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The puzzling way Republicans want to replace the individual mandate, explained with a cartoon

Trumpcare's incentive problem.

On Monday, House Republicans released their Obamacare replacement plan.

Vox's Sarah Kliff has a must-read explainer on the bill, which was developed with the White House and Senate Republicans. One key component is that it gets rid of the individual mandate — the most unpopular part of Obamacare, because it fines people who don't have health insurance.

Instead, Republicans are okay with you not having health insurance. But they have a “continuous coverage” requirement that says if you go without coverage for more than 63 days, you'll have to pay a 30 percent higher premium for one year to get back in.

The question is whether the alternative strategy that House Republicans are offering will incentivize enough healthy people to buy in, making health care more affordable for everyone in the pool. To understand the question, let's first break down how Obamacare works.

How Obamacare works

Imagine a group of people, ranging from healthy to sick:

Obamacare forces insurance companies to accept all these people, regardless of any preexisting conditions. So this raises costs for everyone — including healthy people.

Here’s how Obamacare deals with that. Keep track of those gauges on the top right of each panel that say how sick the pool is and how much insurance costs:

In short, it incentivizes healthy people to stay in the pool by a) giving subsidies based on income, and b) fining people for not having insurance.

What happens when you just get rid of the unpopular part: death spiral

When Donald Trump was elected, he said he wanted to get rid of the mandate — but keep everything else. That would have caused what is known as a "death spiral," as illustrated here:

The Republican plan: replace the unpopular part

So in the replacement plan, Republicans decided to add a few things to keep healthy people in the market and prevent a death spiral:

In order to keep costs reasonable, you need healthy people to stay in the pool.

The way Republicans plan to do that is: a) give you a subsidy, based on age. The older you are, the more you get. And b) if you leave the pool, you are punished for coming back, in the form of higher premiums for one year.

Why the incentives don’t line up in the Republican plan

Let’s focus on that last panel:

This creates a barrier to coming back to insurance. So who is more likely to pay a 30 percent higher premium for one year to come back — sick people or healthy people?

The Republican replacement plan will not necessarily cause a death spiral. But the Republicans want to change the way we incentivize healthy people to stay in the pool.

Rather than punishing you for being out of the insurance pool, they punish you for leaving and coming back.

So think about the Republican strategy and the Obamacare strategy from the perspective of someone who already has coverage:

Now think about these approaches from the perspective of a healthy person who is not in the pool — a person who we want to bring into the pool, because it stabilizes the cost for everyone.

While the individual mandate was unpopular, it was a crucial part of making the health care system work because it pushed healthy people into the pool to keep costs stable. The GOP plan seeks to replace the mandate and achieve the same result — but here’s the dynamic at play:

Since healthy people are punished for restarting coverage, they might decide to hold out until they get sick.

Meanwhile, sicker people might be more willing to pay the penalty since they need care.

That leads to a sicker insurance pool, higher costs for everyone who has coverage, and even less incentive for healthier people to join the pool.

Further reading:


Watch: The Republican health care bill makes no sense

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