Obamacare Follow-up

Obamacare

After reading the comments following Danielle’s Obamacare post, I thought a little follow-up post focusing on some of the text and reasoning of the law might be in order. I may write again soon to discuss some of the recent controversies.

Through a huge legislative package like the PPACA, Congress sought to expand health insurance coverage to include virtually every American[1] while at the same time reducing spending. According to a Congressional Research Service report, the PPACA:

increases access to health insurance coverage, expands federal private health insurance market requirements, and requires the creation of health insurance exchanges to provide individuals and small employers with access to insurance. PPACA increases access to health insurance coverage by expanding Medicaid eligibility, extending funding for the Children’s Health Insurance Program, and subsidizing private insurance premiums and cost-sharing for certain lower-income individuals enrolled in exchange plans, among other provisions. These costs are projected to be offset by increased taxes and other revenues and reduced Medicare and Medicaid spending. The law also includes measures designed to enhance delivery and quality of care.[2]

In addition to requiring the creation of health insurance exchanges at the state level,[3] the law seeks to expand coverage through existing programs (e.g., Medicaid), strengthen previous laws intended to contain costs, and introduce new managed care programs intended to contribute to both goals.

The changes to U.S. health care made by the PPACA which bear most immediately on the present discussion have to do with its guaranteed issue, community rating, and minimum essential coverage provisions. These provisions, taken together, are the centerpiece of the legislation. Along with the expansion of Medicaid, these provisions were at the heart of the legal challenge and the most recent controversies. Therefore, I think it worth reviewing how they work, what the require, and the reasoning behind them.

The guaranteed issue provision forbids health insurance providers from establishing:

rules for eligibility (including continued eligibility) of any individual to enroll under the terms of the plan based on any of the following health status-related factors in relation to the individual or a dependent of the individual: (A) Health status; (B) Medical condition (including both physical and mental illnesses); (C) Claims experience; (D) Receipt of health care; (E) Medical history; (F) Genetic information; (G) Evidence of insurability (including conditions arising out of acts of domestic violence); (H) Disability.[4]

In other words, the new law forbids any insurance company from denying health insurance coverage to any individual for virtually any reason. Each person who applies is guaranteed health insurance, even if, because of a pre-existing condition, the term “insurance” does not really apply.

Of course, insurance is an arrangement in which person A agrees to pay entity B now, and in exchange entity B agrees to assume the risk of a given future occurrence with respect person A. If the event for which entity B assumes the risk has already occurred and is an on-going concern, there is in fact no insurance at all. In that case, person A is simply paying entity B presently for a service presently provided. In the health care industry, this is the difference between paying for health insurance and paying for health care. Since a ninety percent chance of a one thousand dollar expense in the future[5] is less costly than a one hundred percent chance of the same expense in the present,[6] paying for health care will be more costly than paying for genuine health insurance.

Insurance companies facing this requirement might simply charge more costly individuals a higher premium. The higher premium may in turn prove so prohibitive to an individual with a preexisting condition as to amount to a denial of coverage. This is where the community rating provision comes in. It requires that:

With respect to the premium rate charged by a health insurance issuer for health insurance coverage offered in the individual or small group market–

(A) such rate shall vary with respect to the particular plan or coverage involved only by–

(i) whether such plan or coverage covers an individual or family;

(ii) rating area, as established in accordance with paragraph (2);

(iii) age, except that such rate shall not vary by more than 3 to 1 for adults (consistent with section 300gg-6(c) of this title); and

(iv) tobacco use, except that such rate shall not vary by more than 1.5 to 1; and

(B) such rate shall not vary with respect to the particular plan or coverage involved by any other factor not described in subparagraph (A).[7]

In other words, not only must insurance companies accept anyone who applies for coverage, they may not consider preexisting conditions in determining what premium to charge.[8]

As even a casual observer would be keenly aware, the guaranteed coverage and community rating provisions, taken together, while helpful to individuals with preexisting conditions, create a set of incentives for individual health care consumers that threaten to undermine the entire health insurance market. Rational individuals will not likely be inclined to pay premiums now for coverage they may receive at any time for the same rate. The concern is that individuals will find it perfectly rational to sign up for health “insurance” after a costly diagnosis or on the way to the hospital following a costly injury.[9] How does Congress legislate its way out of this legislatively engineered dilemma? Simply require all individuals to get health insurance. That is where the minimum essential coverage provision, or individual mandate, comes in.

