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A quick recap of the events related to the Affordable Care Act since October 1.
- Promises by the President notwithstanding, individuals owning health policies received a large number
of cancellation notices.
The insurance exchanges opened, giving consumers their first look at policies complying with the
provisions of the Affordable Care Act. These included:
- Significant premium increases for comparable coverage
- Elimination of high deductible policies
- Low out-of-pocket annual maximum responsibility for the insured
- Coverage of things that consumers either don’t need or don’t want coverage for.
- While there were problems with the operation of the exchange websites, it appears that the most serious
complaints involved price increases and the lack of choices to bring the cost down.
- On November 14, President Obama issued an administrative order that delayed the implementation of
provisions of the Affordable Care Act that led to mass policy cancellations. The effect of this order is
unclear since much of the direct regulation of insurance companies is done by the states. It may be easier
to throw dung against a wall than clean it up.
The real problem involves the composition of risk pools.
Three objectives of the Affordable Care Act are:
- To socialize the cost of providing medical service to the uninsured
- To subsidize the cost of health insurance to those with uninsurable risks
- To sever the link between employment and healthcare coverage
The key problem in implementation is the existence of private risk pools. You can divide the population into
- Working individuals
- Individuals over age 65 on Medicare
- Individuals not employed under age 65
Within the last category are the underclass where there is an affordability problem (no jobs and no resources
to buy individual coverage), and those who have been separated from employment because of economic
conditions. The latter are trying to avoid depleting retirement assets because of gaps in both income and health
coverage. Problems with getting coverage due to preexisting conditions are superimposed on affordability
In broad terms, employed individuals are better risks than the unemployed. According to a Gallup survey
(Gallup, Dan Witters, June 2012), the unemployed:
- smoke more,
- exercise less,
- have inferior eating habits, and
- have lower levels of education, which is correlated with unhealthy choices.
Employed individuals are better risks than the Medicare population simply because they are younger. So when
you have a private risk pool that covers employed people, health insurance costs are lower.
Those interested in socializing healthcare costs need to drag employed Americans into the risk pools to subsidize others.
The link between employment and insurance
Employer provided health insurance was very limited prior to World War II. It got a big push from companies
subject to wage and price controls. Giving individuals a fringe benefit was a way to give extra compensation
without violating the price controls.
Labor and management got comfortable with these arrangements, and fringe benefit compensation grew even
after wage and price controls were lifted. A move by the government to make the benefit taxable was stopped by
an alliance of labor and management, and led to the enactment of an explicit exclusion of health benefits from
106(a) GENERAL RULE:
Except as otherwise provided in this section, gross income of an employee does not include
employer-provided coverage under an accident or health plan.
This was a powerful incentive for employers to substitute the insurance fringe benefit for cash compensation.
The growth of commercial insurers followed in the 1950s and 1960s.
Composition of private risk pools
Within the category of working individuals there are the following:
- Large employer groups
- Educational institutions (colleges and universities)
- Governments (federal, state, and local)
- Large companies
- Multi-employer union plans
- Small employer groups (can include self-employed people with employees)
Individuals must purchase commercial insurance to spread risk. Larger groups have other options.
- They can buy commercial insurance where pricing is based on the health claims experience for the
- Large companies can self-insure although they often have some kind of umbrella coverage to limit risk.
The average cost of the group would be built into the employee’s compensation structure.
The existence of these private risk pools has a huge impact on the manner in which healthcare costs are socialized.
Implementation of the Affordable Care Act
There is a risk pool of unemployed and uninsurable people whose healthcare costs needs to be subsidized.
There are two basic choices:
- Create a public risk pool for individuals who do not have insurance coverage linked to employment, and
increase income taxes to fund it, or
- Increase the cost of coverage to the rest of the population, and spread the cost over the private risk pools.
Call it taxation by insurance surcharge.
The mechanism for spreading this cost equitably is where the process is breaking down. Consider what is
happening as the Affordable Care Act is implemented:
- Existing individual insurance policies have been cancelled en masse and have been repriced. The highly
touted expansion of benefits is being used to distract attention from the price action. If coverage were
allowed to be kept constant, everyone would be able to compute the hidden tax.
- Young adults in the individual insurance policy market are getting stuck with large premium increases
at the same time they are struggling to get jobs and pay off student loans. They are an attractive target
because they tend to use medical services sparingly.
- Employees in the small group market are unaffected for 2014, but starting in 2015, experience rating in
the pricing of policies will disappear. They will be required to join the subsidy party.
- Larger groups and the Medicare population are sitting on the sidelines, basically unaffected.
You can see the problem. A subset of workers is bearing the cost, and a wide swath of the population can
cheer for universal healthcare… without bearing any of the cost. This proves once again that everyone loves an
entitlement, as long as someone else pays for it.
This situation is highly unstable. Either all private risk pools will be collapsed quickly into a single risk pool, or
a subsidized risk pool will be created for those who can’t get insurance by other means. It is not possible to have
something in between.
The problems are in plain sight.
- Price shocks are an indication that a subset of workers is being slammed.
- Never missing the chance to set a bad example, Congress gave itself and staffers an exemption until 2015.
- Labor unions are asking for exemptions from provisions of the act affecting Cadillac plans.
- Large employers lobbied for (and received) a one year delay in the implementation of the employer mandate.
These groups will lobby to maintain their risk pools.
And moving beyond private risk pools, there is a growing population of people on Medicare. Not only are
they as a group undercharged for their benefit, but they don’t have the exposure to insurance premiums that
employed individuals have. If you ask people age 55-65 about the costs of individual coverage, you will find
that it is a multiple of the cost of the annual premium for the highest income participants.
At least there is logic to this fee schedule. The fees are graduated and are based on the individual’s ability to
pay. Who is going to exercise the wisdom of Solomon in deciding the extent to which Medicare participants join
in the funding?
Insurance companies as the collection arm of the Internal Revenue Service.
The most problematic aspect of the Affordable Care Act is that it enlists the insurance companies to collect
taxes on behalf of the government. Consider that:
- The government is setting the level of service (“essentials”). These programs expand covered services
over time, and are resistant to oversight. Have you ever seen one of them reduce services?
- The government is deciding what services are 100% covered by premiums, and what services are subject
to coinsurance and deductibles.
- The insurance companies, via the premium setting mechanism (subject to government oversight), are
deciding how much the purchasers of insurance have to pay in subsidies above what they would pay
- And the government, via administrative orders, is exercising wide latitude in deciding who is subject to
There are lots of moving parts here. The underlying proposition is that the government can competently
and equitably run all this over time. That assumption is questionable in light of their performance in getting
Healthcare.gov operational. It may make the Internal Revenue Code look like a model of transparency and
fairness. If you didn’t like insurance companies before, you will like them even less now.
As someone who grew up during the Vietnam War years, I have deep suspicions about government officials
giving administrative orders. Now that the light switch has been flipped, and the operational details are coming
out into the open, it would be an ideal time to reexamine the concept from top to bottom.
To repeat the point made earlier… Either all private risk pools will be collapsed quickly into a single risk pool,
or a subsidized risk pool will be created for those who can’t get insurance by other means. It is not possible to
have something in between.