Romney’s Pre-Ex Plan
Imagine you are a homeowner and — tragedy for you — one night your house burns down. Fortunately, you have homeowners insurance. But when you report the incident to Prudential, your insurer, you get a strange response.
“We’re actually not very good at paying claims like this,” the agent says. “You would be a lot better off if you switched to State Farm.”
Of course in the real world State Farm wouldn’t agree to sell you insurance to rebuild and repair your home after it has already burned down. But suppose we had some crazy law that says it has to.
In that case we would have a casualty insurance market in which (1) a new insurer would have to pay the cost of rebuilding your home, even though you have been paying premiums to some other insurer for many years, (2) every insurer would have an incentive to dump it’s expensive claims on its rivals, and (3) every insurer would have an incentive to avoid anyone with a problem — by not enrolling them in the first place and by providing poor service if they do enroll.
Welcome to the world of health insurance. I only gave the example above because I find that most people can think more clearly about houses than they can think about health care. They can also think more clearly about automobiles. In fact, people can think about almost any subject more clearly than they can think about health care.
In the world of health insurance, we already have this sort of craziness in the group market. ObamaCare will extend it to the individual market.
But what about Mitt Romney?
It burned while I cried.
Mitt Romney says that under his plan you won’t be burdened by pre-existing conditions so long as you have been continuously insured. Granted, that’s not as bad as ObamaCare. But it’s certainly not good.
By way of introduction to the Romney plan, Jim Capretta at NRO explains the problems with the current system this way:
Under current law, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) ensures that workers can easily move from one employer plan to another without fear that their new coverage will exclude a pre-existing condition or that their new plan will increase premiums based on their elevated health risks. However, HIPAA does not provide solid protection for people who move from employer coverage to an individually owned insurance plan. In theory, HIPAA required states to set up options for those people with continuous insurance coverage and a pre-existing condition who want to move into the individual market from group insurance. In practice, those options do not prohibit insurers from charging much higher premiums based on the elevated risks of the enrollees…The upshot is that HIPAA’s protections simply do not work in the individual-insurance market, and that is a big, not a small, problem.
So how would Romney fix the problem? Capretta continues:
Romney’s plan would fix this and extend to the entire health system, including the individual market, the HIPAA protections that work well today in the group market. This would allow millions of people to move seamlessly from group to individual coverage, and back again, so long as they stay continuously insured. That alone will dramatically reduce gaps in coverage that are so frequent today.
OK. Problem solved? What do you think?
Here’s what Avik Roy thinks.
Let me play Devil’s advocate for a minute.
I have a friend who works as an underwriter for a casualty insurance company. Years ago he explained one of the many ways insurers estimate risk. When asked why he didn’t turn in a small hail damage claim on his mother’s house, he explained the property insurer would see the house badly needed paint and a new roof. People who don’t maintain their homes are a bad risk compared to those who do. He didn’t want the insurer to demand improvements or drop his mother’s home owner’s policy.
If this was legal for health insurance, your insurer could demand you maintain your ideal weight, exercise, take your medications or they could drop you. It’s not a bad idea. Why shouldn’t the company that insures your health risk either: 1) charge risk-adjusted premiums to reflect your expected costs; or 2) demand you take care of yourself?
People who are unfortunately afflicted with pre-existing conditions cannot be accomodated through job changes without increasing costs for everyone in the group. The only way to accomodate pre-existing- condition insurance is to require insurance companies to quote such insurance to those persons at competitive market rates. This will, of course increase their costs, depending on their condition,but will not unfairly penalize companies and their groups who work hard to stay healthy, and at the same time not reward people who, for instance, continue to smoke or follow other unhealthy habits.
Expensive, and increasingly so. This would require Guaranteed Issue of individual policies–a precursor to premiums rising fast and high. On the face of it, this would be limited to those who were previously covered under an employer plan, but that includes the vast majority of the population.
People entering the employer-based system already enjoy guaranteed issue as they become eligible, with very limited restrictions on pre-existing conditions. (A point ignored by nearly all media and political panderers). Once someone was insured, the plan you describe would open the door for them to move to the individual market without underwriting. It is a prescription for significant adverse selection.
Allowing underwriting determination of appropriate premium rates would most probably be impossible politically, which would ultimately lead to community rating. This would further exacerbate the adverse selection as the youngest and healthiest would opt out, leaving the more expensive risks in the pool.
As distasteful as mandates or near-mandate incentives may be, they are the only way to maintain the integrity of the risk pool if we are to have guaranteed issue of policies.
