President Obama and his fellow Democrats sold many Americans on the Affordable Care Act largely by emphasizing two arguments: The law would help reduce overall health care costs, and it would provide health insurance to those who, for financial or health reasons, cannot get it now.
Unfortunately, both of these arguments are flawed. The law creates market distortions that will significantly raise premiums and costs for many Americans – including some middle-income families. And there are less costly and less intrusive ways to address the problem of the uninsured.
Two recent independent and nonpartisan studies help explain how the law fails in its mission.
The first is from the Society of Actuaries, a group representing professionals who measure and manage financial risk. The main conclusion is that individuals and families who purchase their health insurance in the non-group (basically the non-employer-based) market will have to pay higher premiums. This is because the law will increase by 32 percent the costs that insurers must cover for health care services, the largest driver of health-insurance premiums.
The second study, commissioned by Covered California, the California entity responsible for setting up the state’s health-insurance exchange, speaks directly to premium rates. Isolating the impact that market changes caused by the new federal law will have, the study concludes that premiums for Californians will rise by an average of 14 percent. Increases will be most pronounced for those families who currently have health insurance and are making more than $94,000 or so – for them, premiums may rise by an average of 30 percent.
What’s the primary reason for these cost increases? In short, it’s the law’s market distortions. Both studies conclude that because the law requires insurers to provide coverage to all comers – regardless of their pre-existing health status – the overall pool of those with health insurance will be sicker and more costly to insure.
Public policy sometimes creates market distortions – as with the minimum wage, for example, or some agricultural subsidies – and in those cases Americans may believe that the economic costs are outweighed by the societal benefit. But we should make these judgments with our eyes wide open.
In the case of health care reform, there are less expensive and intrusive ways to help cover the uninsured. We can accomplish many of the Affordable Care Act’s stated goals while still addressing the shortcomings of our health care system.
Arguably the most significant problem that the law tries to solve with its massive regulatory edifice is that of the patient with a pre-existing medical condition who is either denied coverage altogether or charged a prohibitively high premium. These are people who generally face hurdles in the transition from employer-based coverage to individually purchased insurance, or who are changing plans in the individual market. It’s a problem that affects as many as 4 million Americans, and it’s one that policymakers ought to solve.
The law addresses these concerns primarily through two regulations: as noted earlier, a requirement that insurers provide coverage to anyone who applies, and a prohibition on any variance in premium due to health status. Unfortunately, these rules create the very market distortions that raise consumer costs.
There is another way to solve this problem. State-based high-risk health-insurance pools can be an effective way of getting those with pre-existing conditions (and therefore high health care costs) access to affordable health insurance.
High-risk pools generally offer a choice of insurance plans, and enrollment in them is limited to those unable to get or afford other coverage. Premiums are capped, and the additional cost of coverage is paid through a variety of sources, such as assessments on insurers or tax revenue. Because high-risk pools are isolated from the broader health-insurance marketplace, they don’t increase premiums for those outside the pool.
The challenge with high-risk pools is that they must be properly funded and designed. As the fiscal condition of states has worsened over the past few years, funding for high-risk pools has become even more limited. Three years ago, two conservative scholars estimated that a “comprehensive set of high-risk pool programs” would cost $15 billion to $20 billion per year. That is a small fraction of the new spending the Affordable Care Act creates.
The federal government should ensure that state-based high-risk pools are properly funded, perhaps in the form of block grants to states that should be regularly reviewed to ensure adequacy. And states should have rules to prevent both insurers and individuals from improperly taking advantage of the high-risk pools.
Solutions such as these are far preferable to the Affordable Care Act’s one-size-fits-all approach. Rather than distort the health-insurance marketplace in a way that will increase costs for many Americans, we should focus on reforms that use market forces to reduce costs. Americans should know that there are better ways to bring about health care reform.