Fundamentally, the Affordable Care Act (aka Obamacare) has a flawed design. Its architects meant to appeal to the public, promising what the old system could not fully deliver – guaranteed access to affordable health cover and coverage for pre-existing conditions (PECs). But they were wrong about being able to keep your doctor or your old policy if you wanted.
Previously individual policies had to exclude PEC coverage to be financially viable. Yet employer group policies often covered it after a waiting period, but the extra costs were spread over their fellow workers – a real burden on medium and small-sized companies. Under Obamacare, the very high PEC costs are still spread too narrowly – on each of the very few insurers who have agreed to stay as exchange insurers.
Need a Very Broad Base to Bear PEC Risk
In the most successful European healthcare systems, e.g., Germany and Switzerland, the federal government handles the PEC risk, via national pools and government subsidies, sparing the burden on individual insurers. Those costs are spread through the national tax base, not borne by an individual insurer who is prohibited from rejecting insureds with a high-cost PEC.
Not Designed to Last
Skeptics believe that Obamacare designers knew of this potential death spiral of increasing costs among fewer and fewer insurers, ultimately causing it to fail. To appeal to the public, they made expensive PECs free for exchange insurers. Also, other costly sweeteners were made free: lifetime unlimited benefits and coverage for children until age 26.
This meant that the few insurers left in the exchange would continuously have to raise rates substantially, as lower-risk and younger people would opt out. Higher-risk insureds would stay and force still higher premiums to avoid insurer collapse. That spiral of continually more adverse selection would mean the demise of the system. The exchange insurers could simply pull out. The federal law establishing Obamacare did not have the authority to impose mandatory insurer participation, like state laws can on assigned risk participation.
The likely strategy of Obamacare’s architects was for it to be a stopgap measure before converting it to “single-payer” socialized medicine. Major group insurers initially supported Obamacare passage because, after conversion to single payer, those insurers would become third-party administrators (TPAs). When servicing the future single-payer market, TPAs would be paid a guaranteed fee (e.g., 3 or 4%), with no chance of a loss, to process premiums and pay claims on behalf of the federal government. This strategy ignores failed past experiments with TPAs, where no stake in the outcome, just tended to drive up overall claim costs.
Another clue that Obamacare was not designed to last was that it never addressed the competitive disadvantage of individual policies having no tax deduction. In contrast, employer-based coverage enjoyed the longstanding tax exemption for group insurance. This was installed in World War II to get around wage and price controls, but was not rescinded, partially because the public liked the tax deduction.
In his landmark 2001 essay, “How to Cure Healthcare,” Nobel Economics Laureate Milton Friedman decried this feature because it drives up overall costs due to defensive medicine, when the individual is insulated from the price/value decision. “Who cares about that extra unneeded procedure? You are not paying for it.”
Doctors are incentivized to order extra, paid-for tests, as “defensive medicine,” to mitigate a litigious US tort environment. Some estimates are that this drives up overall costs by 10% to 15%.
Also, because the public liked the tax deduction, to compete better, the individual policy option may have to give some tax relief.
Obamacare Not Very Effective in Getting to Universal Healthcare – Many Still Uninsured
Obamacare proponents originally cited a goal to target the 49 million uninsured Americans in 2010 who needed health insurance. Yet after 15 years, there were still 27 million uninsured by the government’s own count. The truth is that many young people don’t buy exchange policies because they are too expensive. Even the fallback tactic of a tax for not buying has virtually disappeared now. Low-cost health risks are simply self-insuring, relying on hospital emergency rooms as a backup.
In the last few years of the Biden administration, $70 billion a year of federal money was used to subsidize the very expensive premiums charged by exchange insurers. Those subsidies expire this year, and the government shutdown became a tactic to try to force the continuation of the expensive Biden subsidies.
Also, many of the so-called newly insured are only getting expanded Medicaid. Obamacare’s Medicaid expansion lured 30 states with a 9-to-1 federal funding match for new enrollees, covering adults making 38% above the poverty line standard. Yet, many can’t find doctors willing to take Medicaid because the government pays far below the cost of care. And Medicaid spending has exploded—from $390 billion in 2010 to over $900 billion today.
Don’t Overcharge Young People
A major Obamacare flaw was its mispricing of young people’s coverage – not allowing rating by age. This was the very first comment at the 2012 Supreme Court broadcast hearing evaluating whether Congress could mandate the purchase of insurance. Obama’s Solicitor General had argued that young people were irresponsible in not buying insurance and thus burdening hospital emergency rooms to subsidize treating them for free, as young victims could not afford the large bills after a serious injury or sickness.
Justice Samuel Alito debunked this argument immediately, blaming the government for creating the problem in the first place. Many states require “community rating,” meaning they don’t allow health insurance rating by age. So, young people are criticized for not buying an overpriced policy, at say a $3,000 premium, when rating by age would allow them to buy a policy for much less. Alito then criticized Obamacare’s solution. It continues to overcharge them by a lot; only now it requires them to buy the overpriced coverage to subsidize older insureds. As Alito concluded: “There has to be a better way.”
The SCOTUS final ruling, by 7 to 2, was that mandating purchase was unconstitutional, under Article I, Section 8 – not an enumerated power of the federal government. Instead, it allowed a tax on those not buying cover, a small amount initially, and now not being enforced.
Can’t Adopt European-Style Federal Insurance
If Obamacare is not the best path to universal healthcare in America, where do we look for options? Unfortunately, the world’s best universal healthcare systems (e.g., in Germany and Switzerland) cannot be emulated here. While they both offer competition as an improvement over socialized medicine, their federal governments have the authority simply to mandate their programs and require federally designed coverage. They also have the taxing will and authority to cover full PEC subsidies. They are not constrained by a Constitution like ours that exclusively reserves those solutions for the states.