In the end the effect of this plan is not far from ObamaCare at all, except it leaves out those who don’t have insurance now. Both plans would allow more willing and capable people to buy insurance. But both do so by creating a system which is financially unsustainable. They both score points for access, but both would ultimately fail because of affordability.
A good point of either: Both would allow us to eliminate COBRA!
“Romney’s plan would fix this and extend to the entire health system, including the individual market, the HIPAA protections that work well today in the group market.” Work well? Could that be why only 41% of small group employers offer group health insurance? COBRA is merely the full premium rate of the insurance which is often expensive partially due to those very “protections”.
The fastest growing market in most states IS the private, individual marketplace because of its many options, affordability and low prices thanks to risk rating.
This Romney plan will harm the individual market and make it as expensive as the small group market. Very troubling.
Devon
One of the biggest cost factors in our American system is lack of personal resonsibity for your own health condition. I don’t think anyone objects to having to help pay through collect premiums(insurance) to treat conditions that we may have no or little control ober.
But for people to just become unhealthy as a personl choice by laziness or lack of education is not everyone elses responsibilty?? IMHO
Nice post Dr. Goodman. But tell me – why is it necessary to have health insurance linked to a job in the first place? What if everybody had insurance, regardless of employment status?
People naturally need more care as they get older. When I speak to groups and people ask me how we should deal with pre-existing conditions, I explain that pooling differential health risks over the course of your working life would be better than pooling risks among co-workers.
Young workers have low health risks. They should be putting most of their premium dollars into an HSA. Older workers have higher costs. They should likely be spending down their accumulated HSA balances on higher premiums and out-of-pocket spending. That way each worker tends to pool their own risk over their working life. If you retire early, you have your HSA to offset the higher costs – you don’t need young, healthy co-workers to subsidize you. Our system relies on cross-subsidies — where healthy people are expected to pay far more than their expected costs so others can get coverage far cheaper than their expected costs. This does work very well. The people being gouged tend to drop out of the market; while those getting a great deal want to jump into the market.
How would you suggest that happen James? The money has to come from somewhere. Governments generate votes, not revenue, from unemployed people.
Very interesting post.
If you have Medicaid health insurance vouchers for those too poor to buy health insurance on their own, high risk pools for those uninsured who become too sick to buy health insurance on their own, and guaranteed renewability for those with health insurance as long as they continue paying premiums, then you don’t need to extend HIPPAA to the individual market. With the above 3 items, everyone is assured access to health care, without any individual or employer mandate.
@Jordan: Well, let’s just agree that someone has to pay for health care, and at the end of the day, it’s individuals who pay, regardless of whether its through insurance premiums, OOP costs or taxes. And it is simply not realistic to expect those who have low income or no income to “pay their share”, particularly if they have hi-cost medical conditions. So if individual taxpayers are going to pay for their health care (as well as their share of others less fortunate), then tying private insurance to employment is a bureaucratic and economically inefficient way to do that.
A couple of points:
1) Rather than mandates, have guaranteed issue without pre-existing conditions and if people don’t sign up for coverage in a timely manner charge them an appropriate penalty amount monthly from then on;
2)In the article cited this statement appears: “Economists of all ideological stripes agree that the employer-sponsored system in America is a key reason why health insurance is so costly here. And, in turn, because insurance is so costly, people with low incomes can’t afford it, and go without it for long periods. And if they get sick when they’re uninsured, they have a pre-existing condition.
Sorry, but I don’t think economists have the right answers to all the questions – the employer sponsored system in America is not THE reason that health insurance is so costly. If it were only so, we could actually solve the cost problem.
Rather, I would suggest that it may be an unsolvable problem. There is an inelastic demand for health care. We want to live as long and as well as we can so we are willing to spend whatever resources we can, particularly if it is someone else’s money. Since taxes fund the government payments – at least 50% of the money is yours and mine. Then there is the part that you and I pay directly for the services say 20% – 30% of the bill through payroll deductions or copays, deductibles and coinsurance. While I am at it the tax break through employer sponsored plans is actually your and my money too!
The country should subsidize a national high risk pool for the uninsurables. This is at MOST 3% of the population (9M). The hi risk pool should require a significant level of personal responsibility and patient compliance with treatment plans. This would have the added effect of stabilizing the risks remaining in the individual and small group market.
The use of pre-existing conditions is rapidly becoming anachronistic as predicitive modeling, genomics, and proteomics matures to the individual level of knowledge.
Pre-exisitng is not a problem for self-insured groups with actively at work requirements. We can find solutions to covering pre-exisitng conditions for most individuals. Not everyone with a pre-ex condition is a slacker or made a poor choice in the past.
