Why you can't do just the health insurance reforms

Why you can't do just the health insurance reforms

Some in the House are floating the idea of splitting up either the House or Senate health bills into component parts and passing them individually. Some may see this as a way to get partial substantive wins. Others may hope the component bills die in the Senate so they can blame Republicans in November. This strategy does not work substantively.

There is a health insurance reform that could be done individually. The tax code and health insurance rules could be changed to make health insurance portable. If you change jobs but don’t move, you almost certainly keep your car insurance. We don’t even think of it as “taking your car insurance with you,” because your employer is not involved in this purchase. We could do the same for health insurance with some fairly minor changes to law, so that if you switch jobs (or just leave your current job) you could keep your health insurance. You or your new employer would have to pay the full premium, including the part that was previously subsidized by your employer. But conceptually this isn’t too difficult. This already exists to a limited extent with COBRA, which allows people to continue the insurance policy they had with their previous employer, as long as they pay the full premium.

Few are talking about portability, however. Most of the current insurance “reform” debate instead focuses on the guaranteed issue and community rating provisions of the House- and Senate-passed bills. I oppose these provisions, but they have broad-based bipartisan support. Yet those Republicans who claim to support these provisions do not support the other policies required to make these provisions effective. These Republicans have taken a politically savvy but substantively inconsistent (and, I believe, irresponsible) position that could come back to bite them.

There is a broad policy consensus that guaranteed issue and community rating cannot work by themselves. The Wall Street Journal editorializes about it today, and some left-of-center bloggers have been writing about this for a few weeks.

But since you read KeithHennessey.com, you learned about it nearly six months ago. It’s a little weird to reprise a former post, but here goes.

(posted August 4, 2009 as part of A health care fallback strategy, or merely a messaging shift?)

Four sides of a box

The President, his Cabinet and staff, and Congressional Democrats are fanning out across the country to talk about proposed legislative changes to health insurance rules. The most important for this discussion are:

  • Guaranteed issue and renewal: Everyone can buy health insurance, no matter what their medical condition. And everyone can renew their insurance, no matter what their medical condition.
  • Community rating: Everyone pays the same premium, no matter what their medical condition.

(Caveat: The pending legislation would mandate modified community rating. Premiums could vary, but only within certain limits.)

These provisions would mean lower premiums for people who are sick (e.g. with cancer) or have a high risk of getting sick (e.g., disease free, but with a family history of cancer, or a lifetime smoker). They would mean higher premiums for those who are healthy and have a relatively lower chance of getting sick. These are redistributive policies that benefit the sick or likely-to-be-sick at the expense of the likely-to-be-healthy.

To make them work you have to make the low-risk people buy health insurance.

Here’s an extreme example. The numbers are silly, but I’m trying to illustrate the concepts.

  • Imagine the world consists of two people, Bob and Charlie.
  • Bob is healthy. His expected health costs next year are $5,000.
  • Charlie has cancer. His expected health costs next year are $95,000.
  • Under current law, Charlie probably can’t buy health insurance. If he can, he has to pay about $95,000 for it, which may be more than he can afford.
  • If you implement guaranteed issue and (strict) community rating, then Charlie can buy health insurance, and Bob and Charlie each pay the same $50,000 premium.
  • Under this new policy Charlie is a big winner, Bob a big loser.
  • Bob may choose instead to go uninsured, rather than pay $45K more in premiums than his expected health costs. If he does, then Charlie’s back to paying $95K, since there’s no one to subsidize him.

For this system to work you have to require that Bob buy health insurance and pay the subsidy implicit in his community rated premium. You need an individual mandate to make guaranteed issue and community rating work, so you can force predictably healthy people to subsidize through higher premiums the predictably sick.

If you want the biggest health insurance reforms being pushed by the President and Speaker (guaranteed issue and renewal, and a version of community rating), then you also have to have an individual mandate.

But an individual mandate means everyone must have or buy health insurance. There will be low-income people not covered by Medicaid who won’t be able to afford health insurance. If you want them to buy, you’ll either have to subsidize them or force them to make some extremely difficult choices within their already tight budgets. Elected officials will choose the subsidy route.

You need to subsidize lots of low-income (and even low-to-moderate income) people if you implement an individual mandate.

Now the President has said that any increased spending must not increase the budget deficit. The subsidies necessitated by the mandate must therefore be offset with spending cuts or, in the Congressional Democrat view of the world, with tax increases.

You need to cut spending [or increase taxes, or both] if you want your subsidies not to increase the net budget deficit.

We have completed the four-sided box. Start by presuming that it’s too hard to enact a big bill. Assume that strategically you want to enact only the insurance reforms that you think are the most politically attractive component of the bill:

  1. You want to enact only the health insurance reforms.
  2. You need an individual mandate to make the health insurance reforms work.
  3. You need to subsidize lots of people if you implement an individual mandate.
  4. You need to cut spending or increase taxes if you want your subsidies not to increase the budget deficit.

