Solving the health care cost crisis requires relying less on insurance and paying for more medical treatments ourselves. Because the fear of being uninsured drives many people crazy, we hasten to add that we’re not urging people to drop their insurance. Nor do we favor governmental policies that would take insurance away from people who currently have it or that would prevent people who want it from buying it. What we want are policies that would encourage people to use insurance to handle the problems that insurance is well suited for. Right now, health insurance mostly covers the wrong things. It also pays too much (and does so in almost the worst way imaginable) for most of what it covers.
A few seconds of theory show that “health insurance” in modern America isn’t really insurance at all. Consider a simplified model of how insurance works in the rest of the economy. In this model, “risks”—that is, the likelihood that losses will occur—come in only two types: low and high. Low risks are unlikely events like having your house struck by lightning. High risks are probable events like needing to buy gas after driving hundreds of miles. The costs that must be borne when risks turn into realities come in only two varieties too: low and high. Low cost is what you spend when you refill your gas tank. High cost is paying to rebuild your house after lightning sets it on fire.
Table 21-1. Risk and Cost in the Non-Health Care Economy
Cost | |||
Low | High | ||
Risk | Low | (1) Lost Spare Change |
(2) Fire/Flood |
High | (3) Oil Change |
(4) College |
With two risk levels and two cost levels, there are four different possible combinations, as shown in Table 21-1. The table also provides some concrete examples that show the kinds of incidents that each combination of risk and cost represents.
Cell 1 is low risk and low cost—think about the risk of losing some spare change. When that risk materializes, the amount of the loss is literally pocket change. No one buys (or sells) insurance against that risk because the losses are too small to be worth the bother.
Moving downward, Cell 3 is high risk but low cost. Think about the biannual maintenance on the furnace in your house or changing the oil in your car. And cars don’t just need regular oil changes. As a car accumulates mileage, it also needs brake jobs, new tires, air filters, water pumps, timing belts, and lots of other things. Suppose that all of these repairs and preventive maintenance average $500 a year. Because the risk of having this work done is 100 percent, an insurer would have to charge a premium of $500 per year to cover the costs, plus an additional amount to cover its administrative overhead and profit. This arrangement would not really be insurance at all—it is just a form of prepayment of anticipated expenses, with the insurer holding the money. It is also a bad deal for consumers, who could obtain the services they need more cheaply and on their own timetable by purchasing them directly, without the hassle of going through their insurer. The result is that in the non-health care economy, no one sells insurance (or buys it) for anything that belongs in Cell 3.
Moving to the right, Cell 4 is high risk and high cost—like paying for college for your children or making mortgage payments. Most people save for college or take out student loans (thereby borrowing against future income). Mortgage payments are made out of current income. Just like Cells 1 and 3, in the non-health care economy, no one sells insurance (or buys it) for any of the type of things that are in Cell 4—even though college and mortgages can be very expensive.
Finally, the last possibility is Cell 2, which represents low-risk but high-cost situations, like a catastrophic house fire. Houses don’t burn down that often, but when they do, few people can afford to replace them. This combination (low risk and high cost) makes it possible for insurers to protect people from the risk of an enormous financial loss in exchange for relatively modest premiums. A typical homeowners policy, which covers much more than fire-related damage, costs less than $1,000.1
As the examples in Table 21-1 imply, and as our discussion of each cell should make clear, in the non-health care economy, insurance is sold mainly to cover risks that belong in Cell 2, where there is a low (and often tiny) likelihood of a bad outcome, but with catastrophic consequences when the risk materializes. Conversely, when loss-causing events are highly likely (Cells 3 and 4), insurers can’t offer inexpensive protection, so there isn’t much (if any) demand for insurance. And, if the costs and risks are low enough (Cell 1), no one wants to buy or sell insurance against those situations either.
How does this framework apply to health care? Table 21-2 looks exactly like Table 21-1, but with different examples.