As an actuary, who came up through the underwriting ranks, we can and must develop solutions to replace out dated insurance underwriting standards.
@James: Re: employer-based insurance. A perfect segue to the best of all solutions: Everyone should have their own insurance, purchased privately. If this happened, we would level the playing fields amongst industries, do away with Medicare, Medicaid, VA, employer benefits laws . . . a concept so marvelous and simple that the legal and accounting professions will have to oppose it! HSAs are the best vehicle to do so, of course. There are certainly pragmatic hurdles, but it is entirely do-able, and holds the best chance of controlling cost in the long run.
Of course, the idea of people being responsible for themselves is heartstopping to the entitlement crowd, but the facts stll speak for themselves.
John, I think you touched on something here but didn’t outright say it: the system would be better if health insurance was like other insurance types, as in, only catastrophic.
Underwriting itself is obsolescent when the majority of people going through their older decades, will have a series of chronic diseases, partly through the success of having been kept alive long enough for that to happen.
Underwriting by individual is infeasible, if it means that premiums will have to match the risk profile of the enrollee. Pooling is possible if we turn our attention from rating by the patient or group and look at an insurance company’s size and market share. Large organizations should have a financial structure that is deep and wide enough to handle a range of costs of their enrollees. Small insurers are an anachronism. Why do we need 1800 insurance companies? Policy-makers are hard on insurers in ways that show they do not know what value insurers can provide other than claims processing. One of them is selecting out providers who have a poor reputation, cost too much, over-bill or have too many medical errors. Without that buffer, individuals would be on their own, and government would be too remote to help.
We do need policies that contain incentives for good health habits. I wish more insurers would have a “mutual” aspect to their policies. How about offering policies whereby everyone of menopausal age was in a risk group with the same premium, with an agreement on enrollment that the members would comply with plans for health, then benefit at the end of the year by savings sharing. People talk a lot about “skin in the game,” but do not apply that truism to healthcare. By insuring by risk group, it would be possible to compare results across plans in a more meaningful way than just utilization trends.
Wanda J. Jones
President
New Century Heatlhcare Institute
@James: It just concerns me that the government marginalizes employment and creates conditions in which people develop a sense of entitlement to expensive, subsidized, services.
John,
Romney (who I am not advising) is I think proposing mandatory group to individual conversion at class average rates, something that already exists and works well in individual insurance. If you buy individual insurance and make a claim that indicates you have become a much higher risk, your individual insurer (even before ACA) promised not to select you out for premium increase. It did this because you had paid extra premiums when you initially bought as a low risk for that protection against experiencing an unexpected jump in your lifetime premiums. But the great imperfection is that group insurance does not have this protection: if you lose your group coverage and experience an event that means you are a high future risk, right now you are out of luck (and our research showed that people who initially had group insurance who were high risks were much more likely to lose coverage than high risk people with individual insurance). The reason your individual insurer does not mistreat you if you became a high risk (even though it could make more profit if it could get you to drop) is that people would not buy individual insurance when they are healthy from companies with reputations for being beastly to them when they get sick. The same story could be told for group insurance: I am more eager to work at NCPA (or for lower wages) if their insurance will protect me against premium increases whether or not I keep working there. But there is a glitch related to the artificiality of group insurance: employers (even kindly ones) may find it hard to accept taking care of the future insurance needs of people who move on to other things (whether or not for cause). But really, it is not the employer’s money that paid for this protection; it was the worker’s money—group insurance only causes temporary insanity on the parts of employers who think they are paying for insurance and therefore have a right to feelings about it.
Hi John,
I am drafting a response to your column below which cries out for thoughtful responses rather than quick reactions. Having earned my Ph.D. in Ethics & Society and written my dissertation on ethics & financing health care, I see quite a few areas of your essay where I would like to engage in thoughtful discourse with you. I hope you will give me a few days to draft a response as my “day job” doesn’t leave me a lot of time for tasks like this except on weekends. The main area that I want to explore is that ethics is about making choices – yes; but that making ethical choices requires not only considering rights, but also one’s duties and obligations – not only to oneself, but also to others in society. I will get back to you by late Sunday.
Take care,
Fran
Excellent song pairing!
I agree with you on that first post, Devon…but can you imagine the OUTRAGE if we started telling people that they had to take better care of themselves? [rolls eyes]
@Jordan: I hear you. I understand your apparent distaste of the entitlement state. But healthcare is different; it is not welfare. We recognize that healthcare is an entitlement in the US, through EMTALA, something that has been recognized even by the Republicans (and the EMTALA statute was signed into law by President Reagan). And it is a “good” entitlement, in that access to healthcare keeps people healthy and thus able to work, be productive and pay taxes. The problem, however, is the predominant, economically inefficient way in which we *finance* healthcare, through employers and some 1,200 middlemen (private insurers) who provide no marginal value vis-a-vis a public payer like Medicare. And not only is private, employer-sponsored insurance of no marginal value, it generates $300-400 billion in unnecessary administrative costs.
