The Health-Care Double Bind

By Kevin D. Williamson

Wednesday, January 04, 2017

Republicans have begun the process of repealing the grievously misnamed and soon-to-be-unlamented Affordable Care Act through the process of budget reconciliation, a parliamentary maneuver the Democrats had threatened to use to pass the ACA over minority Republican opposition. (In the end, it was not needed, though significant changes to the law were made via subsequent reconciliation bills.) As with President Barack Obama’s pen-and-phone aggrandizement of presidential power and Senate Democrats’ weakening of the filibuster, Chuck Schumer’s party is going to regret a great deal of what Harry Reid’s party did.

It is not the case, as Democrats insist, that Republicans are simply repealing Obamacare without having given sufficient thought to what ought to replace it. Congressional Republicans finally seem to have learned that their prior strategy — simply insisting that a set of incoherent policies causing a great deal of stress and uncertainty constituted “the greatest health-care system in the world” and doing nothing more — was a mistake, a critical one.

But there is a problem.

There are two big, important pieces of the Affordable Care Act that will be of concern as Republicans go about replacing it. The first is the so-called individual mandate, which actually isn’t all that much of a mandate but which theoretically requires the great majority of American adults to purchase a federally defined minimum level of health insurance. The second is the rule requiring that insurance companies cover “preexisting conditions,” which mandates that U.S. insurance companies participate in the fantasy that we can insure against events that already have happened.

The preexisting-coverage rule defies economic reality (also space-time reality) and hence is the popular part of the law. The individual mandate is less popular, because people do not like being told what to do by the government, especially if it costs them money.

You can see the obvious problem here.

We have to have an individual mandate because we want a preexisting-coverage mandate. If insurers have to pick up the expenses for everyone who shows up at their door with lung cancer or HIV or severe diabetes, that has to be paid for. The only way to pay for it is a rule that requires everybody to have insurance; otherwise, economic self-interest ensures that most people have no reason to pay for insurance until they become sick, meaning that they pay no premiums until they have expenses that will far exceed them. An insurance market made up exclusively of sick people is financially unsustainable.

Together, the individual mandate and the preexisting-coverage rule make up the basic policy architecture of Obamacare. There isn’t a feasible way to have the popular preexisting-conditions coverage without the unpopular mandate. In fact, in order to make the system work, we would need to put some more teeth into that mandate: Because the penalties associated with it are very mild, many people, disproportionately young and healthy, prefer to pay the fine than pay a great deal more for insurance. Hence, the pool of newly insured people under Obamacare has been much sicker than insurance companies had expected, which has them squealing. And more than that: It has them pulling out of ACA exchanges and markets around the country, leaving consumers with fewer choices and much higher premiums than they had expected.

If you want to keep the preexisting-coverage rule — and Republicans say they do — then you are going to end up with Obamacare, or at least a version of it. It might be a slightly better or slightly worse version, but that is what you will have.

There are a few ideas for finessing that problem away, such as creating a series of “high-risk pools” or a single federal high-risk pool for sick people seeking health insurance. What this means is that the sick people without insurance who want it would go into a separate insurance pool full of other people likely to require lots of expensive medical care. Naturally, the premiums in this market would be much higher than in the regular market, meaning that state governments and the federal government would be expected to subsidize them heavily, lest sick people be entirely priced out of the market and we’re right back where we started. But this creates the same moral hazard as the familiar Obamacare system: Why not just wait until you are sick to buy insurance if government is picking up the economic penalty for being in the high-risk pool?

The way to cut this Gordian knot is to treat insurance like insurance.

Insurance is not a way to pre-pay for health care, though we insist on treating it as though it is. Properly understood, insurance is not a health-care product at all: It is a financial product, the purpose of which is to mitigate the risk of incurring large and unexpected costs, whether that is damage to an automobile (your car insurance does not pay for oil changes) or health-care costs. It is necessarily prospective, which is to say, forward-looking. No one can say whether you’ll have a heart attack tomorrow or get brain cancer in 20 years, though our actuaries are really very good at determining how many people out of a million will have a problem like that in any given year, and what it will cost to treat them. But we insist on trying to bend insurance into a retrospective product, as though it were possible to play the odds on something that already has happened. So long as we try to push off the obligation for paying for preexisting conditions onto financial firms — which is what insurance companies are — we are simply using those companies to launder health-care benefits that are in reality publicly financed, in part or in total.

It would make much more sense to do the opposite of what the pollsters would advise: Keep the unpopular mandate — strengthen it — and do away with the popular preexisting-conditions rule, replacing it with stronger regulation protecting people with insurance from losing their coverage once they become sick or grow old. For the people without coverage? Medicaid stinks, but in a reformed version it is the most obvious solution, a way to pay directly for health-care services rather than paying insurance companies to pay for services, as though putting a financial middleman in the equation were going to improve things.

Ultimately, health-care reform that treats insurance as insurance means that Americans will simply pay out-of-pocket for most of their medical needs, with insurance in most cases picking up the cost of catastrophic accidents and illnesses. Empowering consumers to do this means creating a real market with real prices, which simply does not exist now: Try getting three competing quotes on a 2017 Honda Civic and then do the same with an appendectomy and see which market has real prices. That will be a long and difficult reform project, one that will not be achieved through a single piece of legislation, or indeed through legislation alone.

Good health-care reform is not going to be popular, because paying bills is not popular. But so long as we are trying to pass the bill on to someone else, health care will remain a mess.