The Insurance Market Regulations in the Republicans’ Health Care Bill: Crippling Obamacare, or Passing a Hot Potato to State Governments?

By David Gamage

On Monday, the House Republicans finally revealed their draft bill to “repeal and replace” the Affordable Care Act (#Obamacare or #ACA). The bill is titled the American Health Care Act, and commentators have been referring to it as either the #AHCA or #Trumpcare.

To assess the bill, it is helpful to think of it as consisting of four primary buckets:

  1. ending many of Obamacare’s tax provisions (read: large tax cuts for the very wealthy);
  2. phased-in cuts to Medicaid funding and scheduled devolution of Medicaid to the states (read: eroding the health safety-net program for the poor);
  3. transforming Obamacare’s other major health subsidies from being based mostly on income and health costs to being based more on age (read: the implications of this are actually less straightforward than what much of the commentary suggests, but that is a topic for another day); and
  4. other changes to Obamacare’s insurance market regulations (the subject of today’s blog post).

In this blog post, I will focus on the fourth bucket—the changes to Obamacare’s insurance market reforms other than the changes to the subsidies. Time permitting, I hope to write future blog posts on some of the other buckets.

What is most striking about the AHCA’s insurance market changes is how they keep the vast majority of Obamacare’s reforms in place. Right-wing groups have thus taken to calling the AHCA “#ObamacareLite”. Yet I consider this a misnomer. A more accurate label would be #ObamacareCrippled.

The AHCA’s changes do not really water down Obamacare, as the intended slur of “ObamacareLite” implies. Rather, the AHCA’s changes would likely cause Obamacare‘s framework for regulating the individual market to fall apart. If the AHCA bill were to be enacted in its current form, the result would likely be adverse-selection death spirals. The only real hope for saving the individual market would be for state governments to step up with new state-level regulations for supporting insurance markets within each state.

The AHCA retains Obamacare’s bans against insurance plans denying coverage or charging more to people with preexisting health conditions. This means that the individual market for health insurance will not function based on an actuarial fairness model wherein people would be charged based on their expected future healthcare costs. Instead, the individual market will function based on a risk pooling model.

Any risk pooling model for health insurance needs mechanisms for coping with adverse selection. Absent such mechanisms, we should expect healthier Americans to opt for cheaper, more bare-bones health insurance plans, or to forgo purchasing health insurance all together. This would then leave more comprehensive health insurance plans covering sicker and more costly populations of insureds, which would then lead insurance companies to raise the prices on these plans or to restrict the benefits that are more attractive to sick insureds. The iteration of these dynamics generally leads to adverse-selection death spirals that can cause insurance markets to collapse into only bare-bones plans being offered or even no plans at all.

Obamacare dealt with these dynamics though the individual mandate, through actuarial value requirements and other restrictions banning bare-bones health plans, and through risk-adjustment systems that would charge health insurance plans that ended up with less costly pools of insureds while compensating plans that ended up with more costly pools of insureds. Many argue that these measures of Obamacare were not sufficiently robust and that adverse selection death spirals are currently beginning to develop in at least some states. To the extent that is correct, the only possible solutions are either (a) some combination of toughening the penalties for going without insurance coverage and the restrictions on bare-bones insurance plan offerings and/or implementing stronger risk-adjustment or subsidization mechanisms to bolster more comprehensive insurance offerings, or (b) moving away from the risk-pooling model and toward either an actuarial fairness model or a single-payer model.

Yet the AHCA does none of these. As noted previously, the AHCA continues to rely on the risk-pooling model by preventing insurance plans from charging more or denying coverage to insureds with preexisting conditions. Then, instead of strengthening Obamacare’s provisions for limiting adverse selection, the AHCA dramatically weakens these provisions. Most notably, the AHCA replaces Obamacare’s individual mandate with a (laughably non-harsh) continuous coverage requirement while also repealing Obamacare’s actuarial value requirements.

In other words, the AHCA will allow healthy people to purchase cheap, bare-bones insurance plans or to forgo purchasing insurance all together. Then, when these people become sick and need greater coverage, they are allowed to switch to a more comprehensive health insurance plan, paying no penalty if they are switching from a bare-bones plan or paying just 30% more for a year if they are switching from no coverage.

This is simply not enough incentive for healthier people to purchase more comprehensive insurance plans from the individual market. If enacted, the AHCA would thus result in more comprehensive insurance plans being swamped with high-cost insureds with expensive health conditions, which would then create overwhelming pressure for insurance providers to either restrict the features of these plans that appeal to high-cost insureds or else to withdraw from the market all together.

Put another way, what insurance provider would want to create a plan that offers great cancer coverage, if the result would be to attract extremely high cost cancer patients without being able to either charge higher premiums for them or to otherwise be reimbursed for their greater cost?

This is why I label the AHCA as “Obamacare Crippled.” The AHCA mostly retains Obamacare’s framework for regulating the individual insurance market, but it cripples the key mechanisms required for that framework to function.

Were the AHCA to be enacted in its current form, the best hope for saving individual insurance markets would be for state governments to step up and pass state-level regulations to make up for the AHCA’s weaknesses. Nothing currently prevents state governments from implementing their own individual mandates; or, even better, state governments could directly subsidize exchange plans to make the individual mandate unnecessary, along with implementing better, state-level risk adjustment mechanisms.

So, rather than calling the AHCA “Obamacare crippled,” should we instead say that the AHCA passes to the states the hot potato of either implementing unpopular individual mandates or alternatives or else funding greater subsidization of more comprehensive individual insurance plans? This begs the question of whether state governments are up to the difficult political task of implementing the necessary reforms. I expect that at least some state governments would probably fail, resulting in the destruction of the individual insurance markets within those states.

The AHCA is a draft bill. Its framework could be improved so as to be made workable. Joseph Antos and James Capretta explain one approach for how this could be done. Their proposed approach would involve, among other measures, greatly harshening the continuous coverage requirement. They write:

“The AHCA penalty imposed on persons who experience a break in their insurance enrollment of more than two months in the prior year would be a 30 percent premium surcharge payable for 12 months. For a plan costing $6,000 a year, that amounts to a surcharge of $150 a month. Healthy consumers are likely to take their chances, saving that $6,000 in the hope that they would not incur significant medical expenses during the year. With the repeal of the individual mandate, and the retention of the ACA’s insurance rules, the overall effect would be significant market turbulence, starting immediately in 2017.

To avoid a complete collapse of the market, the AHCA should provide a strong and clear penalty for persons who exit the market, covering multiple years. One approach would be to extend the current surcharge over several years. Another possibility would be to impose a waiting period before benefits would be paid.”

More generally, the Obamacare legislation is itself deeply imperfect. There is great need for further reforms to either fulfill the promise of Obamacare’s framework or else to switch to an alternative framework. I hope to write more on what I view as the best directions for future reform. Among other issues, as I have explained in my prior academic work, it is crucial to alleviate the disconnect between the subsidies that have long been offered for employer provided insurance and those made available for individual insurance—either under Obamacare, the AHCA, or whatever might come next.

Ultimately, I agree that further healthcare reforms are needed. But the current draft of the AHCA bill would be a disaster. We should either repair and improve Obamacare or else seek a grand bargain for a better replacement. The politics of healthcare reform are undeniably difficult. Nevertheless, #ObamacareCrippled is no way forward.

[This post was cross-posted over on Whatever Source Derived.]


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