Table 21-2. Risk and Cost in Health-Related Expenditures
Cost | |||
Low | High | ||
Risk | Low | (1) Band-Aids |
(2) Major Trauma/Cancer |
High | (3) Childhood Vaccines |
(4) Post-Retirement Housing and Food |
Just as in Table 21-1, insurers don’t add value for the kinds of problems that land in Cells 1, 3, and 4. For Cell 1, the cost of Band-Aids is sufficiently trivial that no one would buy insurance against that eventuality. Similarly, for Cell 3, if you have children, the likelihood of needing to pay for vaccines is 100 percent—at least, if you care about keeping your kid from dying of measles or whooping cough. And for Cell 4, the likelihood of needing housing and food in one’s old age is quite high and the cost is large as well. These aren’t the kinds of situations that normally give rise to a robust demand for insurance. And, except for the minority of seniors who require some form of long-term care, there is no market for post-retirement housing insurance.
Finally, as Cell 2 indicates, health insurance is a good way of protecting people against remote risks, such as the risk of being severely injured in a car crash and needing expensive medical treatments. As in Table 21-1, insurance works well for the type of problems that fall into Cell 2 because insurers can protect people from catastrophic outcomes while charging relatively modest premiums. When the risk is low but the ultimate cost is extremely high, voluntary markets emerge where consumers can transfer that financial risk to an insurer willing to accept it.
To sum up, health care coverage works well for low-probability, high-cost events (Cell 2), but like other types of insurance it has little to offer for other probability/cost combinations. Stated differently, insurance is a good way of paying for health care when each member of a sizable population faces a small risk of suffering a large loss. But insurance is a bad way of dealing with losses that do not fit this description, including inexpensive medical treatments and treatments for chronic illnesses and other maladies that people are certain to need. The way to deal with these costs is simply to pay for them. The money can come directly out of consumers’ pockets or it can come from somewhere else, as it does when people who are too poor to pay for the needed services receive financial support—welfare or charity—from others. For everything other than low-probability, high-cost events, insurance doesn’t work.
The type of insurance that works is often called catastrophic coverage. It protects people from large losses by applying after they meet substantial out-of-pocket minimums or deductibles. Catastrophic coverage is cheap because insurers expect people to use it infrequently. The type of insurance that doesn’t work is called comprehensive coverage. It combines catastrophic coverage with a prepayment plan for medical expenses that fall into Cells 1, 3, and 4. This is the type of insurance that most people have and that Obamacare requires them to purchase.
Some policy provisions can make the difference between catastrophic coverage and comprehensive coverage hard to discern. For example, when selling coverage for catastrophic risks, an insurer may include coverage for certain inexpensive treatments—like vaccinations, hypertensive medications, or routine blood pressure monitoring—that are highly effective at preventing potentially serious maladies—like the flu, childhood diseases, heart attacks, or strokes. When items like these are covered, the package looks like it falls on the comprehensive side of the divide. But the reason for covering these treatments is that they make it less likely that subscribers will suffer illnesses that are expensive to treat and thereby keep the cost of catastrophic coverage down. Analytically, these provisions have the same function as discounts for nonsmokers or, in the case of automobile insurance, rebates to policyholders who avoid being involved in accidents for long periods. By encouraging behaviors that reduce the frequency of expensive claims, they generate savings in excess of their costs that insurers and policyholders can share.
Left-leaning policymakers and policy wonks like comprehensive coverage because it redistributes resources in favor of people they want to help. This practice is usually called “cross-subsidization,” but it would more accurately be described as welfare. How does cross-subsidization work?
Assume 10 people apply for health insurance. Eight are healthy. Two are sick. How much should each person pay? If the insurer is free to price the policies according to the expected cost that each applicant represents, the healthy people will pay less than the applicants who are sick. Lots of people don’t like that idea because it makes it much more difficult for the infirm to obtain health insurance. This concern helps explain why Medicare was created.
