Posted: November 17, 2013
Despite Problems, Two and a Half Cheers for Obamacare
It has been a tough six weeks for Obamacare. The healthcare.gov website got off to a very rocky start and insurance cancellation notices are getting the lion’s share of media attention. So now what? Should we throw in the towel on health care reform?
I have been a vocal advocate of Obamacare in columns published in the News Journal over the past few months. So it’s probably no surprise that I think the answer is no. It’s far too easy to focus on the current implementation problems and lose sight of the pervasive, structural health care problems that led to Obamacare in the first place. So let’s take stock of what is right and what is wrong with Obamacare.
What’s still right. Obamacare is a mainstream policy reform that strengthens the private health insurance market. It is based on market-oriented principles developed at the Heritage Foundation, one of the most conservative think tanks in the country. The current problems with Obamacare don’t change that at all.
Before Obamacare, 46 million Americans lacked health insurance. Families often lost health insurance when they lost a job, something that happened to far too many Americans during the recession. Americans with pre-existing conditions were completely shut out of private insurance markets. Policy benefits were impossible to understand and often turned out to be non-existent at the worst moments. All those problems are addressed by Obamacare. The current problems don’t change those things, either.
Finally, Obamacare moves us toward becoming a country where almost everyone, no matter their income or accident of birth, will have access to quality health care. That’s still true, too.
What’s wrong. The Republicans have leveled charge after charge at Obamacare. It has death panels. It’s a government takeover. It will bankrupt us. False, false, and false. But they have found two issues with traction – the inexcusably poor performance of the government website and the recent cancellation of policies that is seemingly at odds with the promise that President Obama made. These are not trivial problems, but they are modest compared to the benefits of Obamacare.
First, let’s agree that the roll-out of healthcare.gov was awful. Proponents of Obamacare, including me, are far angrier about this than the Republicans, whose anger is tempered by glee. It is fair to note that the technical demands of healthcare.gov far exceed those of Amazon and other e-tailers. Amazon doesn’t need to verify its customers’ identities, verify citizenship via a Homeland Security database or income through an IRS database. The website has problems, but they are technical, not substantive, and they will be resolved.
Second, the problem of cancelled insurance policies has been greatly exaggerated. The evidence thus far suggests that it affects a very small percentage of families, orders of magnitude smaller than the number of persons who will directly benefit from Obamacare. Moreover, many of those people will be better off as a result of Obamacare, even if they don’t yet realize it.
Two different kinds of policies have apparently been cancelled. The first kind was bare-bones insurance purchased primarily by people who couldn’t afford better coverage and who gambled that they wouldn’t need it. That’s a gamble that people lose all the time with devastating medical and/or financial consequences. Plans providing better coverage will now be available to these people through the exchanges. Many of them will qualify for subsidies that make the final cost similar to, if not lower than, the poor coverage they had before.
The second kind of cancelled policies are “Cadillac plans” with very generous benefits. Most of these plans do meet the new insurance regulations and could legally be continued. These cancellations may seem puzzling, but they are actually an example of dysfunctional private insurance practices that are curtailed by Obamacare.
The reason is that Cadillac plans in the individual insurance market can only be profitably sold to persons who are unlikely to need generous coverage. Anyone wanting to purchase this kind of plan has to fill out an extensive medical history, so that potentially expensive patients can be screened out. Insurance companies are cherry-picking the inexpensive patients at the expense of the less healthy, who end up with higher-priced policies or with no insurance at all.
Under Obamacare, insurance companies can no longer use pre-existing conditions to deny coverage or increase its price. This is a widely popular provision, even among Republicans. As a result, if an insurance company continued to offer its Cadillac plan, it might find it was attracting exactly the wrong customers—patients who might actually need expensive health care! Obamacare makes cherry-picking in health insurance, which adds to the overall administrative costs of the US healthcare system without providing any benefits, a thing of the past.
Blaming Obamacare for the cancellation of these Cadillac plans is understandable, but it is shortsighted for two reasons. First, a top-of-the line Platinum policy will be available on the health insurance exchanges to families with those cancelled policies. Even more importantly, if a serious health condition develops—which can happen to anyone, anytime—these families now have guaranteed coverage with no increase in rates, thanks to Obamacare.
