SENATOR JOHNSON STILL WANTS TO REPEAL THE AFFORDABLE CARE ACT
In his effort to retake the Congress, Senator McConnell is urging Republicans to shut up about their policy preferences until "we take it back." Senator Johnson violated the secrecy of this stealth platform when he said recently that he would like to return to the days when Republicans actively tried to "repeal and replace Obamacare." Speaker Pelosi responded: "the GOP just can't quit their obsession with ripping healthcare away from Americans with pre-existing conditions." The White House issued a statement: "Senate Republicans have a plan to gut healthcare, raise premiums, and strip protections for pre-existing conditions."
Opponents of the ACA seem to have forgotten the extreme dissatisfaction voters expressed with the health insurance market that existed prior to the ACA when insurance companies could deny coverage based on "pre-existing" health problems. Now seems a good time to ask whether the basic economics of insurance markets can help us predict how the ACA and its free-market alternatives would work.
A Primer on Insurance
Insurance provides financial relief to those who suffer the consequences of low-probability, high-cost events — car crashes, health problems, natural disasters. Companies collect premiums so that the few who suffer insured-against events receive financial assistance from the many who avoid these problems. In a process called "experience rating," they place their insureds into pools based on perceived risk levels. High-risk people are assigned to a high-risk pool and charged a higher premium than lower-risk people who are placed in a lower-risk pool and charged a lower premium. For example, drivers with prior accidents or OWI arrests pay higher car insurance premiums than drivers who have clean records. Similarly, the sick person with a pre-existing condition would pay more -- and may even be denied coverage for that condition.
Experience rating will not result in universal healthcare because the premiums charged high-risk people (mainly those with pre-existing conditions, or currently ill, or older Americans) will be simply too high for many of them. Their only choice is to forego coverage and utilize emergency rooms when medical care is needed. While the road system is designed for the cautious driver, the healthcare system is designed to help sick people and to prevent healthy people from becoming sick. To insure sick people the same way we insure drunk drivers is unjust and perverse. This "free-market solution" would return the nation to the days when families would hold bake sales and car washes, sell their homes, and take on odd jobs to help sick members.
The regulatory alternative is "community rating," where premiums reflect a shared responsibility and are based upon the experience of a large “community” of people. Accordingly, those who are lower risk subsidize those who are higher risk: high-risk policyholders pay less than their expected cost as their costs are subsidized by low-risk policyholders who pay more than their expected cost; as a result, higher-risk people are not priced out of the market.
A Market Solution with Regulations
In the early 1990s, the Heritage Foundation, a pro-market think tank, recognized two critical facts about insurance markets: first, unregulated "free" markets are incapable of delivering universal health insurance coverage, and second, to approximate universal coverage while retaining the advantages of competition among private insurance companies, a series of new government regulations is necessary. Heritage proposed a regulated private insurance market in which insurers are required to offer policies that meet certain specifications. These specifications include: (1) a mandate requiring everyone to have proof of insurance; (2) a prohibition against the use of pre-existing conditions as a basis for rejection of coverage; (3) a ban on lifetime coverage limits; and (4) the creation of state insurance exchanges that provide consumers with information to assist them in their selection of a health insurance plan. The purpose of these exchanges is to protect those in need of health insurance against the natural tendency of unregulated insurance companies to charge experience-based premiums. To have access to the market through these exchanges, insurers must agree not to deny coverage for pre-existing conditions or to raise premiums to unreasonable levels when people get sick.
Further ACA Market Support
Under the Affordable Care Act, the federal government helps people pay their premiums, especially the poor and those with pre-existing conditions, using tax dollars levied on higher-income people. In exchange for mandating that insurance companies cannot deny coverage to any applicant, the government pays “premium support," a subsidy to make up the difference between the insurance premiums and the amount paid by the citizen. Further, the government helps those with pre-existing conditions by capping the net premiums they pay.
In addition, ACA pays “reinsurance” directly from the federal government to those insurance companies who wind up with a disproportionate share of the high-risk customers, as well as “risk corridors,” which are limits on potential losses. Premium support, premium caps, risk corridors, and reinsurance, all stabilize the regulated market in which all applicants must be issued policies. In combination, these measures are designed to increase the number of firms willing to compete in the exchanges.
The ACA is not the free-market solution Ron Johnson instinctively advocates. Nor should it be equated with either the single-payer (non-market government) solution or the British-style (tax-supported government health provider) solution. The ACA exchanges create a market of private insurance companies to which President Biden would add a "public option" as a choice on the ACA exchanges. This public option would resemble Medicare but would be available to people below age 65 as an alternative to private insurance.
If Senator Johnson has an alternative system that can solve the same problem that the popular ACA solves, the senator should propose it before proposing repeal of what is working. The fact that Congressional Republicans attempted 70 efforts to repeal the ACA without proposing a viable replacement indicates that the Heritage Foundation was right when it set forth its necessary conditions for a system that would work, the very conditions upon which the Affordable Care Act is built.
William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.