But, if you aren’t willing to create an entirely new program like Medicare, with the resulting on-budget expenses, what else can you do to fix this problem? The obvious solution is to force insurers to charge everyone the same premium. This is known as “community rating,” and it is what Obamacare requires. Obamacare prohibits insurers from charging sick people more, from denying coverage on the basis of pre-existing conditions, and from charging older people more than three times as much as people who are younger. (The actual cost ratio between senior citizens and those under 65 is more like 6 to 1.)2
Community rating erases price differences or reduces them, but it also causes healthy applicants to be overcharged. Instead of paying premiums that reflect only the costs they are expected to generate, people who are young or healthy also pick up part of the tab for folks who are old or sick. This is cross-subsidization because the former are subsidizing the latter. By mandating community rating, the politicians, academics, and policy wonks who support Obamacare are using the insurance system to transfer resources from low-risk to high-risk groups in an off-budget fashion. This was a conscious decision, as we discuss further below.
Insurance markets don’t tolerate cross-subsidization. Instead, competition forces premiums to reflect the costs that people are expected to generate. A carrier that wanted Person A to pay more so that Person B could pay less would quickly find that A went to a different company whose lower price reflected only A’s expected cost. That’s why young single males pay much more for auto insurance than middle-aged men who are married and have kids. An insurer who tried to make the latter pay more so that the former could save money would lose its middle-aged male customers in droves. That’s also why homeowners who live in regions that are prone to earthquakes, floods, or wildfires are charged more than those whose areas are safer. It would be a bad business strategy to use premiums to force the latter to subsidize the former, particularly if the market for insurance coverage is remotely competitive. And, the more competitive the market, the more likely that premiums will reflects costs (and risks).
People are rarely bothered by the fact that insurance markets tie premiums to risks. Few seem to think that regulators should intervene and force carriers to charge everyone the same thing. Why should safe drivers pay more so that careless drivers can pay less? Why overcharge people who live in areas devoid of trees pay to subsidize people with houses in fire zones? In the wake of the hurricanes that recently devastated parts of Texas and Florida, many people who live inland are wondering why their tax dollars are used to subsidize insurance for people who choose to live near the coasts. Shouldn’t the latters’ taxes be increased to reflect the risk they incur by purchasing homes that are more likely to be flooded? As a general matter, people seem content to let prices vary across persons according to actual risks, which happens naturally when markets set insurance prices.
But many people think about health insurance differently. They think it is unfair and morally indefensible for high-risk people to pay more than low-risk people for the same coverage. Unfortunately, these proponents of cross-subsidization rarely acknowledge that their objective is to coerce low-risk people into giving wealth to others. Instead, they deliberately obscure the reality that the policies they support are a bad deal for most people.
Chris Conover discussed the impact community rating would have on young people, whom Obamacare overcharges so that older people can pay less.3 Rates for people ages 18–24 had to increase by 45 percent above the actuarially fair price so that the rate for those ages 60–64 could be reduced by 13 percent. “Is this fair?” Conover wondered.
Ask the typical 20–24 year-old—whose median weekly earnings are $461—whether it’s fair to be asked to pay 50 percent higher premiums so that workers age 55–64—whose median weekly earnings are $887—can pay lower premiums. Think about that. The median earnings for older workers are $420 a week more than those of younger workers, or roughly $20,000 more a year. How is mandating a price break on health insurance for this far higher income group at the expense of the lower income group possibly fair?4
It isn’t fair. It’s immoral.
Jonathan Gruber, a health economist who helped design Obamacare, admitted that cross-subsidization is at the heart of the program. He also acknowledged that transparency about forced wealth transfers would have doomed the bill.
If you had a law which . . . made it explicit that healthy people pay in [and] sick people get money it would not have passed. . . .
Lack of transparency is a huge political advantage, and basically, call it the stupidity of the American voter or whatever, but basically that was really, really critical for getting the thing to pass.5
According to Gruber, if the American people had understood that Obamacare was really an off-the-books welfare program, Congress would not have passed it because even more Democrats would have voted against it.
Our view is simple. It is morally desirable to help poor people, people with chronic medical conditions, and others with the cost of health care. But it is a terrible idea to use the insurance system to accomplish this goal. Welfare programs are designed to redistribute wealth to those who have lost life’s lottery; insurance is a financial instrument designed to keep people from losing that lottery. The two differ greatly and should not be confused or combined.