The verdict. Obamacare is not perfect and no one should have expected it to be. It does and will have problems and need fixes. But it remains very sound healthcare policy. Its problems are temporary and isolated, while its benefits are large, widespread, and permanent.
So, despite its current problems, it’s two and a half cheers for Obamacare, with a fervent hope that, sooner rather than later, it will earn all three.
Posted: November 7. 2013
Health Insurance Markets Are Even More Dysfunctional Than You Think: Why Even Cadillac Plans Are Being Cancelled
The recent uproar over cancellation of private insurance plans is an opportunity to reflect on how dysfunctional individual health insurance markets really were.
It is clear enough that some plans are being cancelled that don’t meet the new terms for minimum insurance, even though many of them were grandfathered in, that is, allowed to remain in force as long as they didn’t change terms and didn’t enroll new clients. That apparently is a business decision by insurance companies.
Many of these plans provided extremely minimal insurance, probably purchased by people who couldn’t afford better coverage and who were gambling that they wouldn’t actually need insurance. That’s a tough gamble to lose, and people lose it all the time with devastating medical and/or financial consequences. Most of these people will certainly be able to purchase plans providing better coverage and they will be required to do so. The list price will be higher, reflecting the better coverage, but the net-of-subsidy price will probably be similar, if not lower. Truthfully, most of these people will be better off. Better off, that it, if the government website ever actually works.
From an economics standpoint, the more interesting cancellations are policies touted as “Cadillac plans” that presumably do meet the new insurance terms and therefore could be sold and could enroll new clients. One such anecdote appeared on the PBS News Hour a week or so ago, where an irate, apparently well-to-do male, probably in his 50s and an Obamacare hater from the get-go, claimed that his plan, which covered everything and had an unlimited network of doctors, had been cancelled. How so? What’s going on here?
This puzzled me, at first. My instinct was that he was either wrong (like many other Tea Partiers) or that there was, indeed, some subtle way in which this policy, however generous, didn’t comply with the new standards. But upon further reflection, I realized that this is an example of insurance underwriting at its best/worst. These Cadillac plans, with unlimited coverage and free choice of networks, can only be profitably sold to persons who are relatively unlikely to need coverage like that. No private insurance company would ever willingly sell such a plan to a prospective heart or liver transplant patient or someone with other very serious and potentially costly medical needs. Undoubtedly, any individual wanting to purchase this plan on the individual market would have to fill out an extensive medical history, so that expensive patients could be screened out. That’s the business model for that kind of policy.
Understand that this screening is profitable for a private insurance company, but provides zero social benefits. It uses up resources, human and otherwise, that could be used for productive things. It is part of the high administrative costs of American health insurance. It does not reduce the number of persons with health issues, but rather pushes them on to other companies who may not be as adept at screening or into other policies that would undoubtedly have far more cost-sharing or cost far more.
One of the central and most popular provisions of the Affordable Care Act is that insurance companies can no longer use pre-existing conditions either as an excuse to deny coverage or to increase the price of coverage. Only age and smoking history can be used to price a policy and even the effect of these is limited by law: a 3 to 1 premium for old v young and a 50% premium for smokers. As a result, if the insurance company continued to offer its Cadillac plan, it might find it was attractive to exactly the customers they want to screen out—patients who might actually need extensive health care! So they cancelled the policy.
The irate guy on PBS was, in fact, technically correct that the cancellation of his policy was a result of the Affordable Care Act, in this case the ban on the use of pre-existing conditions and almost all health insurance underwriting. He may have to settle for purchasing a Platinum policy on the health insurance exchange; the Platinum is the premier policy and covers 90% of expected (actuarial) health costs. He will be fine. Because all the plans cover a core set of basic benefits, he will also have an easier way to understand what his coverage is providing him.
From the standpoint of the economy, this is probably a good thing in the sense that it eliminates wasteful screening of potential customers. This particular individual and some others may be worse off, forced to buy a policy that is different than they would otherwise choose. But I would argue that they are actually better off: they have the protection of knowing that should they develop a pre-existing condition, they have guaranteed coverage.
This leads us into the territory of how to evaluate a new public policy like the Affordable Care Act appropriately. The right way is not to think in terms of your present conditions (like the guy on PBS was doing), but rather the policy you would choose if you didn’t know your present conditions. Economists call this decision-making “behind the veil of ignorance,” a concept due to the philosopher John Rawls.
