Curing the Pre-Existing Conditions of ObamaCare
By Tom Miller and James C. Capretta @ the American (September 10, 2012)
The administration’s emphasis on pre-existing conditions falsely implies that the only way to cover future serious illness is with ObamaCare’s heavy-handed requirements.
Families USA, an advocacy group closely aligned with the Obama administration, recently claimed that 25 percent of non-elderly Americans, or 65 million people, suffer from a pre-existing condition that would threaten the security of their health insurance if it were not for ObamaCare’s protections.
This preposterous claim fits a pattern. ObamaCare’s apologists have been trying for three years to divert the public’s attention away from the trillion-dollar entitlement expansion, tax hike, and power grab by the federal government that ObamaCare represents. The emphasis on pre-existing conditions is aimed at creating the false impression that the only way to cover anyone who might become seriously ill is with ObamaCare’s heavy-handed and government-centric requirements.
This is nonsense. The country does not need ObamaCare to solve the relatively limited problem of restrictive insurance coverage for pre-existing health conditions. Nonetheless, it remains crucial for ObamaCare’s opponents to embrace a sensible fix. Apparent lack of a clear alternative should not provide an excuse for retaining the entirety of the ObamaCare edifice.
The starting point for addressing the problem of pre-existing conditions is a proper perspective on its size. The claim that tens of millions of Americans are at risk of losing coverage defies common sense. ObamaCare included $5 billion in new funding to subsidize insurance for the millions who were supposedly sick and without options. Far from the alleged 65 million people, only 77,877 had signed up for the subsidized Pre-Existing Condition Insurance Plan by June 30 of this year. The truth is that most Americans with health problems are protected by rules passed years ago by Congress and state legislatures that prohibit discrimination against them in job-based insurance. Not surprisingly, those employer plans pay for hundreds of billions of dollars of claims each year—from workers with “pre-existing” health conditions.
But don’t get us wrong. The problem of gaps in coverage for pre-existing conditions is real and needs to be addressed. It affects several million Americans, and that’s far too many.
The fundamental cause of gaps in coverage is a lack of portable health insurance, not the likelihood that almost everyone will eventually suffer from some spells of poor health. Health problems are an inevitable pre-existing condition of life, especially as we live longer. Lack of access to health insurance, however, is largely due to two particular public policies that unfairly penalize individuals and families seeking coverage on their own, rather than through their employer’s group coverage.
The Root of the Problem
First, for more than six decades, U.S. tax law has favored employer-sponsored insurance (ESI) with large subsidies. Americans who don’t have access to ESI, or lose it, remain at a serious financial disadvantage in finding more affordable insurance. As a result, almost all private insurance plans are selected by employers, and workers don’t own their policies.
Second, workers who move from one employer’s health plan to another employer’s plan are protected from being singled out for coverage restrictions or higher premiums based on their individual health status. Federal rules enacted in 1996 under the Health Insurance Portability and Accountability Act help protect workers from the possible risk that a new employer might treat them differently from other co-workers, provided that they maintain continuous qualified coverage in switching from one ESI plan to another. But when a worker needs to buy insurance on his own, outside of the workplace, problems can and do occur. The 1996 “portability” rules did not allow such seamless movement between group and individual plans.
Fixing the regulatory portion of this problem is straightforward. (A comprehensive fix also requires addressing the tax treatment of health insurance, which we address briefly below.) The federal government should create a nationwide rule (which states would implement) allowing the continuously insured to move from one insurance group to another, including individual market plans, without facing coverage exclusions or premium adjustments based on the development of potentially costly health conditions since they first gained coverage. This would create a powerful incentive for all Americans to stay insured and retain this protection without the heavy-handed penalties of ObamaCare.
To make this work, some additional federal funding of existing state high-risk pools is necessary, as well as the establishment of new pools in states without them. (Let’s face it—state governments are, and will remain, broke for the near future.) The federal funds will serve two purposes.
First, high-risk pools will be needed as a safety net for people who have not maintained continuous coverage, despite suffering from significantly higher health risks. Of course, the whole point of extending continuous coverage protection is to prevent large numbers of people from taking this risky route. For the protection to have any meaning, insurers must be allowed to charge much higher premiums to people who passed on obtaining coverage when they were healthy but want to purchase insurance once they’ve developed elevated health risks. Otherwise, far fewer people would stay continuously insured.
Even with clear penalties, however, some people will still go without coverage. In some cases, they may have chosen to be uninsured, but others will have experienced various economic or health misfortunes that prevented them from securing insurance. Regardless, a socially acceptable safety net will be needed for those who are very sick and without other options because of insufficient resources. (On the other hand, uninsured Americans who have costly conditions but sufficient resources should have to pay higher premiums for their coverage.)
This safety net should focus its taxpayer-provided resources on the most vulnerable citizens with the most urgent and expensive health needs and the least resources. This approach reflects a balance of competing priorities. Our society of course needs to be compassionate and provide for those with no other options, regardless of the circumstances. But, at the same time, it is also important to encourage those who can provide for themselves to do so to limit the burden on taxpayers.
Second, it will be necessary to provide some transition support to keep premiums from rising too much and too quickly in the individual insurance market, as this “continuous coverage” protection against changes in one’s health status is implemented across all forms of private insurance coverage. When workers were granted new portability protections to move between employer plans without pre-existing condition exclusions in the 1990s, the higher cost of coverage associated with granting this right to workers was easily absorbed in the larger market of employer-based plans. But allowing continuously covered workers to leave job-based plans and get individually-owned coverage at standard rates, regardless of their health status, could lead to a large influx of people into the latter insurance market who were staying in their jobs mainly for the health coverage. The still-thinly-populated individual insurance market then would be prone to destabilizing premium spikes.
To smooth out the transition, high-risk pools in the states could provide additional temporary (no longer than a five-year phase-out period) subsidies to those insurance plans that experience unusually large increases in their claims costs due to attracting enrollees with higher health-risk profiles. Over time, as movement among plans accelerates, premiums will find a new equilibrium on a more level playing field, and no further support of this kind will be necessary.
The overriding policy goals here are to protect the most vulnerable Americans against excessive insurance premiums based on health risk, while maintaining strong incentives to remain continuously covered. Americans simply switching between employer group insurance and individual market insurance won’t face the risks of coverage restrictions or higher premiums if their personal health status changes.
The Goal: Seamless Portable Coverage in a Functioning Marketplace
Getting to a world of seamless portable coverage across all types of private insurance that rewards the many millions of Americans who act responsibly remains the policy destination. But to get from here to there requires better-targeted subsidies and incentives, prudent transition rules, and clearer principles.
This combination of continuous coverage incentives and high-risk pool subsidies won’t solve the more significant health policy challenges we face. But it will clear away the politically manufactured fog that obscures the need for better solutions to the problems that ObamaCare either ignores or aggravates.
What American healthcare needs is the discipline and accountability that comes with a functioning marketplace. More than anything else, that will require transitioning away from today’s open-ended federal subsidies for insurance in Medicare, Medicaid, and job-based coverage toward a system of “defined contribution” support so that consumers who economize are rewarded with lower out-of-pocket costs. Those federal subsidies also need to be retargeted based on an individual’s relative income and health status. Further, insurance regulation must foster responsible competition among the states and informed choice by consumers instead of regulatory coercion.
In the end, the real debate over ObamaCare and what should replace it is not about how many Americans might face a pre-existing health condition in the future. It’s fundamentally about whether healthcare resources will be allocated through the government-centric channels of political expediency, one-size-fits-none bureaucratic commands, and special-interest deal making or through a system of decentralized and patient-centered choice and competition.