Health care (Part 3): Why not an individual mandate?

I get it. You don’t like the government telling you what to do. But before you reply by saying that President Obama is a socialist who hates America and wants to take away your freedom, take a second to understand the political history and economic rationale behind it. This isn’t a new idea! Republicans pushed for an individual mandate in the early ‘90s as a way to address the free-rider problem; the Heritage Foundation (a conservative thinktank) endorsed it; George H.W. Bush developed a similar plan and discarded it because Democrats in Congress wouldn’t even consider many of the proposals; it was proposed as an alternative to President Clinton’s health reform plan! How did everyone pull a 180º?! This proves that health care reform is something that should be viewed without regard for party (as it has been favored by individuals on both sides of the aisle at one point or another), and with full consideration of whether it is good policy, especially now that the constitutional question of the individual mandate was affirmatively settled in 2012.

Many of you probably did not have a chance to really look at the timeline of provisions, so here are some major rules now imposed (or effective within the next year or two) on insurance companies by the ACA:

  • No annual or lifetime spending caps on essential health benefits
  • Companies cannot drop coverage when you are sick
  • No price gouging (raising premiums for profit)
  • All new plans must provide preventative care (screenings, vaccinations, etc.) free of charge
  • Discrimination based on pre-existing conditions or gender is prohibited
  • Children may stay on their parents’ plans until they are 26
  • If insurance companies don’t spend up to 80% of revenues on health benefits, they must return it as a rebate to customers

I believe these restrictions are great for customers. It ensures fairer coverage in an industry where people often get surprises from their providers about what is suddenly not covered. At the same time, and some may disagree, I find it unreasonable to impose such burdensome regulations on companies without something to offset the higher costs. In that case, the higher costs would just be passed down to customers through significantly higher premiums. Policymakers in Washington took note of this, undoubtedly through lobbying by the insurance companies. This, my friends, is where the individual mandate comes in, and this is the grand compromise I was referring to.

The market for health insurance, or for any type of insurance, is afflicted with the problem of asymmetrical information. Consumers know more about their own health than insurance companies do. However, those who are healthy are more likely to choose to go uninsured, and those who are sick are more likely to seek coverage. This is called adverse selection. Adverse selection is a type of market failure. This poses a problem for insurance companies, who set their premiums based on their expected costs, which are derived from estimations of the healthiness of those whom they insure.

Consider a simplified, general example. Say that the entire population is insured by one company. The company sets one premium rate for the entire population, which is based on the average health of the population. The population includes some very sick people, some very healthy people, and some in the middle. Because the premium is an average rate, those who are very sick benefit, while those who are very healthy lose. As a result, those who are very healthy drop out of the plan, and all that remain are the very sick people and the middle people.

The insurance company, knowing that all the very healthy people have left the plan, raises its average premium rate to cover its expected costs (which are now higher because the population on average is less healthy than before). Now, the very sick people are still benefiting, but the middle people are losing out. So the middle people drop out, and all that are left are the very sick, who end up being charged a premium that is “actuarially fair”, and the very healthy and middle people are uninsured.

This example demonstrates several key concepts. The first is risk-pooling, which any student of basic microeconomics has surely encountered. People buy insurance because of the possibility that some bad event might happen to them. In the case of health, some people have a higher chance of a bad event than others (for instance, a heart attack) due to genetics, environment, occupation, age, habits, etc. The larger the population of those that are insured, the more people that these risks (and thus the costs) are spread over. The costs of treatment for the very sick, therefore, are subsidized by the very healthy. By having the very healthy included in the population, the premiums are lower than if they were not included, because the insurance companies have lower average costs.                                

It seems only fair that we ask insurance companies to provide fairer coverage through these regulations in exchange for spreading the additional costs over a greater and more diverse population of beneficiaries. My next post will cover the other side of the individual mandate that addresses another major goal of the ACA: controlling health care costs.

- Anthony

Health care reform (Part 1): What really is the Affordable Care Act (aka ObamaCare)?

Despite being signed into law over three years ago, the Patient Protection and Affordable Care Act combined with the Health Care and Education Reconciliation Act, more disaffectionately known as Obamacare, have not ceased to be part of a national debate – and a sticking point for Republicans. Republicans have vowed to repeal the Affordable Care Act since it was passed, and they took the administration’s delay of the employer penalties until 2015 as a sign of defeat. It has been particularly salient in the news recently as Republicans have threatened to continue the government shutdown in order to remove funding for the Affordable Care Act from the budget for the upcoming fiscal year.

So what is this debate really about, and why is there so much antipathy towards the Affordable Care Act (and why do people seem to like the Affordable Care Act more than Obamacare, even though they are the same thing)? I hope to spend a little bit of time looking at the law, projected costs and savings, and public opinion over the next few blog posts. (Throughout these posts, I will refer to Obamacare by the abbreviated title of one of the two main pieces of legislation – the Affordable Care Act)

First of all, it is clear that there is widespread uncertainty of exactly what is included in the 906-page law and the rationale behind it. The nickname “Obamacare” alone has biased many consumers against the program even though they are likely benefiting from it.

 

To me, it seems that opinion on the Affordable Care Act is in part fueled by a vast misunderstanding of both the intent and the expected consequences of it, and in part by misleading portrayal of the law in the media. The law is actually not as complicated as it may seem, if one boils it down to a few basic principles. President Obama wanted to accomplish two primary goals in health care reform, which are included in this law:

1)      Making insurance coverage fairer and more affordable

  • Insurance companies cannot deny coverage or charge higher premiums based on pre-existing conditions.
  • Young people can stay on their parents’ plans until they are 26.
  • Tax subsidies, restrictions on premium increases, closing the “donut hole,” prohibiting lifetime and annual spending caps, and many other provisions

2)      Everybody in the United States must have some form of health insurance, whether on the private market, through an employer, or through a public exchange.

The second point, expectedly, has been the most contentious. But I would be astounded if anybody said to me that they oppose either of those first two bullets in (1). In my many conversations with people over health care, some claim they staunchly oppose the Affordable Care Act and yet are still taking advantage of the provision which allows their children to stay on their parents’ health insurance until they are 26. Hell, I’m one of the people taking advantage of it, and gratefully so. But let’s put down our partisan blinders and really ask whether the Affordable Care Act is really so bad.

What I hope to accomplish in this series of posts is to explain why the law is more reasonable than people think. The Affordable Care Act is actually one giant compromise. The first group of provisions here (1) impose a significant burden on insurance companies in order to improve health care coverage, and the second provision (the individual mandate) is meant to offset the cost to insurance companies of allowing young people to stay on family plans and guaranteeing fair coverage even if one has a pre-existing condition.

In my next few posts, I will go more into detail on specific provisions in the law and the individual mandate, but for now it suffices to say that since the passage of the Affordable Care Act, many people with pre-existing conditions are now guaranteed affordable health insurance, and many young people can forgo insurance premiums by staying on their parents’ plans.

This is only the tip of the iceberg on a discussion on the Affordable Care Act, so stay tuned for my next post. (I also welcome any corrections!)

- Anthony