Uwe Reinhardt, a noted health-care economist at Princeton, died Nov. 13. Vox’s Sarah Kliff recently wrote about how Reinhardt’s thinking has shaped her own coverage of health-care policy. A year ago, soon after Trump’s election, Reinhardt explained in Vox how the Republicans seemed inclined to ignore the fundamental challenge that health-care policy must confront: A very few sick people are responsible for most of the cost yet cannot afford to bear it themselves.
His skepticism about the political chances of ACA repeal, and his doubts that repeal could occur without potentially causing millions to lose their health insurance, proved prescient. The piece appears here in its original form:
President-elect Donald Trump was very explicit during the presidential campaign that one of his first acts in office would be to initiate the complete repeal of the Affordable Care Act — something Republican Congress has been itching to do for years.
Repealing Obamacare, however, with neither eliminate nor bypass the central challenge of health care, which can be gleaned from the chart below. That challenge will persist regardless of whether the Republicans quickly settle on an alternative plan, or if they repeal without a replacement.
Shown on the horizontal axis are deciles of the US population, arrayed from individuals with low per-capita spending on the left to high spending on the right. The vertical axis shows the percentage of total national health spending accounted for by a particular decile on the horizontal axis. In addition to the deciles, the most expensive 5 and 1 percent of the population are shown on the right.
Included in the high-cost segment of this graph will be individuals who may be only temporarily sick — for example, as a result of an accident. For the most part, however, they represent chronically ill people, often with multiple conditions that can be medically treated, albeit at great expense that exceeds these individuals’ capacity to finance their care with their own financial resources.
The fundamental questions in the US, as in other countries, are a) what kind of treatments these very sick members of society should receive, especially end-of-life treatments, and b) how those treatments should be financed, given that these treatments can quickly exhaust the budgets of the afflicted.
In very poor, developing countries the answer to this question may well have to be to leave those sick people to their own fate. That approach is unacceptable in the more developed world, where sick individuals usually do receive needed treatments even if they cannot pay for them. This leaves three alternative outside sources of financing that care, to wit:
- public subsidies financed from general taxation,
- cross-subsidies baked into health insurance premiums, forcing healthier individuals to subsidize through the premiums they pay the health care of chronically sicker member in the same insurance risk pool, or
- cross-subsidies baked into the prices charged paying patients by doctors, hospitals and other providers of health care, which forces paying patients to cover these providers’ so-called “uncompensated care.” Paying patients include both insured patients and self-paying patients.
All health insurance systems in the developed world use one or the other of these approaches to respond to the plight of very sick members of society.
Canada, for example, uses the first of these approaches, financing its single-payer provincial health plans mainly out of general taxation.
Germany relies on the second approach, using the premium mechanism to trigger the needed cross subsidies. The premiums paid by individual employees or retired persons have long been solely a fraction of the individual’s income. Thus they automatically embody cross subsidies from healthy to sick individuals and from high-income to low-income persons.
The unique US system combines all three ways of subsidizing care
The highly pluralistic health insurance system of the US uses a mixture of all three approaches. Public programs such as Medicare, Medicaid, the VA health system and Tricare (the health insurance programs of families of active military personnel), rely mainly on taxation as a source of financing.
The far flung employment-based private health insurance system, on the other hand, which covers about two-thirds of the population and accounts for one-third of total national health spending, uses mainly the premium mechanism to subsidize the very sick. In that system, the individual employee’s contribution toward the premium for his or her health insurance is divorced from that individual’s health status; it is, in the jargon, community rated, meaning younger or healthier employees cross-subsidize the care of their sicker colleagues.
Finally, the nation has always relied and continues to rely on an informal catastrophic health insurance system operated mainly by hospitals. Under this system, the cost of health care rendered to uninsured patients unable to pay for it is added to the prices charged insured or self-paying patients.
The Affordable Care Act of 2010 (ACA) incorporates a judicious mixture of the first two approaches. Within age belts, health insurance premiums on the ACA market places are community rated; the individual’s premium is completely divorced from that individual’s health status. The law limits the differences among age groups, so that people over 64 pay no more than three times what 21-year-olds pay. (The insurance industry has long pleaded for an age-band ratio of at least five-to-one.).
That feature of the ACA naturally forces relatively healthy individuals to pay premiums in excess of their actuarially projected costs. And the excess is used by insurers to cross-subsidize the health care of sicker members of the risk pool whose premiums are below their actuarially expected costs. But individuals up to 400 percent of poverty also receive direct, tax-financed federal subsidies toward the purchase of health insurance; individuals or families below 250 percent of the federal poverty level get, as well, direct federal subsidies towards out-of-pocket expenditures.
The idea that individuals stricken with illness should not be punished by health-insurance premiums that reflect their dire health status probably appeals to many Americans — perhaps most, including president-elect Trump. It is, after all, the ethical foundation of the bulk of health insurance in the US. But implementing a policy that divorces premiums from the individual’s health status is very tricky when applied to the market for individually purchased insurance policies, as it is on the marketplace exchanges of the ACA. The graph below illustrates the problem.
Some people will inevitably have to pay more than is “fair”
The graph represents an insurer’s risk pool of insured individuals who purchase health insurance individually and who are arrayed, on the horizontal axis, from relatively healthy on the left to relatively sick on the right. The vertical axis exhibits the premium charged individuals for a specified, insured benefit package.
Prior to the onset of the ACA, insurers in this market would have based the premium charged the individual on that individual’s health status, a process called “medical underwriting.” Applicants had to complete very long detailed questionnaires on their own and on family members’ health status. The result was “actuarially fair” premiums — that is, premiums that reflect the projected cost of buying insured benefits for that individual. In the graph, these premiums are depicted by the upward-sloping white line.