But they are routinely conflated and commingled, even by people who know better. Consider how three prominent health policy analysts argued against a recent Republican proposal to cap the rate of growth in Medicaid spending per capita. The proposal, which was modeled on a similar proposal made by President Bill Clinton in 1997, would convert Medicaid from an open-ended obligation of the U.S. Treasury to one in which Medicaid could still grow faster than GDP but slower than it had grown historically. The commentators argued that the cap would imperil Medicaid’s ability to pay for nursing home care and described the nursing home benefit as “insurance for all of our mothers and fathers and, eventually, for ourselves.” But their column then made it clear that Medicaid is not an insurance plan at all. Instead, it is a welfare program for the elderly poor:
Medicaid is our nation’s largest safety net for low-income people, accounting for one-sixth of all health care spending in the United States. . . . [N]early two-thirds of that spending is focused on older and disabled adults—primarily through spending on long-term care services such as nursing homes.
Indeed, Medicaid pays nearly half of nursing home costs for those who need assistance because of medical conditions like Alzheimer’s or stroke. In some states, overall spending on older and disabled adults amounts to as much as three-quarters of Medicaid spending. . . . [If Medicaid’s budget were cut, m]any nursing homes would stop admitting Medicaid recipients . . . . Older and disabled Medicaid beneficiaries can’t pay out-of-pocket for services and they do not typically have family members able to care for them. The nursing home is a last resort. Where will they go instead?6
The authors could and should have explained this problem without ever using the word “insurance.” All they had to say is that many poor Americans need help paying for nursing homes and that, in the future, millions more will find themselves in this predicament. What is needed, they might well have concluded, is a safety net that protects old people against the consequences of being poor. That, however, is neither insurance nor even a plan for prepaying expected expenditures. It is welfare, plain and simple.
It should now be clear that both Medicare and Medicaid are hodgepodges of three different things: insurance, prepayment plans, and welfare. Both programs provide protection from low-probability catastrophic risks, and, to the extent they do, they provide insurance. But they also pay for many inexpensive treatments and services, like X-rays for strains and sprains and medications for aches and pains, while also covering things that people are certain to need, such as treatments for chronic illness. So they are prepayment plans too.
Both programs also transfer wealth. Medicaid does so overtly. It uses general tax revenues to pay for health care for the poor. Medicare is stealthier. It fosters the impression that beneficiaries pay for the services they receive by contributing tax dollars throughout their working lives and by paying Medicare premiums in their later years. In fact, the typical beneficiary takes out far, far more than he or she puts in, meaning that Medicare has an enormous welfare component. And, as we describe in further detail in Chapter 22, this welfare component is a reverse-Robin Hood scheme because it funnels resources from the less well off to the more well off.
The Medicare program is also grossly underfunded relative to its future obligations. And the fact that Medicare and Medicaid are entitlements means that spending grows on autopilot because Congress does not have to make annual appropriations to fund these programs.
Comprehensive private coverage is a hodgepodge too. Like Medicare and Medicaid, comprehensive private health insurance provides insurance against low-probability catastrophic risks. It also provides prepayment of expected medical expenses. That’s why private health insurance covers well-baby care and many other readily predictable expenses.
Private health insurance may contain a welfare component too, although it’s harder to see. Many employers charge different rates according to whether coverage is for a single individual, a couple, or a family, while ignoring other variables, such as age and family size, that also bear on expected costs. The decision to ignore these considerations can have real distributional consequences. They can force younger workers to subsidize older ones, small families to support larger ones, and infertile couples to help those who want comprehensive maternity coverage. Under plans like these, some amount of cross-subsidization is inevitable, although it is disciplined by the willingness of employees to participate, the willingness of employers to allow these wealth transfers, and any offsetting adjustments in wages.7
Government can also create cross-subsidies in private health insurance. Coverage mandates can have that effect. For example, all Obamacare policies have to cover a raft of preventive care treatments and wellness checkups without any cost sharing by insureds. Similarly, all Obamacare policies have to provide 10 “essential” benefits, including maternity and newborn care, mental health services, addiction treatment, preventive services, and pediatric services, such as well-child visits, vaccinations, and pediatric dental and vision care. The money to pay for those things had to come from somewhere. Some of it came from people who used those services, and the rest came from those who did not but were forced to buy policies that included the coverages anyway.
