May 2, 2017

Affordable Care Act Repeal Can't Ignore Price Controls

Tracy C. Miller

Senior Policy Research Editor
Summary

Price controls are the most problematic aspect of the ACA.

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The failure of the American Health Care Act (AHCA), the planned replacement for the Affordable Care Act (ACA), was the first major legislative defeat for President Trump. Critics dubbed the AHCA “Obamacare Lite” for its many market-limiting provisions that would have discouraged improvements in health care while leaving healthy Americans with higher costs—and most everyone with fewer options. Now Republicans in Congress are considering the MacArthur-Meadows amendment to allow states to apply for opt-out waivers for some Obamacare rules, including mandated benefits and required community rating. 

Replacing the ACA remains a worthy goal, but only if the new policy allows a freer and more functional health insurance market to emerge. The opt-out provisions of the proposed amendment do not go far enough in this direction.

The AHCA would repeal the employer mandate and the mandate that an individual purchase health insurance. It repeals a number of the taxes intended to help pay for government costs resulting from the ACA. It also eliminates or alters some of the ACA’s tax credits for individuals and small businesses. 

The problem is that the ACHA still mandates which specific health benefits all health insurance plans must include. And rather than permitting insurance companies to freely vary prices based on health status, it retains the ACA’s community rating price controls.  

This is one of its biggest weaknesses. Although community rating keeps prices down for those in poor health, it results in higher prices for those who are healthy. 

The ACA was designed to make it possible for the insurance companies to cover high-risk clients by earning extra revenue from healthier people. It did this by requiring everyone to buy insurance, while prohibiting insurance companies from charging different prices based on health status. Without the price controls, insurance companies would lower premiums for healthy people and raise them for those with costly preexisting conditions. 

Repealing price controls is tricky, because—according to prevailing wisdom—those who are now insured but have high health risks would lose their coverage. 

There are a few ways to provide affordable coverage to them while permitting insurance companies to lower premiums for healthy clients. These approaches may require additional government spending. Health care reform with no extra taxes, subsidies or mandates is ideal, but in the near term, it is important that any repeal account for the distortions in our system that make it more difficult for some to get coverage than others. 

One of the biggest distortions, dating back to the 1940s, is a tax break for people covered by employer-sponsored insurance (ESI). Since most people get their insurance through their employers and that coverage is not portable, people with pre-existing conditions had trouble getting health coverage when they changed jobs. The ACA, by requiring community rating, changed that. 

But requiring insurance companies to charge the same premium to everyone has made selling coverage through the exchanges unprofitable for many of them. Healthy people have little incentive to buy coverage that costs them much more than it should, and the penalties for being uninsured are relatively small.  

This creates a cycle in which, without those healthy participants, the average health of the insured population declines. Costs go up, making it harder for insurance companies to keep premiums affordable and still make a profit.

Instead of requiring insurance companies to charge the same premium on the individual market for people with pre-existing conditions as everyone else, the federal government could fund reinsurance to keep premiums down for those who have maintained continuous coverage. 

Doing this—while also allowing insurance companies to lower prices for healthier people—would require another source of revenue. It might be necessary to maintain one or more of the types of taxes within the ACA, such as the Cadillac tax, which gradually reduces the tax deduction for employer-sponsored insurance plans. 

Price controls are the most problematic aspect of the ACA. Since the federal government imposed them, it should repeal them, rather than create a bureaucratic process for states to apply for waivers—as does the MacArthur-Meadows amendment.                      

But would 60 Senators vote to do away with price controls? Not likely. To have a chance of getting enough votes in the Senate, any plan must keep premiums affordable for people with pre-existing conditions who are already insured.