Now that Congressman Tom Price has been selected by President-elect Donald Trump as his candidate for Secretary of Health and Human Services, it's time to attend to his plans to repeal and replace the Affordable Care Act. There are a lot of misconceptions about his replacement plan. I want to start by focusing on what the legislation Congressman Price proposed -- The Empowering Patients First Act of 2015 -- does with respect to pre-existing condition exclusions and medical underwriting. In short, it doesn't allow insurers to use them, except when it does.
The basic idea of Empowering Patients is to say that so long as you stay insured, insurers can't impose either pre-existing condition exclusions or raise your premiums because you have expensive medical conditions. There's no individual mandate -- the government isn't going to tax or penalize you if you don't have insurance. But under section 221 of Empowering Patients, if you haven't kept up your health insurance purchases for the requisite amount of time, an insurer is free to impose pre-existing condition exclusions for up to 18 months when you do want coverage. And it's also free to raise your premiums up to 50% for up to three years.
It thus simply isn't true to say that Empowering Patients is going to let insurers discriminate on the basis of health as they did in the "bad old days." So long as you've had what's referred to as continuous coverage (a/k/a "creditable coverage") -- health insurance for at least 18 months -- you are safe. And, by the way, for those who know health insurance history, this should all sound familiar. The idea of Empowering Patients is essentially what we've had for 20 years in employment-based health insurance: President Bill Clinton (with some help from Hillary) and a bipartisan consensus enacted it as part of the Health Insurance Portability and Accountability Act (HIPAA) back in 1996. It thus simply isn't true to say the Empowering Patients is necessarily going to lead to a death spiral. A lot of people are going to buy health insurance when they are healthy not so much because they need it right then and there, but to keep themselves from being subject to pre-existing condition exclusions and higher premiums when they really do need coverage. It may be better protection against a death spiral than an ACA-style individual mandate riddled with exemptions and that may well have been too small.
So, who could object? What could go wrong? Well, as always, we now need to get into the details. There are at least three problems that arise when one tries to use a continuous coverage requirement as a way of avoiding the adverse selection death spiral that threatens whenever you restrict insurers' ability to base the terms of their contract on the risks posed by their insureds.
Problem 1: What If the Individual Doesn't Have Insurance?
If a broad spectrum of people can easily purchase and retain health insurance that counts as creditable coverage, then Empowering Patients will end up barring medical underwriting for almost everyone. If health insurance is too expensive, however, or offers too poor coverage or if other impediments exist, then insurers will more frequently impose existing condition exclusions and higher premiums. A lot of people think this is unfair because, often (though hardly always) one's health isn't really one's fault. And it can be costly because sick people often impose costs on a lot of people and because we thus end up picking up the bill for a lot of the medical treatment anyway.
It's hard at this point to know whether health insurance will be too expensive but there is some reason for optimism. First, there will be tax credits that help people pay for policies: $1,200 a year for those age 18-35 up to $3,000 per year for those age 50 and older. Those tax credits will not be enough to buy the sort of full-benefits policies that the ACA required. But those sums might be enough to pay a good share of the cost of the types of health insurance that were sold before the ACA silver-plated the industry.
There's also reason for pessimism. What do we do with all the people who were priced out of Obamacare or were exempt from its individual mandate? As Empowering Patients is currently written, those people won't have 18 months of creditable coverage to start out with and will thus be subject to pre-existing condition exclusions and higher premiums. It's a little tough to tell people who were hurt by Obamacare's inadequacies that they start life under Empowering Patients with a disadvantage. There may need to be an amendment to the bill to permit what would literally be a once-in-a-lifetime deal in which everyone gets to buy insurance without pre-existing condition exclusions and pricing based on health status. And government may have to make a one time payment to the insurance industry to cover the special costs associated with this opportunity. Given the money saved from repealing Obamacare, however, there might be some funds with which to pursue this one-time deal.
One more point. Recognize that under Empowering Patients, the policies people purchase will often be far less complete that those available under the ACA. The policies might have annual limits, lifetime limits and not provide free preventive care. And, unfortunately for those who believe in federalism, it doesn't look as if states that insisted on fancier health insurance for their residents would remain free to set the bar higher. (Read section 301 of the bill if you want to understand why).
Problem 2: What Counts As Insurance?
Empowering Patients restores an earlier statute to say that essentially any health insurance plan will count as creditable coverage. It does so presumably because Empowering Patients doesn't contain any elaborate definitions about what counts as health insurance with adequate "actuarial value" or how much cost sharing an insurance policy can permit. Basically, as the bill is drafted today, it looks as a piece of paper that says "health insurance" counts if at least one state regulator lets the policy be sold as health insurance.
