For health insurance to work, it needs to be a bad deal for lots and lots of healthy people. Those people pay for coverage for years without an expensive chronic illness or catastrophic accident. The money they pay covers the millions of dollars of medical costs for the small share of insurance enrollees who aren’t as lucky.
When that doesn’t happen, the health insurance market collapses. It’s a catastrophe known as a “death spiral” — and it’s what some experts fear could happen under the Republican plan to replace Obamacare.
But not everyone shares that concern. The result is a big dispute about the Republicans’ plan to replace Obamacare’s individual mandate — the requirement that all Americans buy health insurance coverage or pay a fine to the government.
On one side are critics from across the political spectrum who worry the Republican plan isn’t strong enough to encourage healthy people to buy health insurance. On the other are industry officials and former Republican Senate staffers who argue that the Republican solution — allowing insurers to charge people more if they go too long without insurance — will be at least as effective as the individual mandate was.
This debate illustrates how hard it is to build a health care plan that actually works. Each interlocking element needs to work. If one part doesn’t function as expected — as some experts expect to be the case here — the whole system can fall apart.
How Republicans want to replace the individual mandate, explained
Obamacare’s individual mandate required that all Americans carry insurance coverage or pay a fine — this year, $695 — to the government. The mandate was one of the health law’s least popular provisions.
But it was necessary. Obamacare’s architects needed a way to encourage healthy people to enroll in coverage, which would make it more affordable for the sicker people also signing up. When too many sick people and not enough healthy people buy insurance, insurers end up charging more. They need to be sure they’ll have enough money coming in from premiums to cover medical bills.
The Republican plan gets rid of the individual mandate. But it has a different way of penalizing people who decide to remain uninsured. People who don’t maintain “continuous coverage” would have to pay a hefty fine if they buy health insurance after being uninsured for too long.
Imagine a worker leaving her job and losing her insurance coverage. If she buys her own policy once her employer-provided policy expires, her insurer has to charge her a standard rate. But if she went longer than 63 days without insurance — perhaps she couldn’t afford a new plan between jobs at first— and then tried to buy a plan on the individual market, insurers could charge her a 30 percent premium surcharge. She would need to pay that higher premium for a full year before returning to the standard rate.
The threat of this penalty is meant to induce healthy people to maintain coverage when they’re healthy, just like the individual mandate. But while the mandate payments went to the government, this surcharge would go straight to insurers.
Health policy experts — including some conservatives — worry about a death spiral
The concern with the continuous coverage provision is that it could have the unintended consequence of discouraging healthy people from buying coverage.
If there is a surcharge for people who have been uninsured and want to buy coverage on the individual market, only people who really need insurance — the people who have high medical costs — might end up paying it. Healthy people who don’t think they’re likely to need help with medical bills might be more comfortable staying out of the individual market for longer, perhaps until they get a job that offers coverage. That could drive up premiums for everybody.
“The 30 percent provision incentivizes those who face much higher costs to sign up, forcing insurers to cover them at a loss,” conservative health policy expert Avik Roy writes. “This seems like a recipe for adverse selection death spirals.”
Here’s how Robert Laszewski, a health industry consultant and frequent Obamacare critic, games out the situation:
The Republicans now want to create a scheme that doesn't require anyone to sign up. But when they get sick enough that they need insurance, they will be able to quickly do so by paying a paltry 12-month 30% premium surcharge.
For example, a person paying $5,000 for health insurance would pay a one-time total $1,500 penalty! A family paying $10,000 in annual premium would pay only a $3,000 penalty for any late enrollment!
And the structure of the penalty makes the problem worse, said Larry Levitt at the Kaiser Family Foundation. Under the individual mandate, people pay the fine if they’re uninsured. Under the Republican plan, people would pay the penalty only when they eventually buy coverage. There’s no immediate cost to actually being uninsured.
“You’re not suffering any consequences for being uninsured beyond not being protected,” he says. “It’s only when you decide to buy coverage that you pay a penalty and that could discourage you from signing up.”
“Next best thing to the individual mandate”: other experts aren’t as worried
The health insurance industry has the most to lose from the individual market collapsing. They’re the ones on the hook for huge bills if only sick people sign up, and the premiums don’t cover the costs.
So it’s telling that they aren’t too worried.
“Continuous coverage, if structured right, could be the next best thing to the mandate,” says one health insurance industry official, who has reviewed the AHCA.
That’s because, in the view of one industry official, the individual mandate didn’t work that well in the first place. It was never an especially effective policy to push healthy people onto the market. The cost of the fine ($695 this year) is much lower than the cost of actually purchasing insurance. The uninsured can apply for numerous exemptions if their break in coverage was short, for example, or health insurance in their area was too expensive.
“The mandate, in theory, was supposed to work to get healthy people signed up — but then it gets to the implementation part and you have exemptions, and that changes,” the official said.
That’s the baseline from which the insurance industry is working — and from that lens, the continuous coverage provision might not be that different.
Other experts agree. Rodney Whitlock, who formerly worked for Senate Republicans on the Finance Committee, had the Congressional Budget Office score a continuous coverage proposal during the Obamacare debate in 2009 and 2010 to see whether it would do as much as an individual mandate to encourage enrollment.
He says that CBO thought the two policies would work equally well, and scored the continuous coverage provision the committee presented then as covering as many people as the individual mandate.
"From my experience, I will be surprised if they say this have a radically different impact on coverage than what was passed in the ACA,” he says. “The numbers on subsidies and Medicaid could be radically different on coverage. But I think on this it could come back somewhere close."
For similar reasons, Deep Bangeree, a director at ratings firm Standards & Poors who focuses on health policy, also doesn’t expect the continuous coverage provision to be much change at all.
He recently authored a report estimating that the individual market would shrink by 2 to 4 million people under AHCA. That would mostly be due to the smaller tax credits and not the new continuous coverage provision. He expects it would work mostly the same as the mandate.
“Both of them attempt to disincentivize dropping coverage,” Banjeree says. “If anyone is trying to game the system, the continuous coverage’s 30 percent surcharge might be stronger than the mandate. The penalty is not that high.”
Why Republicans — and Democrats — have struggled with this problem
Death spirals are a hard problem to design health policy around.
In order to prevent a situation where only sick people enroll, it requires doing something unpopular: penalizing healthy people when they don’t sign up. Obamacare did this through a mandate to purchase coverage, insurers want to do this through the premium surcharge.
This is always the part of health reform that politicians are least enthusiastic to embrace. President Obama opposed the individual mandate during his 2008 campaign, but ultimately came to support the provision when advisers convinced him it was crucial to making the health expansion work.
Republicans have learned that the individual mandate is a very unpopular policy, so they’re testing out something different. And that change comes with risk that this new penalty might not work as well as the last one.