Direct regulation of health insurance premiums can result in cross-subsidization as well. As mentioned, Obamacare required young people to subsidize the elderly by capping the premium gradient (the ratio between highest and lowest premiums) at 3 to 1 when the real old-to-young cost ratio was closer to 6 to 1. In like fashion, when Obamacare eliminated the use of pre-existing conditions limitations, it created a large cross-subsidy that favored people who were predictably high cost.
Insurance costs a lot because American health care is expensive. Cross-subsidies make premiums even higher for low-risk/low-cost enrollees, who are forced to transfer their wealth to others. As insurance prices rise, people naturally want to buy less of it, and they will not want to buy it at all if it costs more than the value they think it provides.
That’s why Obamacare had an individual mandate coupled with a tax penalty imposed on people who opt out of the program. Cross-subsidies are hard to maintain when people can avoid being overcharged for insurance by refusing to buy it.
What does this mean for ordinary people, who don’t spend all their time thinking about health policy? Consider what happened to Stacey and Eddie Albert—a nutritionist and a personal trainer, respectively. Before Obamacare, they had a bare-bones health insurance policy from Horizon Blue Cross Blue Shield of New Jersey for which they paid about $360 a month. The policy suited their needs and their budget, both were healthy, they rarely saw a doctor, and they had no children. But, when Obamacare came along, the price of coverage jumped to $650 per month. Some of that was because the Obamacare policy covered things that weren’t covered under the old policy—like pediatric dental care and maternity services.8 The Alberts didn’t value those benefits and had gotten along perfectly well without them until Obamacare forced them to buy a bunch of coverages they didn’t want. Their premiums were further inflated by overcharging them for the coverage they received so as to provide welfare for others.
The Alberts didn’t use many medical services. In that respect, they are typical Americans, not exceptional ones. Although the United States now spends an average of more than $10,000 per person on medical services each year, most of this spending is concentrated on a small fraction of the population. For most Americans, the annual cost of health care is slightly below $1,000, an amount that most can afford to pay out of pocket.9 If you sort the population by health care spending, the lowest-spending half accounts for a mere 3 percent of the nation’s total annual health care bill.10
Of course, spending is higher for Americans who are involved in accidents or suffer from chronic conditions, but many of them could manage their own expenses as well. The average cost per trauma victim is less than $3,000 per person who incurred an expense. The comparable annual figures for people with heart disease, cancer, mental disorders, and chronic obstructive pulmonary disease/asthma are $4,349, $5,631, $1,849, and $1,681, respectively.11 Although no one enjoys spending sums like these on medical treatments, many consumers could cover them without breaking the bank.
But, as everyone knows, the problem is that spending on health care can vary greatly. All it takes is a bad case of trauma or an emergency surgery for appendicitis to move a person from the average category into the highest cost group—the 5 percent of Americans whose medical treatments account for 50 percent of total spending.12 The mean annual expenditure for that group is about $43,000. Making the top 10 percent of spenders, who collectively account for 66 percent of medical expenses, is even easier. The mean outlay for that group is only $28,500. There’s a lot of turnover in these high-cost groups too. Although nearly two-thirds of the members of the top 5 percent group suffer from long-term illnesses, every year about half of that share gets better and drops down to a lower bracket. Of course, this implies that lots of new people move into the high-cost group every year too.
Many people think that this distribution of costs makes it impossible for health insurance to work. This position betrays a fundamental misunderstanding of insurance economics. It is precisely the potential for incurred costs to vary by several orders of magnitude that creates a demand for insurance and allows catastrophic coverage to do its job—by placing a ceiling on the amount that a person must spend out of pocket on needed medical services in any policy period. When spending exceeds the ceiling, the insurance policy kicks in and protects the consumer from much or all of the burden of any additional medical treatments. And, because so few people incur catastrophic health care expenses, catastrophic coverage is affordable—as long as it isn’t larded up with payments for predictable expenditures and cross-subsidies.
Catastrophic coverage isn’t a complete answer to everything that is wrong with the health care sector. We have addressed other problems that require attention in other chapters in Part 2. Here, we concentrate on the problem of dealing with known or predictable medical expenses.
