An Obamacare Truce?

October 3rd, 2015

The Affordable Care Act has not lived up to its name. As I’ve discussed at some length, the winners of Obamacare tend to be those who could not afford insurance before the law went into effect–either because they did not have enough money, or because pre-existing conditions made their premiums unaffordable. This number is fairly finite–under 20 million. But what about the two-hundreds millions people who were quite content with their health insurance policies before Obamacare, but stand to lose them? For the majority of them, they are paying more, and getting less. This–and not any litigation challenges–poses the biggest existential threat to the ACA. If rates continue to increase, as quality of care decreases–and more people opt to go uninsured–the law will quickly become unstable. In Slate, Reihan Salam cogently summarizes the numbers:

Whether the next president is a Republican or a Democrat, Obamacare is going to be overhauled. The reason is that in its current form, it is not serving middle-class families all that well. Back in June, Robert Laszewski, a close observer of the insurance industry, pointed out that among people eligible for the Obamacare exchanges, it is only the poorest and sickest who’ve been signing up for coverage in large numbers. For example, 76 percent of eligibles earning between 100 and 150 percent of the federal poverty level have enrolled while only 20 percent of eligibles earning between 251 and 300 percent have done so. This is despite the fact that the law uses all kinds of carrots (subsidies for those who can’t afford coverage) and sticks (penalties for those who forego coverage) to get uninsured people to sign up. The problem, according to Laszewski, is that while Obamacare-compliant plans are a good deal for the poor, who enjoy generous subsidies, and the sick, who get far more in benefits than they pay in premiums, they appear to be a bad deal for everyone else.

Recently, the economists Mark Pauly, Adam Leive, and Scott Harrington released aworking paper that estimates how much better or worse off “non-poor” uninsured people’s earnings would be after buying Silver or Bronze plans on the Obamacare exchanges. Among other things, they took into account the average financial burden involved in buying coverage as well as the value associated with consuming more medical care. What they found is that while most uninsured people making between 138 and 250 percent of the federal poverty level seem to be somewhat better off, a substantial majority of those earning more than 250 percent seem to be worse off. Essentially, most of the better-off uninsured are paying far more for their Silver and Bronze plans in premiums than they are getting out of them in benefits.

The result is that millions of middle-class people are choosing to go without coverage, despite the risk that entails. It turns out that it is very hard to force people to buy products that they don’t want. True, the IRS could get much tougher about forcing the uninsured middle-class to pay penalties, and Obamacare’s champions could get behind making these penalties more onerous. But does anyone see this get-tough approach as a huge vote-winner? As long as middle-class voters don’t believe that Obamacare is benefiting them, Obamacare is going to be politically vulnerable.

So what to do? Reihan offers this a truce that both Republicans and Democrats should–but won’t–jump at:

What might an Obamacare truce look like? Rather than fight the fact that the Obamacare exchanges have become a refuge for the poor and the sick, Republicans and Democrats should embrace it. The central elements of the Obamacare truce would be to repeal the unpopular individual and employer mandates, which are meant to corral people into buying insurance, and to deregulate individual insurance plans that are not sold on the exchanges. (Right now, all individual health insurance plans must be compliant with Obamacare’s insurance regulations.) If you want to buy an Obamacare-compliant policy, you’d be welcome to buy one on an exchange. But Obamacare’s insurance regulations and its premium subsidies would only apply to plans sold on the exchanges.If you choose to buy private insurance not on an exchange, your plan would be regulated by your state government, and you wouldn’t be eligible for any financial assistance. Premiums for off-exchange plans would tend to be much lower than for Obamacare-compliant plans, as they’d offer fewer free services upfront and they’d skimp on Obamacare-mandated benefits that many consumers don’t want or need. Yet because these plans are better-targeted to meet the needs of the middle-class unsinsured people who are avoiding the Obamacare exchanges like the plague, there is good reason to believe that coverage levels would increase. That’s an outcome both the left and the right should celebrate.

In effect, the Obamacare exchanges would only serve as high-risk pools:

Conservatives can talk a big game about replacing Obamacare with high-risk pools. Yet they often underestimate how expensive these high-risk pools would be and how difficult it would be to get them off the ground. The Obamacare exchanges are perfectly designed to serve this function. The downside, of course, is that because the exchanges would serve a poor and sick population, theaverage cost of serving beneficiaries on the exchanges would be high. This in turn means that insurers would charge very high unsubsidized premiums for exchange plans.

But isn’t this the feared death spiral? Reihan disagrees–very few people would sign up.

But these high unsubsidized premiums would affect relatively few people, as almost everyone who isn’t eligible for premium subsidies would flock to cheaper, lightly regulated off-exchange plans. (One big exception would be states like New York that had heavily regulated insurance markets even before Obamacare. This is an argument for allowing consumers to buy off-exchange insurance policies across state lines, so that New Yorkers could take advantage of lightly regulated Texan policies, or for states like New York to embrace deregulation.)

In many respects, a tax on insurance policies that would fund these sort of high-risk pools for the 20 million or so people that benefit from Obamacare would be far less destructive than forcing nearly every American onto the exchanges.

This is an interesting proposal, that incorporates elements of Obamacare, while eliminating the most unpopular aspects. I hope to see many more of these plans leading up to 2016.