My Apothecary colleague Avik Roy claims that “Donald Trump Is Right: You Can Repeal Obamacare And Still Cover Everyone With Pre-Existing Conditions.”
He’s absolutely right – and here’s how to do it.
The main problem – and indeed, this is what one of the primary causes of skyrocketing premiums and ACA Exchanges collapses – is that sicker patients pay the same premiums as everybody else, but cost more for insurers to cover. This makes ACA coverage a great deal for people with expensive pre-existing conditions, but a lousy deal for healthy people, who can pay the penalty (or use one of the many loopholes), pocket the savings, and enroll when (if) they ever get sick. The result is higher average costs to cover those who sign up, and therefore higher premiums, and therefore fewer people signing up. (It’s called an “adverse selection death spiral.”)
The ACA provides subsidies – but only based on income, not on health status. It seems that authors of the ACA believed that the only reason someone might be uninsured is that their income was too low compared to the insurance premium. But there’s another reason someone might be uninsured – maybe the premium was too high compared to the expected need for insurance (i.e., the person might have a long history of excellent health), making gold-plated comprehensive coverage look like a waste of money. Or, perhaps the premiums were too high because someone had a middle-class or higher income, but pre-existing conditions made the insurance unafforable even at a high income.
The ACA subsidizes coverage for people in lower-income brackets, mandates identical premiums regardless of health staus, and assumes that the rest will take care of itself. Clearly, that isn’t happening.
Here’s the solution: restructrure the subsidies so that they apply to health status, not (just) income. In other words, pay a subsidy to an insurance company when they enroll a person with pre-existing conditions (or equivalently, an above-average percentage of such people), to offset the additional cost, and keep premiums low for everyone else.
This is called risk-adjustment, and it’s been used quite successfully in the Medicare Advantage program. Here’s how it works: The diagnosis codes in each patient’s health history, along with other factors such as age, are used to calculate a “risk score,” reflecting how much, on average, their care will cost compared to an “average” patient. Risk scores are calibrated so that an average patient has a risk score of 1.0, with higher scores indicating higher-cost (less healthy) patients, and lower scores indicating lower-cost (more healthy) patients.
Insurance companies will then be able to set premiums based on the average patient in the population, not the average patient in the sicker-than-average adverse-selection-biased risk pool. Instead of receiving a subsidy based on how many poor people sign up – a figure that doesn’t signifantly affect their costs – they’ll receive a subsidy based on how high their average customer’s risk score is.
The subsidies can be keyed to a “standard” health plan, so that patients who select a higher-benefit plan will still pay the difference, and those willing to accept a lower-benefit plan will still pay less. However, a plan that ends up attracting mainly healthy patients won’t get much (if any) subsidies, and a plan that ends up attracting mainly sick patients won’t automatically be forced out of the market by heavy losses.
One can expect that under this approach, premiums and deductibles will be substantially reduced. That will attract more health people into the market, making the required subsidies payment less than one would think looking at today’s enrollment pool. If additional subsidies are needed for the poorest individuals, that can be added without distruption the risk-adjustment subsidies.
More to the point, an individual mandate and the associated penalty would not be required. If an additional incentive is desired, the risk-adjustment subsidy could be made only for those who enroll in the first year of the program, and/or maintain continuous coverage.
Some will argue that healthy people shouldn’t be taxed to subsidize coverage for sick people. Others would argue that this is precisely the sort of situation in which redistribution is appropriate, since people generally don’t get sick on purpose. Either way, this is in some sense beside the point, since both sides in Washington seem to be in agreement that pre-existing conditions should not be a bar to coverage. The House Republicans made that clear in the GOP health plan released last June, and President-elect Trump said the same during his campaign. This is merely a way to accomplish that goal without markets collapsing and without coercive devices like the individual mandate.