Insurance can’t do much to help people manage the consequences of illnesses that occurred before they were insured. When someone is highly likely to need expensive medical services year after year, there is no risk to insure. There is only a need to pay for the treatments. This is true, for example, of uninsured children born with significant, lifelong health problems. The medical services they require must be paid for somehow, and we should make it as easy and affordable as possible for people, including hopeful or expectant parents, to insure before health losses occur. But in cases where they don’t, we shouldn’t call whatever mechanism pays for their health care “insurance” because the need for the services is certain.
Insurance can’t do much with the predictable costs of aging either. As people move from their thirties into their forties, fifties, and later decades, their expected medical costs rise inexorably. Because insurance premiums reflect expected costs, they rise with age too.
Even if the costs of aging were much less predictable, insurance still wouldn’t be a good way of paying for them. Consider joint replacements. A 2015 study found that the average cost of total knee replacement surgery was about $31,000.13 In that year, the average new car cost about $33,000, only $2,000 more.14 People pay for their cars all by themselves; why can’t they pay for new knee joints too? When it comes to financing the two, the main difference is that we’re used to buying cars ourselves while we’re used to using insurance to pay for medical treatments.
But paying for replacement knee joints with insurance has bad consequences. Prices rise because insurers add a substantial layer of expense. Insurance also stimulates demand and compounds the pricing problem by paying far more than consumers would if they were spending their own hard-earned money.
Consider the extent to which the average price for a total knee replacement varies, both within the same city and across states. In Dallas, Texas, the average charge for a total knee replacement in 2013 was about $40,000. However, one hospital in Dallas averaged $17,000, while another averaged $62,000. If patients paid for these procedures directly, the high-priced hospitals would go out of business, unless they could prove that they were vastly superior. Hospitals in New York City might not perform any knee replacements at all, unless they blockaded the bridges and tunnels to ensure their customers couldn’t leave town. The average charge for a knee replacement in New York City in 2013 was just shy of $70,000. Cost-conscious New Yorkers could have the surgery done in Dallas and pocket the difference. Or they might pay a visit to Montgomery, Alabama, where the lowest-priced hospital charged only $11,000, and save even more.15
Cars need regular maintenance, but even when kept in good repair, they eventually wear out and are replaced. Human bodies deteriorate with age too, even when cared for well. Often, the options we choose for ourselves when we ail cost the same or less than those we select when dealing with our cars. So why do we pay for the latter directly while using insurance to pay for health care?
For most of us, the answer isn’t that we have sufficient cash on hand to pay for cars but not for knee surgeries. When Americans buy new cars, we often take out loans that we pay off over time. In 2016, the average new car loan was for $30,000 and the average loan term was 68 months.16 Presumably, the people who took out these loans had too little cash on hand to pay for knee replacements or cars, but only if they needed the former were they likely to pay with insurance.
The answer isn’t that cars last longer than knee joints either. The opposite is true. Artificial knees typically are good for 20 years.17 People would usually find knee surgery easier to afford than their first new car too, because joint replacements happen late in life, after the mortgage has been paid off and the kids are done with college.18 New car buyers are usually much younger and have many more competing needs. In 2015, more than half of all new cars were sold to people 49 years of age or younger.19 All things considered, knee replacement surgery seems to be more affordable than a new car—and it would be even easier to budget for if people bought it directly because it would cost much less than it does.
So why do people use insurance to pay for knee replacements and other medical procedures instead of borrowing money to pay for them? Why don’t they save up in advance, the way people often do for their children’s college expenses? For many reasons, none of them especially good. People think of new cars and college educations as gains and of medical treatments as losses, and they connect insurance to the latter, not the former. Tax breaks encourage people to use insurance to pay for medical treatments but not other things. The health care system teaches people that they’re supposed to use insurance to pay for its products. And people who see others insuring against health care costs find it natural to do the same.
But it doesn’t follow that insurance is a good way of dealing with medical expenses that are known or predictable. To the contrary, if you were trying to create a dynamic that would funnel ever-increasing amounts of money into the health care system, it would be hard to improve on Obamacare, which required everyone to have comprehensive insurance, backed up with huge amounts of federal funding to hide from everyone involved the true costs of running prepayment and welfare programs in the guise of an insurance program.
