Saturday, June 28, 2014

Hey, red state governors: here's an ACA "repeal and replace" plan to protect the rate-shocked

Guaranteed issue -- the guarantee that one's health or medical history won't be factored into the cost of health insurance bought on the individual market -- is one of the most popular features of the ACA. Many Republicans vowing to "repeal and replace" the law promise to keep it. But maybe they shouldn't.

Guaranteed issue is also the primary driver of the rise in health insurance premiums triggered by the ACA (the base price, that is, offset for most consumers by government subsidies). Benefits consultant Milliman estimated in March 2013 that guaranteed issue would drive the cost of insurance in California up 26.5%.  More recently, with the data for the ACA's first open season in, a NBER study by a team of health economists led by the Wharton School's Mark Pauly identified it as the primary cause of cost increases averaging 14 to 28% in 24 states. 

The rise in insurance premiums for the unsubsidized, leading to "rate shock" for some who were already buyers in  the pre-ACA individual market and earned too much to qualify for subsidies, has been Republicans' most potent attack point against the ACA. Rhetorically, they like to pin the price hike on the "essential health benefits" (EHBs) that all policies must provide under the ACA -- e.g., childbirth and mental health coverage. But the price impact of EHBs is dwarfed by guaranteed issue. Some Republicans and conservatives acknowledge this indirectly by touting state-run high risk pools for those with preexisting conditions -- a proposal that implies the end of guaranteed issue.

State high risk pools have been around for some time, and were funded as a temporary measure by the ACA to cover those with pre-existing conditions until the state insurance marketplaces were launched in 2014.  They have generally been underfunded, often prohibitively expensive and/or available to only a fraction of those who needed them.

I have a question for health economists -- or, if you prefer, a modest proposal for red state governors who would like to "repeal and replace" the ACA on a state level -- as the law allows via innovation waivers that empower states to submit plans that would meet the law's goals by alternative means. If feasible, it might be attractive to self-styled champions of the free market -- and of constituents who liked their pre-ACA insurance and couldn't keep it, chiefly because they've been drafted to subsidize insurance for the less healthy.

It's this: what if a state allowed insurers to medically underwrite policies -- that is, vary price according to the buyer's health and medical history -- and the federal government picked up the price difference via subsidy? The underwriting might be within a narrow band, say a 2-to-1 ratio between premiums for the healthiest and sickest, analogous to the ACA's limiting "age banding" to 3-to-1. The higher cost for sicker patients should be offset by lower prices for the healthy. The "control" would be the ACA's "loss ratio" requirements, which stipulate that Qualified Health Plans must spend at least 80% of premium dollars on medical care for plan members.

Subsidies might also have to be extended to some people with preexisting conditions earning more than 400% of the Federal Poverty Level, the current cutoff, using or extending the ACA's formula for affordability. At present, subsidies for the highest earners who qualify for them are calculated to cap premiums at 9.5% of household income. For higher earners, a cap might be set at, say, 12%.

The "winners" would be healthy buyers on the individual market who don't qualify for subsidies: their premiums could potentially drop 20-30%.  The losers would potentially one -- if the "health-banding" and subsidy adjustments were calibrated right.

The chief impediment to doing this on a national level would be that re-introducing medical underwriting complicates the application process -- though the proposal could include measures to simplify the underwriting compared to pre-ACA practices (and the subsidy-eligible would have no incentive to underplay their ailments).  For red states, particularly small ones, the added difficulty in sign-up might be a feature, not a bug--fewer people would apply. 

I probably should have vetted this plan with experts before floating it, but what's a blog for? If it's feasible, I'll follow up. Health economists, please consider yourselves queried.

p.s. I don't really mean to suggest that restoring medical underwriting is a good idea -- just to challenge red-state governors to put one of their shibboleths  -- that a less-regulated market allowing cheaper products to be available to some unsubsidized buyers would be better because freer -- into practice. Who's stopping them? If even a dicey case could be made that such a change is economically viable, even a Democratic HHS Secretary would probably let a state try it.

1 comment:

  1. Virtually no state that had high risk pools before 2014 ever gave the pools enough funding to accept all applicants.

    My own state of MN was an exception; and I was in the high risk pool myself.

    One of the Republican repeal/replace proposals last year had high risk pool funding of $5 billion a year for the whole country. Pathetic.

    In theory there is nothing wrong with healthy people paying less for insurance, but also paying taxes to help those who are excluded from insurance markets. But in practice it is kind of trade adjustment assistance for the victims of NAFTA. Somehow the tax money never materializes.