Those who claim that the Senate Republican proposal to replace Obamacare will kick millions of people out from health insurance coverage are dead wrong. Yes, it will cause the number of insured people to decline, but that will happen because millions of healthy individuals will be incentivized to voluntarily opt-out of traditional health insurance. For those people, the law will make traditional insurance a sucker bet. Instead of buying comprehensive health insurance policies, as they are currently known, they will either go without insurance for as long as possible or purchase a new type of low-cost insurance that the new proposals will likely create if they become law.
Let’s be clear. No one really wants to buy health insurance. When you do, you are effectively making a bet with your insurance company that you will get sick while they are betting you don’t. If you do get sick, you get a potential payoff. If you don’t, the insurance company keeps your premium. The same is true with all insurance. No one wants to buy auto or fire insurance, but we do in case we get into a car accident or our house burns down. But if the laws were changed so that fire insurance claims could be made after the fact, then consumer behavior would change significantly. People would simply opt-out, and then put in claims when and if they have a fire. But the only reason insurance companies can afford to rebuild houses is because so many of their customers pay premiums but never file claims. So if fire insurance companies could not discriminate against people with pre-existing fire conditions, they would cease to exist as businesses.
The architects of Obamacare saw this problem in advance and attempted to solve it by imposing financial penalties on those who made the rational decision not to buy. The Law’s fatal flaw was that the penalties were not stiff enough to stop people from opting-out. (If they were that high the law would have likely been declared unconstitutional). When the healthy individuals left the system, many insurance companies experienced huge losses, forcing them to either exit markets completely or to raise premiums steeply on those who remained.
Amazingly, despite the many clear warning signs that too many people were dropping out, the original version of the Senate bill did even less than Obamacare to encourage healthy people to stay. That version allowed such individuals to forgo insurance when they didn’t need it, but guaranteed that they could buy, without penalty, when they did. This would have exacerbated the huge losses that insurance companies are already seeing under Obamacare and would have forced the government to step in and transfer those losses to taxpayers. But, on Monday, the Senate belatedly recognized what they should have realized from the start, and came up with what purports to be a solution to prevent people from gaming the system. But like the veiled attempt made by the House, the Senate version falls well short of the mark.
The House attempts to keep healthy people in the system by imposing a 30% surcharge on insurance for one year after a person with lapsed coverage (of 63 days or more) came back into the system. In fact, it was this provision that prompted Present Trump to call the plan “mean.” But the 30% one year bump is a small price to pay for those who may go years, or even decades, paying nothing at all.
Once the Senate realized that they needed some kind of penalty, they devised something that is even “meaner” by Trump’s standards. They now propose a 6-month waiting period on people with a 63 day lapse in coverage. This means those hoping to get a free ride will risk exposing themselves to six months of bills if they get injured or sick. On paper at least, that could be a steep incentive to keep coverage current. But, already, Democrats have jumped on the proposal as unfair.
But like every far-reaching regulatory proposal, this plan does not anticipate the changes in the market that it may itself create. It is likely that insurance companies will respond to this provision by offering “waiting period insurance” that will pay medical bills only between the time a real health insurance policy is purchased and the waiting period for that policy ends. To submit a claim under such a policy, the insured would only need to provide proof that he had already purchased an actual health insurance policy. Only then would the "waiting period policy" actually kick in to pay claims during the interim.
Since these waiting period policies would only provide coverage for a short time period, the risk to insurance companies would be relatively low. That means that the costs to consumers would be considerably lower than long-term plans. Some consumers could maintain such policies for years, and save lots of money in the process. To further reduce costs, buyers could opt for waiting period policies with higher deductibles, or that exclude coverage for things like pregnancy. The Senate bill makes the cost even lower by providing that premiums on traditional policies do not kick in until the waiting period ends, meaning consumers will never be on the hook for paying both waiting period and longer term health insurance premiums at the same time. To guard against people waiting until they are sick to buy waiting period policies, those selling those policies can also impose a 6-month waiting period of their own on people with pre-existing conditions. This will ensure that only healthy people buy these policies, keeping premiums as low as possible for buyers, while maintaining profitability for sellers.
People would not opt to buy real health insurance policies until after they were sick enough to need one. But such policies would no longer constitute insurance at all in the traditional sense, as buyers would know the outcome in advance of placing their bets. Since they would only place winning bets, the insurance companies would be guaranteed to lose money on every policy sold. This will create a vicious cycle of rising premiums, more dropouts, and ever-greater government bailouts until taxpayers were responsible for everything.
While many Republicans originally and correctly opposed Obamacare, their concerns seem to have evaporated in the face of political gamesmanship. In order to achieve some kind of victory they are now promising the impossible. Trump is the leading figure on this bandwagon. He doesn’t seem to care in the slightest what is actually in the law or what it will do to health care. He just wants something to pass so that he can take credit for the victory. But another layer of regulation surely won’t help.
Over the past half-century, U.S. health care costs have risen sharply because of a raft of government policies and tax incentives that have shifted routine health care payments from individuals to insurance companies. Believe it or not, before the 1960s a very large percentage of Americans paid for medical care out of pocket, according to a 1963 study by the Social Security Administration called Survey of the Aged. At that point, health care as a percentage of Gross Domestic Product hovered around five per cent.(1) Today that figure is more than three times that at around seventeen per cent.(1) Despite the huge increase in costs, health outcomes are not radically different from what you would have expected in light of the medical breakthroughs, technological improvements and the decline of smoking.
As it turns out, insurance is a very inefficient way to pay for many of the health care services we use, the vast majority of which are actually highly predictable. Our current insurance system incentivizes consumers to over utilize health care without any regard for its cost and removes any market based restraints on prices charged by hospitals, doctors, and pharmaceutical companies. As a result, health care costs have risen considerably faster than the rate of inflation.
The advocates of greater government involvement have always said that health care is too important to be left to the free markets. But you could make the same claims about food, clothing and shelter as well. The free market is perfectly capable of delivering those necessities at costs that fit all budgets. In fact, the relative costs of all three of those things have stayed the same, or come down, over the years. But health care, distorted by regulations, subsidies and tax incentives, has seen costs spiral out of control.
Republicans are now presented with a rare opportunity to make the radical departure that they promised when they did not control the White House. The best approach would be to seek to eliminate the entire insurance apparatus, reduce regulation, increase free market choice, legalize interstate and international competition, and clamp down on malpractice lawsuits. The money currently being over spent on health and malpractice insurance, excess paperwork and unnecessary defensive medicine, could then be used to fund the kind of charity hospitals that once served as the backbone of our health care system.
But since Republicans do not have the guts to stand up for the free market principles they pretend to stand for, they should not make the fatal political mistake of affixing their brand to a sinking ship. Better to let the S.S. Obamacare sink, and then come up with a free market system that will actually float.
1. SOURCE: Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Statistics Group; U.S. Department of Commerce, Bureau of Economic Analysis; and U.S. Bureau of the Census.