What about individuals with pre-existing medical conditions? The plight of these unlucky individuals has preoccupied American health policy for decades, culminating with Obamacare’s elimination of limitations on pre-existing conditions. What can we do about this problem if we move to a system of catastrophic coverage that does not cover known or predictable medical expenses?
The first point to understand is that much of the debate over preexisting conditions is based on misleading statistics. Advocacy groups highlight the large number of Americans with chronic illnesses and imply that they are all at risk of being priced out of the insurance market.20 This is complete nonsense. Insurers limit coverage of pre-existing conditions to ensure that new applicants are not gaming the system by purchasing coverage only when they think they will need it. Historically, people who maintained their coverage were not subject to limitations on newly developed conditions at renewal time, even if they experienced claims.21 Indeed, the incentive to obtain and maintain insurance coverage derived partly from the fact that renewal at standard rates was usually guaranteed. (The same was ordinarily true for people who changed jobs, as long as they had coverage at the job they left.) Most insurers in the individual market voluntarily offered continuing coverage of this sort, and the 1996 Health Insurance Portability and Accountability Act roped in the few that did not.22
Greg Scandlen discusses the exaggeration of the frequency of coverage denials based on pre-existing conditions in his recent book, Myth Busters: Why Health Reform Always Goes Awry. He begins by observing that such denials occur only in the market where people who do not obtain coverage through their employers buy it directly. This market encompasses about 10.3 million people. He then points out that denials based on preexisting conditions occur only when people buy insurance for the first time; denials do not happen when people who are already covered renew. That limits the at-risk group to about 1.8 million people per year. Finally, he notes that, in 2008, insurers accepted 87 percent of new applicants. The number denied coverage, 223,000, constituted “less than one tenth of one percent of the country’s population.”23 Many of these unfortunates still had options too. They could join states’ high-risk pools or obtain coverage through state-appointed insurers of last resort.
Obamacare itself showed that its architects exaggerated the severity of the problem of coverage denials based on pre-existing conditions. Although the legislation passed in 2010, the provision requiring insurers to accept all applicants would not take effect until 2014. Believing that they needed to address the problem of coverage denials more quickly, Obamacare’s architects created a special program called the Pre-existing Conditions Insurance Plan (PCIP) that went into effect immediately. The U.S. Congressional Budget Office (CBO) projected that 200,000 people a year would enroll in PCIP.24 Medicare’s actuaries projected that 375,000 would.25 In reality, total enrollment peaked just below 115,000,26 just about enough to fill the University of Michigan’s football stadium.27 The neutral arbiters at the CBO and Medicare had pegged the expected annual demand at two to three times the actual total demand, reflecting the tendency to exaggerate the frequency of coverage denials for pre-existing conditions.
Prior to Obamacare, there were people with expensive illnesses who did not have health insurance, whether because they failed to purchase coverage when they should have, lacked the resources to do so, or lost their coverage along with their jobs. And, of course, not all of them may have felt the need to obtain coverage through the PCIP. So we should view these figures as a lower bound on the number of people who actually experience problems with obtaining coverage because of a pre-existing condition.
Assume for the sake of argument that we are talking about 500,000 people or even 1 million people per year. We note at the outset that this is at most 0.3 percent of the U.S. population. But, if we want to do something for these people, we should treat their problem just like we treat the problem of known or predictable medical expenses. We should subsidize them so they can obtain whatever level of coverage or treatment we collectively deem to be adequate. And we should do that in a transparent on-budget way, so that everyone voting for the legislation understands the associated trade-offs.
Obamacare supporters object that Congress and state legislatures won’t provide sufficient funds to take care of the problem of pre-existing conditions if voters understand what is going on. That may or may not be true. But consider what it means that Obamacare supporters believe it to be true. If Congress and state legislatures won’t provide the level of funding they want, it means that voters don’t want what Obamacare supporters want. Obamacare supporters know this, and they therefore prefer to use (in Jonathan Gruber’s words) a “lack of transparency” to deceive voters about what Obamacare really does. If Obamacare supporters believe the only way they can get what they want is to lie to their fellow citizens about what they are doing and why, that is a more damning indictment of their position than anything we can say about it.