Posted: October 13, 2013
John Boehner is half right: Obamacare does needs work. Here’s what it needs. Hint: not what Speaker Boehner thinks.
During the current budget and debt ceiling disputes, John Boehner and other Republicans have repeatedly said that Obamacare needs to be revised and revamped. Surprisingly, they have a point, although not the one they intended. Obamacare does need work: it needs to be strengthened, better understood, and defended against the onslaught of Republican misrepresentations.
The most pressing task is to fix Obamacare to include many families just over the poverty line who have unexpectedly been left with no assistance whatsoever. Here’s how that happened. The Affordable Care Act included two mechanisms to extend health insurance to the many Americans without it. Most such families would obtain insurance through the new health insurance exchanges, where they would receive a subsidy on a sliding scale if their family income was between 133% and 400% of the official government poverty level. But families with incomes that were no more than one-third above the poverty line—the near-poor—would, instead, be enrolled in Medicaid, the government health insurance plan for the poor for which they were previously ineligible. The Medicaid expansion would also cover poor and near-poor single persons, who were typically ineligible for Medicaid. The Federal government would pay 90-95% of the cost of the Medicaid expansion in each state.
Because it was assumed that the near-poor would be enrolled in Medicaid, they were not made eligible for the subsidies that other families receive through the exchanges. But when the Supreme Court upheld the Affordable Care Act, it made the expansion of Medicaid optional for each state. Of course, since states would pay only a tiny fraction of the cost of expansion and would thereby enable some of their neediest citizens to obtain health insurance, a reasonable person would expect most states to agree to the expansion.
But reason no longer prevails in any matter involving Obamacare and the Republicans. In state after state with a Republican governor, the Medicaid expansion was rejected. A total of 26 states, including Texas, Florida, Ohio, Pennsylvania, and Virginia, turned down the Federal aid. In the most heartbreaking example, Republican governor Rick Perry of Texas turned down $79 billion of federal aid that would have assisted an estimated 2.5 million Texans, in order to bolster his Tea Party credentials for a presumed 2016 Presidential bid. As a result of these state actions, the near-poor are in the worst of all possible situations: low income, often precarious health, no Medicaid access, and no subsidies through the exchanges.
We could hope that the Republican governors will eventually see reason and accept the Medicaid expansion, but, frankly, that is unlikely. Instead, here is what must happen. When the current budget and debt ceiling debacle is finally resolved, there will likely be negotiations between President Obama and the Republicans about reforms to entitlement programs like Medicare and Social Security, as well as to taxes. As part of those negotiations, President Obama must insist that the current premium subsidies now available to low- and moderate-income families be made available to near-poor families whose states have denied them the Medicaid expansion benefits that were intended for them.
Our second task is to understand that we are all part of Obamacare. It is too easy to think of Obamacare as benefits provided to others, rather than to ourselves. But that is dead wrong. Any of us could be one day away from losing a job and the health insurance that comes with it; just think what happened to so many families during the Great Recession of 2008 and 2009. Any of us could be would-be entrepreneurs who now, thanks to the exchanges, can afford to forego employer-provided insurance to start that small business we always dreamed of. Any of us could have a loved one born with a pre-existing condition or develop one at an early age. And many of us will eventually have pre-existing conditions ourselves, possibly before we are eligible for Medicare. Every single American is a potential beneficiary of Obamacare.
Task three is to fight back against the lies and disinformation that the Republicans have spread about Obamacare, from Sarah Palin’s “death panels” to Ted Cruz’s “government takeover of the health care industry” to the recent tasteless TV ads funded by the Koch brothers. For the record: there are no death panels in Obamacare; the only doctors on the government payroll work for the VA hospitals, just as before Obamacare; and the government will not stand between you and your doctor.
Finally, we need to encourage everyone to sign up for health insurance. The Republicans are apparently reaching out to young uninsured adults, encouraging them not to sign up for health insurance as a last-ditch way to undermine the exchanges. This is truly sickening: what parent would give that advice to his or her own adult children? Everyone, even young adults who think they are invulnerable, is only one day away from a major health event that could destroy them financially.
Delay and defund Obamacare? Absolutely not. Let’s work, instead, to deliver its full benefits to all who deserve them and truly move the United States toward the goal of universal access to quality health care.