If the GOP Repeals Obamacare, Then What?
Republicans have talked about repealing Obamacare, but have given little thought to what could replace it.
As with all economic topics batted about in the political sphere, there has consistently appeared to me to be a great deal of simplistic thinking and even misinformation floating around regarding healthcare insurance reform. We had a mess of a system with high costs, escalating premiums, unimpressive statistical results, and significant inequities before the latest attempt. The situation was not only problematic for the poor and uninsurable, but it was sapping the competitiveness of American business, which was saddled with healthcare costs far beyond those of foreign competitors.
As the administration and Congress moved toward the passage of their version of reform, opposition mounted. Unfortunately, the counter-proposals which were offered generally sounded good to laypersons, but to anyone knowledgeable about the system, they were so unworkable as to undermine the credibility of opposition. Truly, the reform could have been far better. Truly also, had many of the elements offered by opposition succeeded in passage, reform would have been far worse. Working from memory, here in my opinion were problematic ideas:
"Provide an avenue for small business to band together voluntarily to negotiate lower rates from their insurers on a group basis." While it sounds attractive to political office holders and perhaps even business owners, most who have an education in the fundamentals of insurance understood this system would likely self-destruct. Indeed, it represented a past and failed business model.
Businesses entering voluntarily into such an association could voluntarily leave it. As a result, those businesses with employee pools healthier than average had an incentive to quote and obtain insurance on their own, since they could get a better rate than that offered by the association. Only those companies with worse than average health pools had an incentive to remain, because the association's average was better and therefore costs lower. Slowly healthy companies left, unhealthy companies remained, average costs migrated ever higher, and soon the associations held only those companies so unhealthy that they could not obtain coverage on their own. The costs of care for these pools eventually exceeded the premiums collected, and they collapsed. This is the dynamic known to insurance professionals as "adverse selection."
"Allow the purchase (or sale) of insurance across state lines." Here, too, the proposal is ultimately unworkable. Insurance, in the absence of regulation, is license to steal. Anyone of low scruples (and, alas, there are many) can in theory open an insurance company, sell policies, collect premiums, decline to set any capital aside to pay claims, pay themselves handsomely, grow rich, and then one day close the doors. In response, if you are going to call yourself an insurance company, you must be prepared to pay claims, otherwise you are just stealing. Just as laws prevent us from walking into a neighboring house and stealing their silverware, regulations are also appropriate to prevent someone from claiming to be an insurance company without serious intent to pay claims. The stronger the sense of law and order of the state, likely the stronger its regulation of insurers.
Today it already is possible for insurers in one state to sell in another; but they must meet that state's regulatory requirements protecting consumers. If consumers could purchase insurance from a state with inadequate regulation, and the insurer in that state could market into a state with strong regulation, then the unscrupulous would seek out the state with the weakest regulation. Because the requirements to retain capital to pay claims would be weaker, so too would the premiums be cheaper. Indeed, those irresponsible companies in weak states would undercut the prices of responsible companies in strong states. Like a Ponzi scheme, they would collect premiums, fail in their ability to meet their obligations, and collapse, taking down with them all the unfortunate people who had been coaxed into their products. For good reason, states with good lawmakers would act. Indeed, they have acted, and that is why such regulations exist.
If this proposal were to prevail, it seems to me that the effect of allowing companies to market across state borders without regard to state regulation would ultimately be the opposite of that desired by proponents. In order to prevent the most unscrupulous of companies, located in states with the weakest regulations, from wreaking havoc, ultimately stronger regulation would be required at the national level, divesting states of control and responsibility.
"Remove any mandates for individuals to buy private insurance" This is perhaps the most controversial... the one in which insurance principles mix or collide variously with values of individual freedom and values of equitable behavior. On the one hand, a lack of mandatory participation produces societal freeloading, wherein premium payers, including business owners, ultimately foot the bills associated with construction of health infrastructure to which the uninsured repair only in emergency. But to deny health services to those who were either too poor or too ignorant to make a priority of insurance, or whose conditions denied them coverage.... well, most of civilization (not all) has come to view that as inhumane. Consequently, they receive care along with those who refuse participation on grounds of individual freedom. In the meantime, those who behave responsibly by participating in insurance shoulder the financial load of providing health care infrastructure to all those who can't or won't participate. That's vexing and, along with a payment system that often divorces individuals from the financial responsibility for their life choices, is a reason why before reform, premiums were escalating at nose-bleed rates for those who were paying them.
Truly, it is objectively difficult to produce a health care system that can achieve universal coverage (that is, for those with pre-conditions that would otherwise disqualify them) without mandatory participation. For in the absence of mandatory participation, individuals with health conditions could refrain from contributing financially to the system until they actually needed treatment, forcing the costs on those who were behaving more responsibly.
Rather than a complete government takeover of health care insurance, wherein (like social security) participation is mandatory, the reform required everyone to participate in private insurance. In this way, universal coverage could be achieved, with sound insurance fundamentals functioning properly, albeit at an expense to the individual freedom not to participate. Indiana, decades ago, agreed to that compromise in automobile insurance, which produced a stable, fully private sector system.
"Be Careful What We Wish For"
In the end, while the increasingly popular imperative of universal coverage has been achieved, cost containment has not. More work is clearly necessary not just in extending coverage, but in getting a better value for our health care dollar, hopefully utilizing private, free-market mechanisms. In light of the lawsuit launched in several states against mandatory participation, however, the situation is very interesting. Should those lawsuits succeed and private mandates be deemed unconstitutional, then the fundamental dynamics of insurance would produce the same systemic failure we were experiencing before this round of reform. Costs would escalate for premium payers (as always), while the plight of the economically uninsurable and physically uninsurable would continue to fester in the public's conscience. Private mandates having failed, it seems likely that the eventual political push, sooner or later, would be for a fully government run system.