You Can't Just Keep the 'Good Parts'

Policy Memo
Tuesday, November 15, 2016

The Affordable Care Act (ACA) dramatically altered the individual insurance market by forcing insurers to insure anyone regardless of health status or pre-existing conditions. It also eliminated caps on coverage. 

These changes have been popular. When elected officials say they support banning insurance companies from discriminating against individuals with pre-existing conditions, they are supporting this part of the ACA. One of what many people consider the “good parts” of the legislation.

Here is the rub -- you can’t just keep these “good parts” and repeal “the rest” of the ACA.

This is why: Health insurance is expensive. It is more expensive when medical costs are high and less expensive when medical costs are low. Thus, insurance costs can go up or down based on how small and sick the insured population is. (For the moment let’s leave aside that costs are also dependent on how much we pay doctors and hospitals for their work.) 

The big federal government health care programs -- Medicare (about 43 million insured) and Medicaid (62 million) -- tend to have enough people enrolled that there is a predictable mix of the healthy and the sick. For those programs, spending is more dependent on the number of people being provided with health insurance.

You can reduce that spending by cutting the number of people who receive insurance. Raising the Medicare retirement age would save money this way and block-granting Medicare without taking into account medical inflation and population ultimately saves money by reducing the number of people with insurance as well. 

The ACA insurance rule changes were directed at the individual insurance market. This market is smaller (23 million) and because it has numerous insurers and numerous populations being insured, it is more dependent on the mix of healthy to sick. 

Prior to the ACA, insurers could hold down costs by not insuring individuals with a history of illness. Insurers could also cap how much they spent on any given person and just stop paying bills after costs went above a certain amount. They could also just cancel insurance for those who got sick. This left insurers with fairly predictable costs and a population of generally healthy individuals. The result was relatively inexpensive health insurance. 

Taking away this ability to discriminate makes insurance more expensive. Income-maximizing individuals have an incentive to wait to purchase insurance until they get sick. Thus, the only people who would ever pay for insurance would be sick people -- and because insurance gets more expensive, becoming sick winds up being an individual financial disaster. The irony of the situation is that avoiding such individual disasters is the reason health insurance exists in the first place.

The “rest” of the ACA that someone might not like -- its mandates, penalties, subsidies and regulations -- are all necessary to prevent this situation.

A mandate is necessary to encourage healthy people to purchase insurance. Penalties are necessary to enforce the mandate. Without them together, too high a proportion of the insured population will be sick. So when elected officials say they want to get rid of those provisions, they need to explain what they will put in place instead. Without something as effective -- or hopefully even more effective! -- the system fails.

One other thing must exist to encourage many healthy individuals to purchase insurance: financial help. Health insurance costs enough money that under any scenario, there is a large population that would have trouble affording it. This is why the ACA included subsidies to help the population under 400 percent of the poverty level pay for their health insurance. This means assistance for individuals earning under $48,000 a year.

Reducing these subsidies could save money for the government by reducing the number of people who purchase insurance. However, you again run into the problem that as fewer healthy people buy insurance, it gets more expensive for those who need to.

There are many other moving parts to the ACA, and most of them are in service to the “good parts” as well. 

If you don’t like insurance regulations, you must explain how you are going to keep insurance companies from discriminating based on health status. 

Do you think the government is mandating insurance that is too generous? Changing that would mean sick people will pay more for their health care. (Right now the cheapest ACA plans only cover 60 percent of medical expenses.)

If you want cheaper insurance plans for younger people, remember that this would mean older, sicker people will pay more for insurance. (Right now ACA plans can only charge three times as much for older people as for younger people.)

If you want the federal government to spend less money, that would mean fewer people will get or purchase health insurance.

Perhaps one might believe the ACA didn’t strike the right balance on these questions. There are a range of possible solutions that at the margins might work to strike a different balance. However, you can’t simply keep the “good parts” and get rid of the others.