The Affordable Care Act…Yet Again

The recent failures of the government’s “Obamacare” website, combined with the avalanche of existing policy cancellations prompts me to comment on the Affordable Care Act (ACA) once again.  Readers of these posts know that I comment on many other things, most of them pleasant.   But few present such a compelling combination of important need and bad policy response as this sad topic.

My initial post (March 3, 2010, while the debate in Congress was still underway) tried to walk a path through possible features of a legislative package that could have achieved bi-partisan support (as opposed to what we got…a law enacted without even one Republican vote) and have begun a process of re-orienting the mentality about insuring health care risks, instead of more deeply entrenching the current faulty mentality.  Let me continue, 3 and a half years later, with describing the important need and then go on to the better policy response we could still have.

Noble Aims; Bad Strategy.

Almost everyone would agree that American medicine (procedures, hospitals, personnel, and pharmaceuticals) is, in the aggregate, the best in the world and, though imperfectly, very well distributed across a very large and diverse population.  No other country anywhere close to the size of the United States does nearly so good a job providing best possible healthcare to so many people. This is not an accident.  It stems, I am convinced, from both a strong capitalist system of rewards for excellence and a very robust system of private insurance that can highly customize its offerings and pricing to the preferences, risks, and pocketbooks of independent consumers.

But, while that robust private insurance market is generally a very good thing, the risk calculus is so good that insurers can too easily choose to cover only relatively low risk consumers.  This was one of the key objectives of ACA: to force insurers to cover all comers, regardless of pre-existing conditions, with a minimum scope and  level of covered services.   One of ACA’s biggest mistakes is to make that “minimum level and scope” too high and too broad…much more than many highly rational consumers would in fact choose for themselves.  So, while forcing insurers and consumers to dosomething was probably an essential part of the law, ACA is forcing them to do the wrong thing.  More on that below.

The other major problem with the pre-ACA  health care insurance system is that  too many very young and currently very healthy people have opted out entirely, forcing the risk pool to be too heavily tilted toward relatively high risk consumers.  Those many “millions of uninsured people” that make for great political sound-bites are mostly young, healthy people that heretofore have made a currently rational decision not to be insured.  Getting them into the risk pool to reduce premium costs for everyone is the second key objective of ACA.  We should carefully ponder whether our society should impose this generational wealth shift from the young to the old (like similar wealth transfers involved in Social Security and Medicare), so let’s at least acknowledge that that is what’s going on here; we can debate the wisdom of doing so at some other time.  But, if that is what we believe we must do, we have to provide the appropriate motivation to do so.  Since the Supreme Court narrowly upheld ACA on the power of Congress to tax (again despite ACA’s proponents strenuously assuring the public…and maybe even deluding themselves…in 2010 that there was no such thing at work; see blog post of July 1, 2012), Congress should have done the taxing right.  As it is, many of the young and healthy will very rationally submit to a modest tax rather than pay substantially greater premiums.

Better Policy Choices.

The fundamental problem with ACA is that it continues an approach based on “first dollar” medical insurance.  Without large deductibles or co-pays in first dollar insurance programs, persons who are in fact medically needy or just so-inclined, are not subject to the normal cost-disciplines about the amount or the character of the services they seek.  That’s fine, so long as individuals are willing to pay for such luxurious insurance coverage.  But to have mandated first dollar insurance coverage – and for an expanded scope and level of “minimum coverage” – was a mistake, particularly since the tax imposed on those who refuse to buy it is far too small.  People are not stupid.  The millions of young, healthy persons who heretofore have left themselves uninsured are mostly going to continue to do so and pay a small tax rather than pay a much larger premium.  Without getting those many low risk people to participate in the pool, the pricing mechanism will force premiums much higher on the older, less healthy, more needy parts of the population.  The young/healthies are not going to just play along from a sense of social altruism.

So, if “first dollar” insurance doesn’t impose usage discipline, thus forcing usage …and costs…higher than they need to be and if we’re going to tax people sufficiently to make them join the pool to keep even those costs down, what’s better?    Mandating “last dollar” coverage for everyone…young, old, healthy, and ill…with no coverage exclusions or pre-existing conditions limitations…and taxing anyone who doesn’t buy such coverage in an amount that exceeds the premium charge.  Since such coverage would only apply to costs above a high threshold, it would be relatively cheap, especially with all those young/healthies in the pool who will almost never get to their ceilings.  The penalty tax wouldn’t have to be very big to get people to buy the insurance so they can avoid tax.

With that “last dollar” mandated health care insurance regime, our society cures at least one of the greatest ills that now plagues us…the fact that some people are forced to exhaust all their other assets or are even bankrupted by extreme cases of health care costs. Even more importantly, we can gradually shift everyone’s expectations about access to basic or pre-catastrophic health care to a more rationally priced system based on actual supply and demand.  We rely on self interest and individuals’ budget constraints  to ration virtually all other goods and services.  There is no fundamental difference here with health care.  The rich will always get more and better, as they do in everything else; and for those who can afford it or are willing to sacrifice other consumption, most people will be able to buy some version of pre-catastrophic coverage, if they want it.  Many people will, rationally, opt out or purchase only the thinnest coverage.  That may not be what the more paternalistic among us would prefer, but it is thoroughly consistent with the preferences for free consumer choice we generally hold sacred.

So, the problem in November 2013 is not in the debacle of the healthcare.gov website nor with the President’s and the Democratic Congressional majorities’ failure to tell the whole truth to the American people when ACA was becoming law in 2010.  The problem was and is its having adopted the wrong strategy.  Forget about fixing the website; let’s fix the strategy!

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