have good reason to be skittish. AHIP explains insurers’ uncertainty with a thought experiment: Suppose twelve different insurers each had an enrollment period in a different month of the year; then parents could still wait until kids got sick to purchase insurance, because they could simply pick the insurer that was enrolling that particular month.

Even if insurers don’t make such a neatly self-destructive alignment of enrollment periods, the more diverse and widely spread their enrollment periods are, the worse the basic problem is. (Building on the earlier thought experiment: If only, say, six months of the year had enrollment periods, then parents would have half as many chances to sign a kid up right before he or she needed care.) In other words, the enrollment-period provision does not entirely eliminate the adverse-selection problem. If it did, insurers would feel confident of their ability to profit as usual. If that were so, Left and Right agree, they wouldn’t be withdrawing.

Bob Vineyard, an insurance broker in Georgia, draws an analogy. “They [proponents of Obamacare] make a big deal about how, ‘Well, insurance companies can no longer discriminate against those with pre-existing condition, and that’s true for children as of 9/23 and everybody else as of 2014.’ It’s kind of like saying, ‘Everybody can get a mortgage.’ Well, we already went down that road.”

Matthew Shaffer is a William F. Buckley fellow at the National Review Institute.

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