Republicans in Congress have done the impossible. They have come up with a solution to the Affordable Care Act (aka Obamacare) that scraps the hated penalties for not having insurance, while keeping the most popular initiatives like banning insurance companies from turning away people with pre-existing conditions and eliminating the lifetime limits on coverage. How have they pulled off such a feat?
Answer: by fudging it.
“Nobody knew that health care could be so complicated,” as President Trump said recently, and I am certainly no expert. But here are the basic principles of how Obamacare and the replacement plan (which I will call Republicare) stack up.
Insurance works by getting lots of high risk and low risk people together and spreading out the costs among them. In healthcare, that’s tricky, as sick people are automatically more likely to buy health insurance than healthy people. If you have a system where only sick people are included, costs skyrocket. Pre-Obamacare, insurance companies dealt with this problem by denying people coverage if they had a pre-existing condition, which affected anyone unlucky enough to have some minor but disqualifying malady like asthma or anaemia, and was effectively a death sentence for anyone with something more serious. Lifetime limits on coverage were also allowed, meaning if your healthcare got too expensive (say because you were fighting cancer), your insurance company could drop you, leaving you out of the market, with a new pre-existing condition.
One of the key principles of Obamacare was to stop both of these practices and ensure anyone could get coverage. That increased the number of sick people in the pool, which needed to be offset by encouraging more healthy people in to subsidise them. Enter the individual mandate, a financial penalty for refusing to buy insurance. If you were healthy but uninsured, Obamacare would fine you, in the hope that you would change your mind and enter the system, mitigating the costs of all the sick people who were now also included.
Many Americans hated this. They called it a tax and were furious the government was effectively forcing them to buy something they didn’t want. Which it was – for the sake of providing healthcare to less-healthy Americans, but that didn’t make it any more popular. During his campaign, President Trump promised to scrap the individual mandate to “fix” Obamacare. The new Republicare plan does the former, but falls short of the latter.
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If you scrap the penalty for not being insured, as Republicare does, you need to either reverse the pre-existing conditions and lifetime limits provisions, or find another way of encouraging healthy people to buy insurance and diversify the risk pool. The first option would devastate millions of Americans and is hugely unpopular, so Republicare has another solution: no individual mandate, but a 30 percent surcharge on the price of insurance if you went 63 days without it. In other words, you don’t get penalised for not having insurance, you get penalised for not having insurance and then buying it.
In a way, this is the same idea: penalties for being outside the insurance system to incentivise people to be inside. But when and how the penalties are enforced matters hugely. If you’re a sick person who didn’t previously have insurance, you are more likely to pay the surcharge to get the coverage you need. But if you are healthy, you might weigh up your options and realise that you will be charged for entering the insurance system, but not for staying outside it. If you don’t need healthcare at that particular moment, why pay the surcharge? Unlike Obamacare, which charged you every year you went uncovered, Republicare will only charge you when you decide you want insurance after all (for example, if you suddenly develop a condition that needs treating). In this way, Republicare actively disincentivises healthy people from getting insurance, increasing the ratio of sick to healthy people in the system and so pushing prices up for everyone. It’s basically a lesson in how not to run an incentives system.
None of this even touches on some of the more ethical problems with Republicare, such as defunding Planned Parenthood (which is the primary source of crucial healthcare for millions of low-income American women, offering services like pre-natal care and cancer screenings) and restricting plans that offer abortion coverage. I won’t even go into the changes in the tax credit allowances, which would give more welfare benefits to wealthy old people than poor young people. Purely on an economic basis, looking at the fundamental concept of incentives, Republicare fails spectacularly.
So why haven’t more economic conservatives in Congress noticed yet?