Republicans' Efforts to 'Fix' Obamacare Would Break the Health Insurance Market — and Not In the Way They Might Intend

Conservatives expect a red-state paradise of unregulated health insurance, but they would actually recreate the dysfunctional blue-state insurance markets that prevailed before the ACA.

Dear readers,

At last week’s debate, President Trump announced that he has “concepts of a plan” for health care reform. And in an interview this week, JD Vance gave NBC some detail about what those concepts might entail. He told NBC’s Kristen Welker:

We want to make sure everybody is covered, but the best way to do that is to actually promote more choice in our health-care system and not have a one-size-fits-all approach that puts a lot of the same people into the same insurance pools, into the same risk pools, that actually makes it harder for people to make the right choices for their families.

To create those separate risk pools, you have to allow insurers to discriminate based on health status — that is, charge less to the healthy and more (much more) to the sick. Jonathan Chait’s thumbnail summary for New York magazine is correct: the “concept of a plan” Vance is fleshing out is a plan to bring back the option for insurers to charge you based on your gender or your health status or whether you have a pre-existing condition; said another way, Republicans’ plan is to repeal some of the most popular regulations imposed by the Affordable Care Act. Voters hate this idea if you explain it to them in plain language, which is why Republicans like Vance are more oblique when they talk about it.

That said, I think it’s important to be realistic about which campaign proposals might actually become law if a candidate wins. For example, I’ve pointed out that the more destructive possible versions of Kamala Harris’s vague anti-“price gouging” plan are legislative nonstarters, and therefore people shouldn’t worry about them so much. I think it’s similarly worth noting that a Trump-Vance administration wouldn’t succeed at repealing community rating or lifting the ban on pre-existing condition exclusions, because Senate rules make doing so impossible as a practical matter.

This was a major theme of the Obamacare repeal efforts in 2017: Republicans wanted to do “repeal” through the budget reconciliation process, which requires only a simple majority vote in the Senate, but reconciliation can only be used to make fiscal policy — changing laws about how taxes are levied and government funds are spent. Repealing the Medicaid expansion and the ACA’s insurance subsidy regime through reconciliation is possible, if you can muster 50 votes in the Senate. Repealing the ACA’s insurance regulations is impossible — which is why the “skinny repeal” bill that John McCain ultimately killed wasn’t going to touch the provisions on community rating and pre-existing conditions.

This doesn’t mean our health insurance market is safe if Republicans win — far from it. But it does mean that if they screw with the market, they won’t get to do so in exactly the way they think they’re going to. They’ll make a mess, but it’s a different kind of mess than they’re expecting — that is, they’ll re-create the mess that prevailed in blue states like Washington and New York prior to the Affordable Care Act.

Here’s how it worked in the before time

Prior to the Affordable Care Act, the only really good way for most non-elderly Americans to get health insurance was through employer-provided coverage. Federal tax law strongly encourages employers to provide health insurance as a benefit, and it sets rules restricting how they may discriminate among employees in how they offer it. These policies make a company’s employee base, along with those employees’ spouses and children, into an effective risk pool — some of the people in the pool are sick, but most are healthy, and as a result premiums are reasonably stable and affordable for the employer to offer.¹

Dall-E image generation for “a swimming pool that entails a high level of risk”

If you didn’t have coverage through your employer or a family member’s employer, you might have tried to buy an individual insurance policy through the public market. Unfortunately, virtually² every state’s market was highly dysfunctional before the ACA. But they weren’t all dysfunctional in the same way. In some states, insurers had broad latitude to price coverage based on expected claims and to restrict exactly what their plans covered. This meant young and healthy people could get affordable coverage, but older people often had to pay implausibly high premiums and people with pre-existing conditions often couldn’t get coverage, or could only get coverage that excluded the conditions that were the primary reason they needed the coverage.

Because this struck people as very unfair, other states imposed regulations requiring insurers to cover pre-existing conditions and to charge the same premiums to people even if they had different levels of risk. These regulations made individual health insurance a lot more expensive for young and healthy people, many of whom dropped their insurance coverage. As such, insurers raised premiums even more in order to cover the cost of their increasingly sick customer pools, which drove even more customers out of the market and required even higher premiums. This is what’s known as a “death spiral,” and a version of it ensued in Washington State and New York State and, initially, in Massachusetts, when they imposed these kinds of regulations on their health insurance markets in the 1990s.

Republicans are right about something in this debate: if you impose guaranteed issue (requiring insurers to sell plans to all comers) and community rating (prohibiting insurers from varying price based on expected claims) and you don’t do anything else, then the individual insurance market will enter a death spiral and more people will end up uninsured. Yet Republicans have completely missed the fact that this is exactly where they are heading on the ACA: if they use budget reconciliation to repeal the law’s insurance subsidies — which currently make insurance inexpensive enough to be attractive to healthy people in spite of community rating — they still won’t be able to repeal guaranteed issue or community rating. As a result, they won’t be recreating Texas’s health insurance market from before the ACA. They’ll be recreating New York’s.³

