Congress Revisits the Pre-Existing Condition Problem

The American health care debate has long been bitter and rancorous. A top reason is the pre-existing conditions problem. As Congress moves to repeal and replace the Affordable Care Act (ACA), the pre-ex problem once again takes center stage. Played right, this offers a chance to shift the policy debate in more constructive directions.

No one expects Allstate to sell fire insurance to someone whose house burned last week and then pay him $100,000 for repairs. When an uninsured motorist wrecks his car, no one complains that GEICO won’t sell him a policy and immediately pay $7,000 for repairs. State Farm doesn’t have to sell life insurance to a hospice-bound cancer patient. Yet for complex reasons, many feel a fierce moral urge to take the opposite view in health insurance. The Affordable Care Act (ACA) requires health insurers to sell policies to uninsured patients who need heart transplants or chemotherapy—at the same price healthy people pay. This is the pre-ex problem.

Thus the sickest people are the likeliest to buy insurance, the high cost of treating them drives premiums up, and some young and healthy people drop coverage rather than paying those high premiums. This is the dreaded market “death spiral.”

There are two broad ways to deal with this:. (#1) Require everyone to have insurance. Either the government pays for your care (as in Canada), or it forces you to buy a private policy (as in Switzerland). (#2) You can string together institutions to encourage insurance coverage and handle care for uninsured people.

This first approach, dubbed “universal” by advocates, subdues the pre-ex problem but creates other problems. Plus, coverage isn’t really universal.

Taxpayer-financed health care requires high taxes that constrict economic output and growth. The government determines which services are and are not covered, who gets each service and under which conditions, and how much providers are paid.

Invariably, the government—when faced with resource constraints—rations care. In the United Kingdom, a National Health Service (NHS) official recently acknowledged that Britain is rationing hip and knee replacements by level of pain. If some bureaucrat decides you aren’t suffering as badly as someone else, they get the surgery and you don’t. The NHS has previously denied some patients expensive potentially life-saving medications. For such patients, universal means, “You have coverage, but not for what is hurting or killing you.”

This one-size-fits-all approach biases care toward older, established treatments and away from newer, cutting-edge ones. It thus slows medical innovation.

Whatever the merits of approach #1, it has never gained the upper hand in the United States. Even the ACA’s weak, ineffective individual mandate is widely hated.

So in the United States, governments generally allow individuals to choose whether or not to purchase health insurance. The ACA leaves tens of millions without coverage, and any repeal-and-replace proposal that passes Congress is likely to as well.

Assuming the pre-ex problem is a permanent fixture in America, the challenge is how best to induce people to remain insured and how best to deal with uninsured people who acquire grievous, expensive medical conditions.

A variety of tools can encourage Americans to obtain and retain coverage. The following were among those discussed in a short book, “The Pre-existing Condition,” which I co-authored and co-edited in 2015:

• States can establish high-risk pools where those with expensive conditions can obtain state-subsidized insurance. (Dozens of states did so before the ACA.)
• Insurers or the government can guarantee that people who maintain continuous coverage will not experience undue premium increases or see their coverage canceled.
• The tax code strongly encourages employers, rather than individuals, to purchase health insurance. Eliminating this preference would bolster participation in the individual insurance market.
• The government could act as insurer of last resort for the heaviest expenditures that patients experience. (Essentially blending approach #1 for high-end care and #2 for lower-cost care.)

University of Chicago economist John Cochrane has suggested that “health status insurance” could subsidize individuals’ insurance premiums once they acquire expensive medical conditions. Creative use of this concept could also reduce insurers’ motives to avoid sick subscribers.

While these ideas have considerable merit, they are mostly redistributive. They don’t alter the number of doctors, nurses, hospitals, or other resources; at best, they only marginally affect how we use those resources and what those resources cost.

Ultimately, the answer to the pre-ex problem is to lower the cost of care enough that the problem becomes less important. For inspiration, think of the massive decreases in the cost of information technology over the past 25 years. There are many ways to encourage such cost-cutting—to encourage technological and managerial innovation. Focusing health care policy on innovation can go a long way toward reducing the rancor and lessening the pre-ex problem.