You’re right back where you started. To enact the health insurance reforms, you need a complete bill that includes an individual mandate, subsidies, and politically painful offsets. You can drop the employer mandate, and you certainly don’t need an obscene $1+ trillion of subsidies. My point is simply that you can’t hive off the insurance mandates and make the policy work.

House Democrats who think they can jam the Senate by sending over popular incremental bills should talk to their policy experts. It’s possible to split off the subsidies, but you can’t make guaranteed issue and community rating work by themselves.

Congressional Republicans (especially in the Senate) may need to be ready to explain how they can say they support guaranteed issue and community rating if they simultaneously oppose the individual mandates, or the subsidies, or the spending cuts and tax increases needed to offset the subsidies.

15 responses

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  4. Keith / Readers – What are your thoughts on guarantee issue, but with (i) an open enrollment period (maybe birth month), and (ii) a standard 12/12 pre-existing condition provision offset by creditable coverage?

    • I think this would work a little better than no mandate. One could legislate an even more stringent rule (e.g., subscribers must pick their plan 60 days before the start of the new year, and commit to the year unless subscriber leaves the state, etc) and it would significantly decrease the number of folks who elect not to insure. Massachusetts has no such limitation (as I understand it) so folks can subscribe and unsubscribe whenever they get sick.

      I like the standard 12/12 pre-existing condition provision too. It would certainly stop those with pre-existing conditions from dropping insurance (since they would incur the exclusion again) but I don't think the problem has been to get those with conditions to subscribe. The intent is to get those without conditions to subscribe.

      I do think that allowing high deductible policies (versus the low-deductible comprehensive coverage in the federal bills) will generate more subscribers as well.

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  7. amcrae,
    If guaranteed issue would work, why haven't insurers tried that already? Seems like it would be an easy sell.

    My worry is those helpful Republicans, eager to prove that they can reform health care or health insurance (or both). They can't do it without the Dems, and to get the Dems, they have to match some of what the Dems wanted to do. Hmmm, which pieces do you suppose? Guaranteed issue and community rating, of course! The pieces that won't reform anything for the better. Oh, and they'll push for tort reform, too, because punishing lawyers is always easy to support, even if tort reform will have a minuscule effect on the cost of health care.

    I want Republicans to put forth bills that encourage the market to make the solutions. Flip the tax advantage from the employer to the individual. Make it possible for insurers to compete across state lines. Then let's rest for a few years and see what shakes out.

    Will they do it? Not by a long shot. They will be too eager to prove that they can reach across the aisle better than the Dems can. I don't want bipartisanship; I want them to do something that will make health care costs come down.

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  9. Well said. Your Bob and Charlie example is one of the clearest examples I've seen yet, and something that Congress glosses over when they continually note that a coverage mandate means "coverage for everybody," which can't possibly have any negative effects….

  10. Keith,

    Any change a deal between Pelosi and Reid has the House accept the Senate bill on the condition that the ill will be "corrected" by congress soon after Obama signs the agreed to bill into law?

    I'd think not but because of the blue dogs. I can't see the blue dogs with twisted arms voting for the Senate bill especially in the face of overt advertising to their constituents explaining this under the table deal.

  11. Your Bob and Charlie example is right on….but to carry it forward to the real world we have a dillema. The facts are that currently everyone that has insurance (private, employer paid or medicare) is now payng for Charlie in their premiums. When you make a single individual pay (Bob) it is dramatic indeed, but the fact is that you and I are paying for Charlie one way or another.

    Now, let's look at another problem. The employee gets his insurance premium paid by his/her employer and doesn't pay any income tax on the value while the private payer must pay out of his/her after tax income. Granted many/most employers no longer pay 100% of the premium but to the extent they do the tax payer gets a break others don't. (I'm aware of the IRS allowed medical expense rule.)

    For all of those individuals that cannot get medical insurance at all, or can get it only through high risk pools, the premiums are often beyond their ability to pay (Charlie.) Should these people be abandoned by society or, should they be lumped into a government plan that is paid for by a dedicated tax and if so, how do you control fraud?

  12. Currently hospitals and other health providers increase their charges for those that can pay by subsidies of those that cannot. Those that have no insurance but can pay are charged considerably more than the insurance companies are for the same service(s.) Some who are deemed able to pay but have no insurance are forced to sell their homes, cash in their retirement plans or all their savings to meet their obligations. Many who suffer this catastrophic situation end up on welfare and again impact you and I in our taxes.

    Obama's invitation to "let me know" of solutions should be taken seriously and not shrugged off as political pander.

    When discourse occurs at the political level it seems that ideology takes precedence over problem solution. I don't have the answers but clearly a growing problem exists. As the population grows and people live longer, inaction could lead to catastrophe.

  13. "Obama's invitation to "let me know" of solutions should be taken seriously and not shrugged off as political pander. "

    I dunno. The reverse is also true. Alternative solutions should be taken seriously and not shrugged off as different-from-Obama's-ideas-and-therefore-no-good.


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