Policymakers across the political spectrum agree that the new health insurance plans mandated under the Affordable Care Act need a lot of young, healthy people to sign up to cover the costs of older, less healthy people.
Sen. Barbara A. Mikulski, D-Md., warned last month that the health plans could face a “death spiral” if an insufficient number of young people sign up. Sen. Ted Cruz, R-Texas, characterized the ACA as a massive transfer of wealth from young, healthy people to older Americans. Sen. Angus King, I-Maine, said opponents are “guilty of murder” for attempting to dissuade young people from signing up.
The more I read about the ACA, the more I’m convinced that many of the people making health care policy don’t know the difference between insurance and an all-you-can-eat buffet. The “insurance” devised by the ACA is not really insurance. This is unfortunate, because the only way the health insurance market can possibly provide affordable insurance for everyone is if policymakers start treating health insurance like genuine insurance instead of a cornucopia of freebies.
Genuine insurance classifies people based on their risk. People facing similar risks pay similar premiums. That’s why teenagers usually have higher auto insurance premiums than more experienced drivers, and younger folks usually pay less for life insurance.
That’s not how insurance regulation under the ACA works. To pay for people who have big expenses, the low-cost, healthy people must buy policies with coverage they may not want and higher rates for the coverage they do want. It’s like forcing everyone to buy Groupons for an all-you-can-eat restaurant every night, even if some of us would rather save our hard-earned money and munch on celery sticks at home. You can eat celery at home if you want, but you still have to pay for the buffet.
For example, the ACA regulations on rate-setting for individual insurance policies limit the differentials health insurers can charge for age, and they require insurers to assume all policyholders are in the same risk pool, regardless of actual health. The analysis accompanying these regulations concedes they could create “potentially higher rates for some young men,” but the Department of Health and Human Services declined to estimate the size of these rate increases. Similarly, no cost estimates accompany the regulation that enumerates the mandated “essential health benefits” new plans must include.
Imagine what pundits would say if policymakers applied similar principles to auto insurance: “We need more little old ladies who only drive to church on Sunday to sign up to cover the costs of the teenagers with multiple DUIs.” Or life insurance: “We need more young healthy people to buy life insurance so they cover the costs of the older folks who are just about to die and collect big payouts.” Or fire insurance: “We need more nonsmokers to sign up so there’s enough money to pay for arsonist claims.”
If an auto, life or fire insurance company tried to charge everyone premiums that did not reflect behavior or risk, it would quickly lose money. And if those insurers used the government to strong-arm low-risk people into buying insurance policies that overcharge them, few people would regard that as fair.
Of course, most people with big health risks are not the moral equivalent of arsonists. In the health insurance context, many people have pre-existing conditions that are no fault of their own. Government should help these individuals buy health insurance in the same transparent way many states help high-risk drivers — by establishing a high-risk pool and paying explicit subsidies to help them purchase insurance.
Explicit subsidies force policymakers to honestly disclose how much gets transferred to whom because lawmakers appropriate that money. For example, two early ACA regulations establishing temporary subsidy programs for people with pre-existing conditions and early retirees clearly disclosed that each regulation would cost taxpayers $5 billion over the 2.5-year program life. This is the honest way to help those in need.
Critics may claim explicit subsidies are impractical because legislators won’t fund them sufficiently. In other words, since the people’s elected representatives won’t support an honest subsidy program, we must fool the voters with a dishonest program that hides the cost. The end — increased insurance coverage — supposedly justifies the means — deception.
It’s time to end the deception. If Congress wants true reform, it would let insurers accurately price risk, then help those who can’t afford insurance with a transparent subsidy program. Those steps would not solve every problem in the health insurance marketplace, but they would transparently allocate aid to people who need it, instead of herding everyone into a buffet line in an effort to cure hunger.
Jerry Ellig is a senior research fellow with the Mercatus Center at George Mason University.