A Better and More Sustainable Solution – Do It by State
To avoid the questionable solution of federal mandates, replace Obamacare with a sustainable, market-based solution by state. The blueprint already exists in state auto insurance markets. Every state virtually requires all cars to carry liability coverage. Hard-to-place high-risk drivers are guaranteed coverage through assigned risk plans with subsidized rates.
A similar framework could work for health insurance. A Georgia Bill was submitted to its legislature that would guarantee access to basic health coverage and subsidize pre-existing condition costs through a state-managed pool. Subsidies would be means-tested—a low-income diabetic might receive an 80% to 100% subsidy for PEC coverage, while the highest earners receive none.
To further lower costs, the Georgia Bill adopts fair, true-cost-based actuarial principles and encourages tax-advantaged health savings accounts (HSAs). Via huge cost-saving deductibles, it lets the tax-advantaged HSA account pay bills below the deductible.
A state could in theory require health insurance purchase, even though the federal government cannot. However, that mandate might not be needed. If such a high-deductible HSA policy were allowed, at say a $500 a year premium, young people would be incentivized to buy it on their own. Private sector banks giving them credit cards might even require getting such a policy like mortgage companies insisting on fire insurance to protect their collateral.
How to Guarantee and Fund Expensive PEC Coverage
The solution to costly PECs is to spread the burden broadly on a government tax base and not waste subsidies on wealthier people. Have a state set up a PEC pool, with matching federal dollars, at say a 3-to-1 ratio, like Medicaid. Possibly use the Medicaid federal funding support rationale that, absent a subsidy, lower-income people would enter poverty if they had to pay full price for needed health insurance.
Also, measure the true cost of PEC coverage by type of condition. For example, diabetes might have an actuarial expected average cost of $6,000 a year to cover. Instead of just having the pool pay for it, let specialty insurers bid on the policy, using research on potential mitigators of loss for a discount. Thus, society would benefit from the research, and the insured could reduce the losses by adopting the incentivized activity.
Having a competitive state program offering basic health coverage could work as efficiently as auto insurance-assigned risk plans do. Overall, 50 auto insurers competing by state give assigned risks a generous subsidy and guarantee needed coverage efficiently. Personal auto insurance total profit margins have averaged close to 4% for decades in the U.S.
Utilize the Existing State Insurance Regulatory System
Many people are not aware of the existing insurance regulatory system in every state. Established by federal law in 1945, states have regulatory jurisdiction over rates, rules, coverages, and financial responsibility on all insurers licensed in their state. They even monitor and publish overall profit margins each year for every insurer and every major line of insurance. They also periodically audit every insurer for adherence to state laws.
So not only is state regulation available to keep insurance premiums fair and reasonable but having many auto insurers by state helps keep rates competitive, and better service as well. Look at all the ads on TV trying to get you to switch easily if you are not happy.
Next, lower the employer tax deduction for so-called “Cadillac” programs of too-generous benefits. This will save tax dollars and lower costs by eliminating some less-than-necessary procedures. Employers can save some of the defensive medicine costs via HSAs and potentially raise cash compensation to employees who lose some tax savings.
Employer-Based Health Insurance Is Outmoded
Few workers stay long with their employer. When leaving current employment, their health insurance disappears. The continuation of health coverage, COBRA, is very expensive, and often a new employer has a waiting period, especially for PECs. Much better is to have an individual policy, as it is portable, like auto and homeowners insurance.
Furthermore, businesses would rather concentrate on their core skills and not have to subsidize health insurance. In many European countries, employers do not have to subsidize health insurance, so their products can be more competitive than in America, where group health insurance costs lower the cash compensation of workers. Individual policies also avoid the problem of unmotivated new employees merely accepting a job for the health cover, not because they are committed to the firm’s overall mission.
How to Address Tax Inequity for Individual Policies
Tax relief can easily be given for individual policies by expanding the standard tax deduction if a person buys a basic health policy. Start with a $500 extra annual standard deduction for those aged 20 or younger. Increase the dollar amount as the insured ages – an extra $100 for each year of age above 20, reflecting that average health insurance costs clearly increase by age.
Index those deductions by the same cost-of-living adjustments as Social Security. Married couple deductions would be double the single amount.
Wealthier citizens filing itemized returns don’t use a standard deduction. They could still itemize for a basic individual health insurance policy.
The reduction to the federal treasury by the new deductions allowed will be minimal, as there are very few individual policies today.
Would the U.S. Supreme Court Allow a State Program Like Georgia’s?
Right now, a federal law, Obamacare, mandates that every health insurance policy must give PEC coverage at no extra premium. If the Georgia Bill were enacted, another review by SCOTUS would likely find that the ACA is not constitutional on additional grounds not reviewed last time. Using the same reason it did for banning a federal mandate to purchase coverage, they could then find that Congress can’t mandate free extra coverage for PECs, or free lifetime unlimited benefits, or free coverage for dependents until age 25. Requiring policy coverages for private health insurance policies is not an enumerated federal power in Article I, Section 8.
Such a Court finding would likely give states several years to enact alternative programs that do comply. Maybe adopt something like Georgia’s or even the Massachusetts “Romney Care” law. The principle of federalism embedded in our Constitution allows the states to innovate, and the more successful state systems will be emulated.
Republished from Brownstone.org under a Creative Commons Attribution 4.0 International License.
