For the past six months or so, Obamacare subsidies for people who buy their own health insurance have been an issue that has loomed over a sharply divided Congress.
One reason why the two parties can’t reach some sort of compromise is that neither party has been willing to tackle the three biggest problems that afflict the market the Affordable Care Act created.
On the buyer side, we have been trying to force people to buy insurance they would never buy with their own money.
On the seller side, we have been trying to force insurers to enroll people they do not want to enroll. And on both sides of the market, we have created perverse incentives that cause costs to be higher and quality lower than would otherwise have been the case.
These problems are not insurmountable. The first problem is so easy to solve that even President Trump (not exactly an expert on health economics) has thought of it. The next two problems are a bit more difficult. But we have found solutions in other parts of our health care system that we can reliably copy.
Buyer choices
The difficulty of trying to force people to buy something they don’t want to buy became evident in year one. Fast food restaurant chains were forced to offer their employees insurance that was so comprehensive, we were led to believe it would cover the cost of a million-dollar premature baby. For self-coverage, employees had to pay 9.6 percent of wages, and out-of-pocket spending could be as high as $6,350. To cover a spouse and children, workers were asked to pay the full premium.
The results were shocking. Almost all fast-food employees turned these offers down – both for themselves and their families.
Turns out, young healthy families with no assets want to know they can pay the emergency room bill if their child wakes up in the middle of the night with a stomachache. They have almost no interest in coverage for low-probability medical events that could cost a million dollars.
In the years that followed, Obamacare insurance became increasingly unattractive. Average premiums for marketplace plans have grown twice as fast as they have in a typical employer plan. Last year, the average deductible in the most commonly selected exchange plan was $4,572, more than twice as high as in an average employer plan ($1,787). The maximum out-of-pocket expense in the average exchange plan was also more than twice as high ($9,450) as in the average employer plan ($4,750).
The current controversy concerns a second tier of federal tax subsidies for marketplace insurance. Although created during the COVID-19 era, the real reason for these enhanced subsidies was not COVID-19. The unsubsidized part of the market was in a death spiral. The healthy were dropping out in droves. As the pool became sicker, premiums kept rising to cover the higher cost.
So what’s the answer?
KFF (formerly Kaiser) says that premiums could be cut in half for most people if they could buy the type of insurance that was generally available before there was Obamacare.
So, let people do that.
What if they choose a plan that fails to cover an unexpected problem (like substance abuse) that is required coverage in the Obamacare exchanges? Let them immediately switch to a silver exchange plan that meets that need. Keep Obamacare insurance in place for people who need it, when they need it. But let most families have cheaper and better insurance if it meets their current needs.
Seller compensation
It should come as no surprise that insurers are not anxious to enroll people whose premium payments are well below the expected cost of their care. What happens when you force them to take all comers—regardless of expected cost? They will make their plans attractive to the healthy and unattractive to the sick.
High deductibles and high out-of-pocket expenses are two ways of discouraging people who plan to spend a lot of money on their care. Another ploy is narrow provider networks.
In Dallas, Texas, the UT Southwestern Medical Center (one of the top medical centers in the entire world) does not take Obamacare exchange insurance. Nor does Baylor Medical Center. The same is generally true of the Mayo Clinic, the Cleveland Clinic and other centers of excellence around the country.
What is the answer to this problem? We’ve already created one in the Medicare Advantage (MA) program.
This is the only place in our health care system where doctors who discover a change in a patient’s condition (say the emergence of cancer) can send that information to the insurer (in this case, Medicare) and receive a higher premium payment to cover the expected increase in treatment costs.
As a result, something happens in MA that doesn’t happen anywhere else. Health plans specialize and try to attract patients with such conditions as diabetes, heart disease, respiratory disease, etc. MA plans welcome patients with costly health problems – patients that insurers in other markets try to avoid.
Perverse incentives
Because subsidized premium payments are capped as a percent of the enrollee’s income, most enrollees bear no personal cost when they choose a more expensive health plan. The extra cost is paid by the taxpayers. And since enrollees are not price sensitive, insurers don’t really compete on price.
Contrast this with the federal employees’ health benefits program. The employer subsidy is a fixed amount, independent of the employee’s health plan selection. If the employee chooses a more expensive plan, the extra cost comes out of the employee’s pocket, not some other pocket. Because this system makes buyers price sensitive, insurers in this market compete on price and quality just like they do in other insurance markets.
It shouldn’t be that hard for Congress to redesign the Obamacare marketplace so that it works as well as the health insurance system they have created for its own employees.