Finally, even if our solution to the problem of pre-existing conditions isn’t perfect, it is important to compare the stable and inexpensive catastrophic insurance market that will result from our proposals to the far more imperfect and dysfunctional insurance market that Obamacare has given us. Lots of people like the fact that Obamacare eliminated pre-existing condition terms, but they hate the individual mandate and the large subsidies that are required to make that decision remotely workable. We don’t think this conflict can be finessed for much longer—and so we are offering a solution that will stick, while also reducing costs and making the system more responsive to its actual customers. Finally, our approach has the singular virtue of transparency about what it is trying to accomplish and how much it is costing us to do so.
One final issue is how we should deal with incompetent and unconscious patients, such as accident victims who are in no position to shop for low-priced health care. Skeptics seem to think that this problem is a compelling argument against more market-oriented approaches to the financing and delivery of health care.28 But it is not a difficult problem, as Professor John Cochrane explains:
Yes, a guy in the ambulance on his way to the hospital with a heart attack is not in a good position to negotiate. But what fraction of health-care and its expense is caused by people with sudden, unexpected, debilitating conditions requiring immediate treatment? How many patients are literally passed out? Answer: next to none. . . .
Most of the expense and problem in our health care system involves treatment of chronic conditions or (what turns out to be) end-of-life care, and involve many difficult decisions involving course of treatment, extent of treatment, method of delivery, and so on. These people can shop. Our health care system actually does a pretty decent job with heart attacks.
And even then . . . have they no families? If I’m on the way to the hospital, I call my wife. She is a heck of a negotiator.
Moreover, health care is not a spot market, which people think about once, at fifty-five, when they get a heart attack. It is a long-term relationship. When your car breaks down at the side of the road, you’re in a poor position to negotiate with the tow-truck driver. That is why you join AAA. If you, by virtue of being human, might someday need treatment for a heart attack, might you not purchase health insurance, or at least shop ahead of time for a long-term relationship to your doctor, who will help to arrange hospital care?
And what choices really need to be made here? Why are we even talking about “negotiation?” Look at any functional, competitive business. As a matter of fact, roadside car repair and gas stations on interstates are remarkably honest, even though most of their customers meet them once. In a competitive, transparent market, a hospital that routinely overcharged cash customers with heart attacks would be creamed by Yelp.com reviews, to say nothing of lawsuits from angry patients. Life is not a one-shot game. Competition leads to clear posted prices, and businesses anxious to gain a reputation for honest and efficient service.29
Like the old Yiddish joke about the man who kills his parents and then throws himself on the mercy of the court because he is an orphan, those who allow third-party payment to create widespread, rampant price gouging oppose letting consumers control health care dollars because, god forbid, someone might get gouged. If there is a problem with overcharging the unconscious and incompetent, it is because our politically controlled third-party payer system encourages health care providers to overcharge everyone. Politicians, medical professionals, hospitals, insurance companies, and many others making money off our health care system are protecting those high prices from the cost-reducing effects of competition.
Jonathan Gruber, the prominent health economist whose remarks on transparency were quoted above, observed that Obamacare relied on a “three-legged stool” to reform health insurance markets: “new rules that prevent insurers from denying coverage or raising premiums based on pre-existing conditions, requirements that everyone buy insurance, and subsidies to make that insurance affordable.”30 That approach doubled down on a failed strategy. It used health insurance to pay for most health care expenditures, insulated patients from the direct costs of their decisions, and hid the enormous costs that resulted. Obamacare’s architects positioned their three-legged stool atop a massive health care bubble.
Moving forward also requires a three-legged stool—but not the one found in Obamacare. The first leg is catastrophic coverage for remote risks with the potential to inflict large losses. The second leg is having people pay out of pocket for medical treatments that are expected and predictable. And the third leg is an explicit on-budget welfare system that provides financial support to people who are poor or otherwise deemed deserving of public support.