With his widely followed, and positively reviewed, address to Congress last week, President Trump showed how easy it could be to unite Washington around a big-budget centrist agenda on health care, immigration, taxes, infrastructure and the military. But the continued accusations surrounding his campaign’s alleged Russian connections, and the President’s conspiratorial responses, have insured that the battle lines have only hardened. However, anyone with even a casual concern with ballooning government debt should take notice just how easily both parties in Washington would agree to vastly expand the gushing red ink if a political truce can be brokered. Those fears should galvanize around the newly-issued Republican replacement for Obamacare. If such a monstrous bill could successfully navigate Congress, we would find ourselves stuck deeper in a deficit deluge than we can possibly imagine.
Obamacare attempted to rewrite the laws of economics by preventing insurance companies from charging high-risk customers more than low-risk customers. But to make this work without bankrupting the companies, all agreed that the young and healthy would need to be forced to buy insurance. The flaw that doomed the law was that the penalties for not buying were too low to actually motivate healthy people to buy. Consumers were charged just a few hundred dollars per year to forego insurance that would have cost many thousands. Given that they could always decide to get insurance in the future, at no added cost, the choice was a no-brainer. Without these healthy people keeping costs down, insurance premiums have risen alarmingly.
Ironically, the Supreme Court noticed this flaw as well. In sustaining the Law’s constitutionality, Justice Roberts argued that the relative lightness of the penalties was insufficient to compel anyone to buy insurance and, as a result, he considered them to be a “tax” that could be voluntarily avoided rather than a coercive penalty to force commercial activity. (Presumably had the tax been high enough to actually work, it would have rendered Obamacare unconstitutional – see my 2012 commentary).
However, the Republican replacement plan, which removes all taxes on individuals who don’t buy insurance, and all penalties on employers who do not provide insurance to their employees, will actually make the problem far worse.
The only reason healthy people buy health insurance is that they know that if they wait until they get really sick no insurance company will sell them a policy. The same principal holds true for all insurance products. You can’t buy auto insurance after you get into an accident. You can’t buy life insurance at a reasonable cost after your doctor has given you six months to live. The fact that your car is already wrecked, or your arteries already clogged, are pre-existing conditions that no insurance company would be expected to ignore.
Allowing voters the low-cost option to buy health insurance after they actually need it is very popular. It’s like promising motorists they can stop paying their monthly auto insurance premium and just buy a policy after they have an accident. If the government were to require this, all auto insurance companies would quickly go out of business (unless they were bailed out by the government).
Obama’s solution was to use the penalties to force healthy people to buy insurance before they actually needed it. As the years wore on, the relatively low cost of the subsidized exchange plans and the availability of those plans to anyone proved popular. However, the mandates and penalties, as well as skyrocketing premiums for non-subsidized policies, were clearly unpopular.
The Republicans have taken the “brave” political approach of keeping the parts that are popular (subsidized access, pre-existing conditions waivers, expansion of children’s coverage until age 26) and jettisoning those that are not (the mandates and the penalties). The new plan pretends to offer a replacement to the Obamacare penalties by allowing insurance companies to charge a 30% increase to the premium for those who come back into the system after having previously allowed their coverage to lapse. But the problem here is that the premium increase is far too small to force anyone healthy to buy insurance. In fact, it is so low that any healthy person currently insured may decide to drop coverage.
The effect of this law, were it actually enacted, would be the death of the health insurance industry. As the law removes the requirement that larger employers provide insurance, I believe that big companies would look to self-insure employees for routine care. For example, employer and employees could pay into a common risk pool that would set their own deductibles and co-pays. For employees who incur medical charges in excess of the cost of an actual policy, the pool could provide funds to pay for outside insurance at the increased 30% premium. As a result insurance costs would be encountered only if there is a need.