Although this feature of Empowering Patients may avoid the need for lengthy regulation of what counts as health insurance, it also creates the opportunity for insureds to game the system. And when insureds can successfully game the system, insurers get nervous. That's bad because, as with the ACA, Empowering Patients depends on voluntary insurer participation. Insureds could buy cruddy coverage when they are healthy and then, when they get sick, switch over to more comprehensive coverage. Such behavior would greatly raise the price of comprehensive coverage. Indeed, in the worst case, it might make it difficult to find comprehensive coverage. Indeed, in the worst case it might make Empowering Patients unsustainable.
Think insureds won't be clever enough to figure this out? Guess again. Certainly before the ACA was enacted, a market grew up in most states for what was called Short-Term Medical Insurance. This is in part because under President Clinton's HIPAA (and still today) an employment-based policy can't slap a pre-existing condition exclusion on you so long as you've had 12 months of creditable coverage. But, if 63 days went by (and, no, I've never really figured out where the 63 value came from) during which you didn't have coverage, all your prior coverage got flushed away. So, a market grew up for short term medical insurance. It often didn't cover all that much but it was often cheap and -- most importantly -- it preserved your rights to get coverage without pre-existing condition exclusions when you finally went back into the job market and got employment-based coverage.
So, if something like Empowering Patients gets passed and a broad spectrum of insurance coverage counts, and if state regulators don't uniformly respond with some respectable floors on the type of health insurance that can be sold, look for some insurers to market "placeholder policies." These placeholder policies won't be designed to do all that much to provide protection against medical expenses but will instead just preserve the right to get coverage later. Unfortunately, if these policies are used widely, they will make real health insurance coverage a lot more expensive.
Problem 3: When Do We Create Exceptions
On the one hand, we don't want people gaming the system and buying health insurance only when they get sick. Every rational person understands that such a system is sustainable, if at all, only by subsidies at least as large as the tens of billions being spent under Obamacare. On the other hand, there are sometimes good reasons that people haven't had insurance. They weren't trying to game the system, they were just in a difficult position. Adopted children are an excellent example. It's pretty tough to tell parents who have just undertaken the mitzvah of adoption that they have suddenly acquired a child with potentially expensive medical insurance expenses. And what about the person who is poor enough that it is incredibly challenging for them to buy useful health insurance but not so poor as to be entitled to whatever becomes of Medicaid? The tax credit offered under Empowering Patients may not be large enough to let them purchase insurance that is useful to them, i.e. that has cost sharing requirements that let them at least some time enjoy the benefits of the insurance. Do we really tell that person that they are now trapped in a system that would subject them to pre-existing condition exclusions if they ever wanted insurance? It's going to be a challenge to keep the system cheap enough not to wrack up further debt or require tax hikes but still have tax credits large enough to let even the poor afford decent health insurance.
The one good sign, though, is that Empowering Patients is willing to access a source of funding that some have considered off limits: tapping into the hundreds of billions in annual stealth subsidies current law provides employment based health insurance through a bogus (but long-standing) tax exclusion. Right now, if an employer pays an employee wages, the employer gets to deduct the amount from its tax liability and the recipient employee has to pay taxes on the amount. But if the employer pays an employee in health insurance benefits, the employer gets to reduct the amount from its tax liability and the recipient employee does not have to pay taxes on the amount. This is true even if the employer provides highly generous health insurance. Section 131 of the Empowering Patients has the courage to limit the amount of benefit an individual can derive from health insurance purchased by their employer to $8,000 per individual ($20,000 per family) before the remainder is recognized as taxable income. If money is needed for more generous tax credits to people buying individual policies, further reductions in these thresholds could yield the federal treasury a ready source of funding.
Conclusion
It's not fair to compare a theoretical Affordable Care Act to the Republican alternatives. The theoretical ACA with low stable premiums, doctors that were kept, and subsidies that did not stretch a federal treasury already in deep trouble does not exist. Nor is it fair to compare the real Affordable Care Act -- you know, the one that was insuring fewer people with fewer insurers and at greater cost per person than anticipated -- to idealized versions of untested alternatives. This time, we need to understand what's in the law before we pass it. This is my start on that enterprise. I hope to see many others join.
Notes
1. Here are some more details on how Empowering Patients First works. If the insured has a pre-existing condition that has manifested in the prior six months, the insurer can slap a pre-existing condition exclusion on the insured for 18-x months, where x is the number of months of "creditable coverage" the insured has. A lot of things count as "creditable coverage," including Medicaid, SCHIP, employment-based coverage, individual market coverage, and other forms of
2. This is my first foray into the Empowering Patients First Act. It's a long bill and I could be making mistakes. Plus, I am confident it will not be passed without a lot of amendments. And there are a lot of issues other than the ones I am addressing in this post. So, my opinions about the legislation might change. Still, given the extent of misconceptions about this and other ACA alternatives, I think it worthwhile to take a first stab.