There is no alternative to the Massachusetts model

When Mitt Romney became governor of Massachusetts in 2003, the state was dealing with the unintended negative consequences of its guaranteed issue and community rating reforms, which had made individual health insurance less affordable and less available. Total enrollment in individual health insurance plans in the state had fallen from over 130,000 in 1996 to just over 50,000 in 2002. To make the market functional, Romney and the Democrat-controlled legislature developed a successful reform that later became the blueprint for the Affordable Care Act: to induce healthy people to buy insurance, Massachusetts offered large premium subsidies to low- and middle-income residents, and it imposed penalties on individuals who didn’t carry health insurance and on employers who didn’t offer it. This approach produced a functional individual insurance market and greatly reduced the uninsured rate — the fraction of non-elderly adults without health insurance in Massachusetts fell from 12.5% in 2002 to 5.5% in 2009, even as it rose from 16.6% to 18.4% nationally.

The Massachusetts plan reflected simple logic: in order for an individual health insurance market to function well, both healthy and sick people have to be able to afford insurance, and they have to actually choose to buy the insurance. The details of how you create affordability and desire can vary — after years of political drama over the issue, our national system does not have an individual mandate like Massachusetts did, but the markets still avoid death spiral in part because the premium subsidies have been made much more generous than they were in Massachusetts — but the core fact is that you must heavily subsidize the insurance so that the average premium paid by consumers is a lot less than the average total claims made by consumers.⁴ If you don’t do that, large numbers of people will be uninsured.

Now, there are some conservatives who think that would be the right outcome — that health insurance is like any other good or service in the economy, and that we shouldn’t encourage people to buy it if they’re not willing to pay its real cost, which is a lot higher for sick people than healthy people, much in the same way that homeowners insurance is just going to be more expensive if your house is on the beach than if it’s not.⁵ But that’s an unpopular position — most Americans have an instinct that it’s unfair to expect people to pay financially devastating sums or forego lifesaving care just because they are sick, which is part of why guaranteed issue and community rating are such popular policies on their own. And it’s also not an available policy — the choice before Republicans is whether to muddle through with the ACA approach, or to drop the subsidies but keep community rating and guaranteed issue, and therefore recreate the sclerotic insurance markets that states like New York and Massachusetts had in the 1990s, where even young and healthy people could not get affordable insurance.

So, maybe Republicans will choose to do that — it would, after all, significantly reduce federal spending. But if they do so, they’ll be returning to a model that was once associated with dysfunctional Democratic governance, and that neither Republicans nor Democrats ever thought was any good.

Very seriously,

Josh

1. One odd effect of this system is that the cost of health insurance is effectively hidden from the consumer: employees typically pay a modest fraction of their health insurance premiums and may not even know how much additional money their employer is paying to fund their care, a hidden expense that economists will tell you ultimately comes out of how much an employer would otherwise pay in wages. This has been one of the drivers of sticker shock around ACA plans: How the hell does an insurance plan cost so much when it’s only really going to pay out if I get very sick, which I probably won’t? The answer is that health insurance has always been expensive — health care is one-sixth of our economy and its cost is getting paid from somewhere — but most of us just have never seen the actual bills.

2. I’ll get to Massachusetts in a moment.

3. In fact, they’ll be creating something worse than what New York had, because pre-ACA New York at least made efforts to prop up its individual insurance market through subsidies to insurers that defrayed some of their costs associated with their sickest members. New York also offered another heavily subsidized individual insurance program aimed at people who were poor but not poor enough to qualify for Medicaid. Without those two programs — both of which entailed significant taxpayer expense — even fewer New Yorkers would have had individual health insurance.

4. I would note that government subsidy as a cornerstone of the American system of private health insurance goes back way before the ACA — the employer market only works because it is heavily subsidized through the exclusion of health benefits from both income and payroll tax.

5. The usual Republican talking point about how the sickest non-elderly people lacking group health coverage should be dealt with is that they should be placed in a “high-risk pool” — a separate insurance market that is subsidized by the government so insurers find it affordable to cover individuals who are likely to make a lot of claims. An effective high-risk pool could prevent a death spiral in the regular market for individual health insurance, because removing the sickest patients from the general risk pool would help hold premiums down for everyone else. That is: there is, in theory, a way to make Vance’s idea for separate risk pools workable. But many states had versions of high-risk pools before the Affordable Care Act. The problem was that these pools required a lot of subsidy to work effectively. As more sick people sought to enroll in the pools, state governments generally found the costs to be impossibly high, leading them to cap enrollment or unravel the plans, and leaving sick people unable to find coverage. Meanwhile, at the federal level, Republicans loved to talk about these as an alternative to Obamacare, but could not put their money where their mouth was. In 2013, then-Majority Leader Eric Cantor had to pull a Republican proposal for a $5 billion high risk pool “demonstration” off the House floor because Republicans weren’t willing to spend that much money on it. A fully-functioning national high-risk pool program would likely have cost about 100 times that much over a decade, and would cost even more today given how price levels have risen since. There is no way Republicans today will be appropriating hundreds of billions of dollars to make their vision of separate risk pools workable, given their desire to use any available fiscal space to cut taxes on high earners and corporations. Without a very large fiscal commitment behind them, high-risk pools are nothing more than a talking point.