Politics & Policy

Insuring the Uninsurable

(Photo: Pogonici/Dreamstime)
It’s the key to solving the GOP’s health-care quandary, and there’s an easy way to do it.

The Affordable Care Act was in large part justified by the desire to make health insurance affordable for low-income individuals with pre-existing conditions. Yet, by requiring carriers to price insurance without regard to the expected costs of care, it has ensured that premiums well exceed the levels attractive to the healthy, and that insurers lack the funds to meet the needs of those who are already sick. As Republicans seek to fix a dysfunctional market in which neither buyers nor sellers are eager to participate, they have stumbled repeatedly on the question of how to assist the chronically ill, who cost vastly more to care for than they can afford to pay in premiums.

Rather than propping up a tangled and costly system of cross-subsidies for care that is inherently incompatible with vigorous competition, they should instead restructure existing direct subsidies to better target them at the individuals who need help the most. Conventional high-risk pools have tended to fall short of ensuring coverage to those with pre-existing conditions, while a re-insurance scheme would increase government spending unnecessarily. Instead, a better approach is to let insurers sell plans off the exchange priced proportionately to the health-care needs of each enrollee, leaving the exchange subsidies more narrowly focused on low-income chronically ill individuals who are unable to afford plans elsewhere.

In 2008, 44 million Americans (15 percent of the country’s residents) were without health insurance, of which 32 million (11 percent) had been without coverage for over a year. Some of these were individuals eligible for public entitlements who had not yet needed to enroll. Some were people able to afford coverage or between jobs, choosing to bear expenses out-of-pocket for a while. And some were immigrants living in the country illegally, and hence still ineligible for most kinds of subsidy. But the Kaiser Family Foundation estimated that 18 percent of applicants had been denied insurance coverage on the individual market prior to the ACA. This group consists of people with major chronic illnesses (such as diabetes or cancer), who lack coverage through an employer or entitlement program. In the best case, individuals with such conditions may incur annual health-care costs exceeding $10,000, while those requiring repeat hospitalizations and the most expensive therapies may accrue costs ten times as high.

The ACA sought to make health insurance affordable to such individuals by requiring insurers to charge sick applicants no more than they would healthy ones, regardless of the large cost differences between them. This has led insurance premiums to be set well above the health-care costs that most people expect to incur, and well below the costs that the chronically ill will incur even in the best case. As a result, many healthy individuals have been waiting to get sick before purchasing insurance, or going without insurance altogether. This has only further increased average costs that insurers are required to cover per enrollee — forcing them to drive premiums even higher, hike deductibles, narrow their networks, skimp on services provided to the sick, and in many areas drop out of the marketplace altogether.

To prop up this system of cross-subsidies, the federal government has taken a highly prescriptive approach to the nature and content of health insurance. It has mandated that plans cover an extensive list of “Essential Health Benefits” and greatly limited the ability of insurers to vary cost-sharing arrangements according to the risk preferences of specific potential enrollees. To support carriers required to cover the chronically ill for less than the cost of their care, it has tried to force the healthy to purchase plans that are of little value to them. Rather than a marketplace in which sellers innovate to attract new customers, the ACA has established a scheme in which either buyers don’t want to buy or sellers don’t want to sell.

Despite the penalty imposed by the ACA on those not purchasing insurance, 6.5 million Americans have preferred to pay their fine (up to the average cost of the cheapest permitted plan type) and bear all health-care costs out-of-pocket rather than seeking coverage. By comparison, only 1.7 million Americans purchased unsubsidized plans on the exchanges in 2016. A further 9.1 million purchased unsubsidized plans off the exchanges, in what has essentially become a separate risk pool.

The ACA’s plan to finance the care of those with pre-existing conditions through mandatory cross-subsidization (the premiums of the healthy paying for the care of those already sick) therefore appears to have failed. As 85 percent of individuals on the exchanges are entitled to subsidies, the brunt of rising premiums and cost-sharing is already borne by federal taxpayers ($38 billion in premium and $7 billion in cost-sharing subsidies), while many others remain unable to access health insurance priced proportionately to their health-care needs and 27 million remain uninsured.

As an alternative to this arrangement, most conservatives would prefer to repeal community rating and allow low-risk individuals to purchase appropriately priced health insurance, which would allow federal subsidies to be better targeted at the sickest patients and reduce premiums across the board. But, beyond this agreement at the level of economic theory, there is widespread disagreement about how else (if at all) to subsidize care for the chronically ill, and the extent to which a return to market pricing of health insurance is politically feasible.

An approach long recommended by economists has been high-risk pools. These existed in 35 states prior to the ACA, and made available subsidized insurance coverage with premiums often capped at 200 percent of market-average rates. But these pools often retained exclusions for pre-existing conditions and annual/lifetime limits on the value of care covered. As a result, their extent varied greatly; they covered 10.2 percent of the non-group market in Minnesota, for example, but only 0.1 percent in Alabama and 2.2 percent nationwide. While covering the uninsurable with community rating imposes an unfunded mandate whose cost and incidence are not immediately obvious, high-risk pools are not designed to be entirely self-financing through premiums and depend on direct appropriations to subsidize the system. Under this system, you get what you pay for, so the states that put in more funds were able to achieve broader coverage. This makes high-risk pools a fiscally conservative option, but they are often criticized for falling well short of guaranteeing that a defined benefit is affordable to all who need it — particularly in poorer states.

