Health Reform: Making the Senate Republican Plan Better

Three Republican Senators have released a health-care reform proposal that has attracted much attention. One of the three, Orrin Hatch, is likely to chair the Senate Finance Committee if the Republicans win the majority in the Senate.

John Gone wayoodman has described the bill neutrally. At Forbes, Matthew Herper describes the effect of capping the employer-based exclusion at 65 percent of the cost of an average plan, and subsidizing people who earn less than 300 percent of the Federal Poverty Line (FPL) with tax credits to buy their own policies. Herper concludes that, for a household in the 25 percent marginal tax bracket, capping the exclusion will result in a tax hike of about $1,345.

One important part of the proposal that has not received enough critical attention is “continuous coverage protection”, in section 202 of the summary. This is basically a “super-HIPAA” provision and it has problems not immediately apparent to the casual reader. There is a better way.

HIPAA is the 1996 federal law that allows you to move from one employer’s plan to another’s without being underwritten and being charged a higher premium for pre-existing conditions. In co-ordination with state laws, it also allowed people to move from employer-based coverage to individual coverage with the same insurer without re-underwriting.

However, to enjoy this protection, a couple of things had to take place. First, you had to use (expensive) COBRA coverage after leaving your job until it expired. Then, even though you were not re-underwritten when going into the individual market, there was no guarantee that the premiums would be affordable. Some states had laws to mitigate the latter effect. In California, for example, a carrier’s post-COBRA HIPAA continuation coverage had to offer beneficiaries the two most popular plans in the individual market, at standard premiums.

HIPAA did not solve another big problem for those who maintained continuous coverage: If you wanted to switch insurers, the new insurer could re-underwrite and increase premiums for a pre-existing condition. The new Republican bill purports to solve this by simply extending the continuous coverage protection across all insurers. The proposal needs significant improvement, because it will demand finely detailed, complex, and burdensome regulations to overcome selection problems.

Avik Roy notes that some in the Twitter-verse think that the continuous coverage provision will lead to people choosing skinny plans when they are healthy and comprehensive plans when they are sick. Let’s also remember that insurers will seek to avoid this happening to them. Although the law will try to force them to accept all comers who had previous coverage, they will find creative ways to avoid enrolling people who want to switch to comprehensive plans, knowing that they are likely to be sicker.

Insurers will design plans in the individual market that attract the healthy and repel the sick. For example, they might offer free health-club memberships while not having robust networks of specialist physicians. Clearly, the only way to avoid this is for the government to heavily regulate the design of health insurance. This leads to more bureaucracy, government meddling, and all the other things associated with trying to force people to do that which they do not want to do.

But there is a solution: Health-status insurance, as described by John Cochrane of the University of Chicago in a 2009 proposal and described by John Goodman in Priceless and here as “insurance against getting a pre-existing condition.” With health-status insurance, part of the insured’s premium pays for a policy that pays out if he falls ill and then tries to switch insurers. The payoff from the health-status insurance finances the insured person’s higher premiums in a new plan. It is a win-win situation: The sick person has a wide choice of health plans that he can afford, and the health plans compete to enroll — not avoid — the sick.

Cochrane envisions this as the natural state of health insurance in a market where individual coverage is the norm. The Senate Republicans’ proposal does not go that far, preserving employer-based benefits for most Americans.

Whether health-status insurance can arise under such a distortion is unclear (although it may be possible in private health-insurance exchanges). Certainly, it will need to be thought through if Senate Republicans hope to develop a bill without unintended consequences for those who need health insurance the most.

Comments (12)

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  1. Russel says:

    The new bill could be a excellent sample of Obamacare. The idea behind it is the primary value of this country that pay more, get more.

  2. PJ says:

    Health status insurance seems to make so much sense, and it’s pretty easy to understand. Republicans should be talking about it.

  3. Matthew says:

    “It is a win-win situation: The sick person has a wide choice of health plans that he can afford, and the health plans compete to enroll — not avoid — the sick.”

    And this is never discussed publicly as an alternative to ObamaCare. It covers all of the necessities and makes actual sense.

  4. Andrew says:

    “the natural state of health insurance in a market where individual coverage is the norm”

    Individual coverage should be the norm instead of trying to fit people with different problems under all of these umbrellas.

  5. James M. says:

    If this can be incorporated into the Senate Republican plan, then this sounds like a winner.

    • Bill B. says:

      The imperative word is “if.” I don’t expect any sort of reform to ObamaCare at this point. We are already far too deep and it isn’t something the government would get behind.

  6. Mark V. says:

    I agree with the picture on this post. There is only one direction the healthcare reform can go: forward. Regardless of the flaws of Obamacare, we cannot go back five years and start over. The Affordable Care Act has gone through a lot of things. Great amount of money have been invested in that program to make it work, yet it hasn’t. If ACA is repealed today, the system is so messed up right now that things are going to be worse than they are now (worse than Obamacare? Scary…) We need to find ways to improve this program. Fix the flaws that plague the system, keep the positive things that the program brought and build upon them. Congress must leave their differences apart and work for the benefit of the people. Compromise; find a bipartisan solution to the issues that the system has. It is Congress responsibility to work for the wellbeing of the people; they were elected to do as such. The people have the right to urge the government to act following the people’s will.

  7. Jimbino says:

    Health care needs to be distinguished from Health insurance. Health insurance is sought by insecure, already-sick and risk-averse people.

    The Amish and Mennonites know the difference even if Goodman doesn’t.

    There is no way I can support any kind of compulsory health insurance or any tax favoring of health insurance over health care.

    A real health care system would be run like Amazon runs its system: competitive pricing up-front, equal pricing for everyone, no tax favoritism.

    • Brian says:

      Why just don’t offer any insurance at all. With no insurance there wouldn’t be moral hazard. People would be free to choose where they want to get the treatment from, based on quality or cost, whichever they prefer. We wouldn’t have to worry about the government dictating what we need to do, and we wouldn’t have to worry about outside forces influencing prices.

      • Buddy says:

        Insurance is just an unnecessary middle man. Cut out insurance and prices will adjust accordingly.

  8. Andrew I says:

    Every time a read a comment like this I blame elected representatives. This health care system fiasco is their fault entirely. Americans voted for a government whose platform was to reform the healthcare system. During the election period it was clearly known that this was the major issue. Sadly the elected officials were people who are ignorant about the topic. Congress has been meandering in the healthcare system without knowing what they are doing. They change things to their convenience, highlight the popular things not what actually is important. The American people elected individuals that don’t know about healthcare to reform the health care sector. I don’t know why some expected the reform to be beneficial.