The minimum essential coverage provision requires that “an applicable individual shall for each month beginning after 2013 ensure that the individual, and any dependent of the individual who is an applicable individual, is covered under minimum essential coverage for such month.”[10] In addition to any government-sponsored program, “minimum essential coverage” is defined as “coverage under an eligible employer-sponsored plan”, “a health plan offered in the individual market within a State”, “a grandfathered health plan”,[11] or “such other health benefits coverage, such as a State health benefits risk pool, as the Secretary of Health and Human Services, in coordination with the Secretary, recognizes for purposes of this subsection.”[12] Any “applicable individual” who fails to comply “for 1 or more months” is subject to “a penalty with respect to such failures.”[13]

On March 21, 2010, the House of Representatives gave final approval to the 2,500 page Patient Protection and Affordable Care Act. Two days later, President Obama signed the bill into law. One commentator described the occasion this way:

After a century of trying, the United States has joined the world’s other major industrialized nations in providing all its citizens with access to essential health care…The Affordable Care Act will usher in a new era in American health care—one in which every American has access to affordable health insurance coverage and no one is turned away simply because they have a preexisting condition…Reform is a historic victory for all Americans.[14]

Of course, not every American saw this particular reform as a “victory.” Not one Republican in either chamber voted for the bill, and the very same day the bill became the subject of a legal challenge destined for the Supreme Court.

A.K.


[1] The Congressional Budget Office estimates that the PPACA will increase the proportion of the population with health insurance from 83% to 94% by 2019. Michael Tanner, health policy analyst at the Cato Institute, points out that “roughly 47 percent of the newly insured…will…be put into the Medicaid or SCHIP programs. Given that roughly a third of physicians no longer accept Medicaid patients, these individuals may still find significant barriers to access, despite their newly insured status.” Bad Medicine: A Guide to the Real Costs and Consequences of the New Health Care Law. Washington, D.C.: Cato Institute (2011).

[3] Each state is required to establish an “American Health Benefit Exchange” by January 1, 2014 “that facilitates the purchase of qualified health plans” and “is designed to assist qualified employers in the State who are small employers in facilitating the enrollment of their employees in qualified health plans offered in the small group market in the State.” 42 U.S.C.A. § 18031 (West). The exchanges are meant to spur competitive pricing for health plans. The Secretary of Health & Human Services will contribute funds to each state for the establishment of the exchange as well as establish criteria for eligible plans. Each exchange is required to operate as a state agency or a non-profit entity established by the state and to be financially self-sustaining by 2015.

[4] 42 U.S.C.A. § 300gg-1 (West).

[5] p(.9) * 1000 = $900 discounted to present value.

[6] p(1) * 1000 = $1000 at present value.

[7] 42 U.S.C.A. § 300gg (West).

[8] The non-partisan RAND Corp. recently conducted a study for the AP predicting that premiums for young healthy individuals could rise by as much as 17%. Some studies suggest that rates for young men could rise as much as 30%. See Carla Johnson, “Health Premiums Could Rise 17 Percent for Young Adults,” AP, March 29, 2010. Its too soon to say for sure what the overall effects will be.

[9] “Without the individual mandate and penalty in place, the argument goes, people would simply ‘game the system’…which would result in increased costs for the insurance companies.” Florida ex rel. McCollum v. U.S. Dept. of Health & Human Services, 716 F. Supp. 2d 1120, 1129 (N.D. Fla. 2010).

[10] 26 U.S.C.A. § 5000A (West).

[11] This grandfathering will not help individuals in the individual market for health insurance who renew annually. When these individuals renew, they are subject to the same minimum essential coverage standards as everyone else. Thus, as millions of Americans have recently discovered, they may not keep their old coverage—at least not for very long—if it does not meet the minimum criteria under the law.

[12] Id.

[13] Id.

[14] Karen Davis, “A New Era in American Health Care” (2010).

2 thoughts on “Obamacare Follow-up

  1. In my eyes, the idea of socialized healthcare is an inherently good one, and many countries have successfully addressed the necessary precautions to make sure that it works without a hitch. However, having grown up in America, where Freedom rings and capitalism matures, and spending my fair share of time in American hospitals, I am a huge proponent for Americans to buy their own insurance plans provided they have the means. I have been blessed and lucky enough to have both military and corporation-based health insurance for my entire life, and have had nothing but positive experiences with doctors if I’m unlucky enough to get sick or hurt. As the saying goes, though, you get what you pay for, and some people are not lucky enough to enjoy the healthcare benefits that many have, and instead of singing the praises of privatized healthcare, I will address the problems with socialized healthcare in the US. For starters, wait times for emergency rooms will increase, doctors’ wages will go down, dis incentivizing them to work their hardest or reach for higher positions within the hospital, and many patients will likely get lost in the mix. I feel that socialized healthcare could work, but it should be 100% optional and easy to use. President Obama has had some struggles with getting the healthcare.gov website to work, and if I can hardly trust the government to let me pay a parking ticket or resolve other legal or bureaucratic issues in a timely manner, I can’t say that I’m terribly excited to see how fast and efficient they are at providing help to a patient who is bleeding to death, or needs an emergency surgery. To me, the biggest argument that can be made against socialized healthcare in the United States is that all citizens must sign up for the same program, while the majority of our federal governmental leaders are exempted. I believe in getting the best that you can possibly get, and if this new healthcare “solution” isn’t good enough for president Obama or his family, then it isn’t good enough for me.

    • Ryan,

      Great insights, thanks for sharing. However, a point of clarification on content is needed. No one is exempt from getting health care without paying a fine, or tax, to not have it. People can keep private plans, but there is a standardization of health care services that insurers have to provide to everyone.

      Danielle

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