High-risk pools are the best way to direct subsidies at those who need them most.

An alternative approach has been to subsidize the care of high-cost individuals in an actuarially priced market through re-insurance. Although the ACA taxes plans enrolling disproportionately low-risk individuals in order to subsidize those attracting high-risk enrollees, this has failed to remedy a situation where all plans have attracted predominantly costly enrollees. In response to this challenge, a form of re-insurance was recently proposed as an amendment to the House GOP bill by Representatives Gary Palmer (R., Ala.) and Dave Schweikert (R., Ariz.), who proposed that the federal government cover the costs of all services at Medicare rates for beneficiaries who have consumed above $10,000 of services.

As with all insurance, the merit of re-insurance depends on the incentives it establishes. The Palmer-Schweikert amendment would have entirely eliminated the incentive for plans to constrain the cost of covering the most expensive beneficiaries. Policymakers have spent years struggling to encourage Medicare providers to be thrifty with diagnostic tests, or get them to administer the most cost-effective treatment options, such as Avastin (for which they are reimbursed $50 per dose) instead of the equally effective Lucentis (for which they get $2,000). The Palmer-Schweikert plan would bring many of the dysfunctions of Medicare into the individual market. Indeed, as Medicare pays 18 to 30 percent more than private insurers for the same lab tests, reimbursing insurers for diagnostic services at Medicare rates (allowing them to profit substantially from each additional test ordered) would almost be an invitation to abuse.

That said, a well-designed re-insurance provision could have some merit. If plans were subsidized according to conditions diagnosed (as Medicare Advantage plans are), they would be encouraged to provide the best treatment to the sickest beneficiaries, without having an open-ended incentive to inflate costs.

Both well-designed re-insurance and high-risk–pool systems represent superior alternatives to community rating. They can both ensure that the sickest Americans receive affordable health-insurance coverage, that insurers are incentivized to attract them with innovative, high-quality services, and that the market for the insurance of the bulk of society can be left competitive and loosely regulated.

The main difference between the two alternatives is that re-insurance leaves the chronically ill in the same kinds of plans and provider networks as healthier individuals, whereas high-risk pools segment them into a separate market. As the chronically ill have qualitatively different health-care needs than the healthy, it is likely more efficient for them to be enrolled in distinct plans. While high deductibles are appropriate for healthy individuals who need insurance only for catastrophic expenses, the chronically ill often have care needs exceeding $5,000 per month. It therefore makes sense for them to be enrolled in a plan that provides intensive preventive treatment and does not put out-of-pocket costs between them and medications necessary to prevent expensive hospitalizations.

High-risk pools also allow funds to be targeted and focused on the neediest cases (high-cost, low-income beneficiaries with pre-existing conditions), rather than sprawling to subsidize people with no need for assistance in purchasing more expensive insurance plans than they would otherwise seek. As regulatory mandates and subsidies generally induce each other, high-risk pools are better designed to keep the footprint of government intervention limited, and serve better to keep the rest of the marketplace free for competition.

So, how do we get from the current system to a system of appropriately funded high-risk pools?

The atrophy of the ACA’s exchanges has inadvertently done much of the work for us, as they have turned into something resembling a defined-benefit version of a high-risk pool. The exchanges guaranteed that individuals’ premiums and out-of-pocket health-care expenses will not exceed a certain proportion of their income, and a subsidy is provided only to purchase the second-cheapest available benchmark plan. Instead of encouraging insurers to inflate the expense of providing care to the uninsurable over time, this ensures that subsidies are reduced by the competitive efforts of plans to cut costs through efficient benefit design and provider payment.

However, exchange subsidies are currently provided to many healthy individuals who have no need for them. Rating regulations should therefore be repealed for plans outside of the exchange to allow individuals to purchase actuarially priced plans that cover no more than the health risks against which they wish to insure themselves. This would ensure that the exchanges fully shrink into a high-risk pool, and that the associated subsidies become limited to those who genuinely do need them. It would also free the millions of healthy individuals trapped in costly exchange plans (and millions more who have been unable to afford insurance altogether) to buy policies that closely meet their needs, and allow a stable pool of chronically ill beneficiaries to receive coverage from carriers who actually want their business.

Absent a practical plan to cover those with pre-existing conditions, no Obamacare replacement is likely to get off the ground. High-risk pools are the best way to direct subsidies at those who need them most, while freeing the marketplace from the unwieldy, dysfunctional, and anti-competitive system of cross-subsidies. If the GOP does not take the opportunity to offer a narrowly tailored solution to the current problem, the Democrats will be more than glad to take charge for another round of their own sweeping brand of health-care reform down the road.

Chris Pope — Chris Pope is a senior fellow at the Manhattan Institute.

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