There has been a lot of criticism of the Republican’s “repeal and replace” bill known as the American Health Care Act. The critiques are coming from both the left and the right. Let’s look at just one provision–the premium age bands–to better understand why both people on the left and right do not like the American Health Care Act for very different reasons.
Consider the provision that insurers can set the price of health insurance for older Americans at up to five times the premiums of younger Americans. This provision will result in higher premiums for older individuals. The AARP writes:
“Before people even reach retirement age, big insurance companies would be allowed to charge them an age tax that adds up to thousands of dollars more per year. Older Americans need affordable health care services and prescriptions.
While it is true that older Americans will receive larger tax credits through AHCA, these credits likely will not offset the additional cost. Thus, AARP is concerted about whether near elderly individuals will be able to afford health insurance on the private market.
Michael Cannon is from the Cato Institute and also does not like the premium age band provision either. However, he believes that community rating is the problem and that that the 5 to 1 premium ratio is too narrow rather than to wide. He writes:
ObamaCare’s community-rating price controls literally penalize insurers who offer quality coverage to patients with expensive conditions, creating a race to the bottom in insurance quality…The leadership bill would modify ObamaCare’s community-rating price controls by expanding the age-rating bands (from 3:1 to 5:1) and allowing insurers to charge enrollees who wait until they are sick to purchase coverage an extra 30 percent (but only for one year). Even with these changes, however, premiums would remain high, ObamaCare would continue to make it easier for people to wait until they are sick to purchase coverage, and the law would continue to penalize high-quality coverage for the sick. In fact, the House leadership’s decision to leave ObamaCare’s community-rating price controls in place while relaxing its “essential health benefits” requirements would cause coverage for sick to deteriorate even faster than ObamaCare does.
So the AARP wants health insurance to be affordable for consumers on the demand side. The AHCA may not make enough progress on this front for many constituencies. At the same time, Cato wants to make sure suppliers (i.e., insurers) are able to set actuarially fair premiums rather than have a narrow premium bands under community rating. By keeping the community rating provisions of Obamacare–even with some age-related premium variance and some penalties–not only is the risk of an adverse event death spiral high, but insurers have an incentive to provide poor quality service to high-cost individuals (e.g., those with cancer) because they are money losers.
A more reasonable solution would be the “Best of Both Worlds” proposal from the American Enterprise Institute. The two primary provisions of this proposal include:
- Allow and encourage insurance companies to charge individualized premiums to consumers that reflect their true health care costs. When insurance is fairly price, insurers will not exit the market and will be incentivized to provide high quality care to the sick rather than trying to get them to leave their plan. In other insurance markets, people with higher potential expenses get charged more. For instance, those with a Ferrari pay higher car insurance rates than those who own a Toyota. Insurers should get paid more for providing insurance to individuals who they expect will cost more so they no longer attempt to shun the sickest individuals.
- Subsidize premiums based on income and age. The AEI plan calls for insuring that all individuals have access to a “basic insurance plan”. What that plan is and how much cost sharing there should be is a political question. As U.S. society has largely believed that all individuals should have access to some form of healthcare, some redistribution is needed. The degree to which this redistribution occurs depends on societal preferences. However, there is precedent for this approach. In the Netherlands and Switzerland, risk adjustment is used so that sicker individuals receive larger premium subsidies. Thus, although insurance will be fairly price, the sickest should be able to afford this insurance due to the risk adjustment subsidies.
This plan works because it is both market-based and equitable. Allowing insurers to set their own prices addresses the Cato Institute’s concerns as it means that markets will function and we will not see mass exits of payers for certain markets. Government premium support subsidies addresses the AARP’s concern that health insurance is not affordable. The AHCA’s simple 5:1 premium bands by age are crude and do a poor job of aligning subsidies with likely premium costs. By better tying government subsidies to expected market premiums, health care would remain affordable for all.
Note: The Best of Both Worlds plan also proposes for allowing for multiyear (long-term) health insurance contracts and abolishing the tax preference for employer-sponsored health insurance plans. While the former is good in theory, the longer the contracts, the less choice individuals have if quality of care is poor. One solution would be John Cochrane’s premium insurance which is similar to a privately-run–rather than publicly run–risk adjustment scheme. Abolishing the tax preference for employer-sponsored health insurance makes sense to allow individual and group plans to compete on more equal ground.
- Amitabh Chandra, Anup Malani, Anupam B. Jena, Dana Goldman, Darius Lakdawalla, Jay Bhattacharya, Michael Chernew, and Tomas J. Philipson. Best of both worlds: Uniting universal coverage and personal choice in health care. AEI Papers & Studies (2013)