A switch from actuarially fair premiums to community-rated premiums that are divorced from the health status of individuals might result in the common premium represented by the light blue line in the graph. Relative to actuarially fair premiums, this switch would raise premiums for relatively healthy people who now are forced to cross-subsidize the health care of relatively sicker people. Those sicker people now pay a premium much below their actuarially fair premium. It is immediately obvious that such a switch presents a difficult political problem, because it redistributes income among the insured based on their health status.
If healthier people are free to decide whether or not to purchase health insurance, many of them might prefer to go uninsured rather than pay the community-rated premium. If so, the remaining risk pool of insured individuals will contain relatively more sick people, which will then raise the community-rated premium over this sicker risk pool from the blue line to, say, the dotted green line. This appears to have happened on the marketplace exchanges of the ACA, and is one major reason why premiums between 2016 and 2017 have risen by an average of 25 percent across the nation, albeit with a wide variance about that average. (In some areas premiums rose only by low single digits, in others by more than 100 percent.)
Americans with insurance from the ACA marketplaces with incomes under 400 percent of the federal poverty level will not be affected by these high premium increases on the ACA exchanges. But the increase will seriously impact individuals with higher incomes and those who for one reason or another procure coverage apart from the ACA exchanges and are therefore not entitled to federal subsidies (a group estimated to be about 7 million.)
The health insurance debate will be driven mostly by actuarial logic, not ideology
Because of this likely outcome of ever riskier insurance pools and the high premiums they trigger, nations that employ private health insurance coupled with community-rated premiums — for example, Germany, the Netherlands, and Switzerland — impose strictly enforced mandates on all individuals to purchase health insurance with a specified benefit package.
In principle, the ACA embodies such a mandate as well, but the penalty of disobeying it (an amount equal to 2.5 percent of income) is generally much lower than the premium for the mandated health insurance. Therefore, many healthier, younger individuals simply prefer to pay the penalty and go uninsured. That action then raises the community-rated premiums of the remaining, sicker insured.
The important point to note is that the process described here is a purely an actuarial problem. If it is desired that:
- everyone in society should have access to needed health care;
- no individual or family should be in financial distress as a result of medical bills;
- the health insurance system employ private health insurers to implement the first two principles; and
- sicker people not be confronted with sky-high health insurance premiums or be refused coverage altogether, but instead pay community-rated premiums under guaranteed issue,
then such a system cannot long survive unless either everyone is mandated to buy insurance, or subsidies are provided through tax revenue to keep the premiums paid by individuals to some reasonable percentage of their income.
That brings us to Trump, and his commitment to repeal the ACA. In this aim, the president-elect should be able to count on his Republican Congress, which has long stated a similar goal, and, in fact, has tried to do so, only to have its bill vetoed by President Obama. But there are two obstacles to Trump’s objective.
First, it would be very difficult to repeal the ACA in its entirety. That’s because the Senate, although in Republican hands, is not filibuster proof, which would require 60 Republican votes, which the Republicans don’t now have. The Senate could use a maneuver called “budget reconciliation” to get rid of any provision in the ACA that involves the flow of federal money — for example, the federal subsidies toward the purchase of health insurance on the exchanges. That could be achieved with only 51 votes.
But numerous other provisions, including the mandate to be insured, community rating, guaranteed issue (no denials for preexisting conditions) and many others, do not involve federal money and therefore cannot be eliminated through reconciliation. They are subject to a filibuster by Democrats. The problem for insurance companies is that the regulations on their industry would remain even as the subsidies for the purchasers of insurance disappeared.
Second, Republicans cannot get around the actuarial problem described above. Even if somehow they could eliminate guaranteed issue and community rating, they would face the problem of how to finance health care for the very sick segment of the population whose care exceeds their own resources. Just giving everybody a refundable tax credit as is proposed by Congress member Paul Ryan’s “A Better Way,” would not much help a very sick individual charged sky-high, actuarially fair premiums.
But unless these tax credits were tied closely to the health status of individuals, which is not part of the plan, they would do little to help such individuals. As Vox’s Sarah Kliff points out, Ryan’s proposal “makes insurance better for people who are young and healthy. It makes insurance worse for people who are old and sick.”
At this time, it still remains every expert’s and pundit’s guess how a Trump administration and its Republican Congress would deal with the ethical and technical problems posed by a repeal of Obamacare. By itself, that move would yank affordable health insurance coverage away from about 20 million Americans who by now have gotten used to it. That does not seem a politically wise move. It would also deprive the health insurance industry, hospitals, physicians, and other providers of health care of revenue on which they have come to count.
Chances are, many components of the ACA would actually reappear under a Republican replacement for the ACA, perhaps rechristened as Trumpcare or Freedomcare or something like that. Recall that Obamacare basically rests on a 1990s vintage Republican chassis onto which Democrats fastened some additional policy particulars.
In any event, for observers with secure health insurance, it will be fascinating to watch how health reform will develop in 2017. For the less fortunate, however, it could be painful rather than, as Trump put it, “terrific.”
The unfolding drama may seem to be driven largely by ideology and partisanship. In the end, however, there is no getting around the actuarial mathematics on which health insurance everywhere in the world rests — public as well as private.
Unless, that is, our government is content to leave millions of Americans without the benefits of health insurance, and the access to essential health care it provides.
The presence of millions of citizens lacking health insurance remains a uniquely American problem.
Uwe Reinhardt is the James Madison professor of political economy at Princeton University.
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