@Brian: why would you advocate for the purchase of private insurance, knowing that the first thing a private insurer does with every dollar of your insurance premium is to take off 15-20 cents (or more) for administrative expenses? And what is it that Americans really want to “purchase” – is it really insurance, or healthcare itself? If Americans buy insurance to help them cover catastrophic healthcare costs, doesn’t it make sense that they would want a plan that minimizes administrative costs, such as Medicare, so that more of their premium dollar (or tax dollar) can be used for actual health expenses?
@James: No question that the system is not efficient yet, but as long as the government meddles in it there is no chance it will improve. Idealistically, a privately available, cradle-to-grave truly catastrophic umbrella plan coupled with an HSA-style savings program, subsidies (or refundable tax credits) for the financially challenged and nationally subsidized stop-loss would be the best for all of us.
Insurance itself introduces a 3rd party to the provider-patient relationship, and employer benefits then a 4th party. With over 20 years of designing employer plans I’ve seen (I think) every trick in the book, but the common denominator of problems is the involvement of the employer. Dropping them from the equation yields the possibility for many benefits, and eliminating government involvement even more:
—Each individual chooses the plan best for themselves and their families
—Each individual responsible for their own successes (or failures)
—Lower taxes
—Demand-driven development of technologies and medical capabilities
—More efficient, local delivery of social services
—No need for many administrative employer laws and practices (COBRA, PDP creditable coverage letters, Women’s Rights Act letters, etc, etc, etc)
—No artificial cost-of-coverage distortions created by varying employer contributions to plan costs
—Leveling of worldwide pricing playing field
—Elimination of the duplicaiton of coverages and coordination of benefits between various plans, especially as it relates to Medicare, Medicaid, VA, Tricare and various other social programs
Just to name a few.
I know there are many practical and pragmatic challenges to implementing such a system, but if we are serious about “reform”, then let’s “reform”. Not the band-aid fixes applied one after another on top of a system structurally flawed from its inception.
So yes, individual insurance, James. Freedom of choice, limiting as many outside agendas as possible.
I’m encouraged by what I’ve seen of Romney’s proposal. The main thing I’d change:
Rather than require all insurers to conform to the HIPAA regulations, I would merely provide a tax credit analogous to the employer tax exclusion for plans that already conform to the regulations. I see no reason to outlaw individually-underwritten insurance, so long as it’s excluded from the tax credit.
‘Guaranteed issue’ is meaningless unless you have either (1) some form of community rating, or (2) premium subsidies for high-risk individuals. And since the purpose of a tax incentive is to make guaranteed issue possible, then it makes sense to limit subsidies to these kinds of plans– whether in the form of a tax break community-rated coverage, or of a high-risk premium subsidy.
I understand the concerns about community rated coverage, but it seems to work well enough in the sense that the vast majority of Americans already have community-rated coverage. The alternatives are not without problems either, and more importantly are not yet in place. I’ve seen a lot of ideas, but no single, mature, concrete proposal.
It seems to me the priority is to replace Pelosi-care, and do so as quickly as possible. Wouldn’t it make more sense to extend slightly the system we already use, and then worry about transitioning to something better as it becomes available?
I don’t understand why people fail to grasp that group insurance is a farce. Among other things the sickest people are often forced by illness to stop working which leads to loss of insurance. The COBRA fix didn’t really help those most in need because they couldn’t afford the premium once they lost their jobs. Thus the insurers had the perfect escape from many of the most expensive claims and the American worker was left out in the cold, no job, no insurance. For others group insurance led to job lock.
Mark Pauly is right. Individual insurers have to maintain their reputations and in a free market their reputations have inherent value as seen when companies are bought and sold. Think of the value of the Coke brand. Perhaps many do not recognize this because they get group insurance and have never personally experienced a true market for their health care needs and when they did they didn’t have the tax deduction.
Here is my story, I have been self employed since 1997. For me, affordable insurance is a high deductible catastrophic care that costs about $1,500 per year. I never go the the doctor, and am used to it. Further, I do not drink, do not smoke, watch my weight, exercise daily. In light of the above, my savings on health insurance premiums well deserved, and paid for daily with self discipline & personal sacrifice.
Obamacare is confiscating my affordable health insurance, and compelling me (with taxes) to pay for an unwanted very expensive plan.