Costs and the Pre-Existing Conditions Pledge

Pre-existing conditions are the touchstone of the 2017 health care debate. In passing the Affordable Care Act (ACA, or “Obamacare”), Democrats promised that expensive medical problems wouldn’t preclude anyone from obtaining health insurance coverage. Today, Republicans touting the American Health Care Act (AHCA) offer a similar pledge. While this bipartisan consensus reflects a deeply humane sentiment, it’s an expensive, risk-laden proposition for four reasons.

1) The definition of pre-existing conditions varies wildly. These can be either ongoing illnesses (chronic or acute) or conditions likely to occur in the future. Costs enter the equation in indeterminate ways. 

Hay fever is an ongoing condition, but unlikely to result in high premiums or denial of coverage; thus, it probably doesn’t qualify one as pre-ex. But a condition that’s inexpensive one day can become expensive with the introduction of new treatments—and vice versa. Some conditions—say, lower back pain or certain mental health issues—are difficult to verify objectively. Genetic tests and other diagnostic tools will offer more ways to tag people as pre-ex over time.

2) Whichever definition one chooses, the number of people with pre-existing conditions as defined is hazy. In 2011, the Obama administration warned, "129 million Americans with a pre-existing condition could be denied coverage” without the ACA. John Goodman of the Goodman Institute believes, “Less than 1 percent of the United States is estimated to be uninsurable.” In 2016, the Kaiser Family Foundation (KFF) claimed, “About 52 million people would have difficulty getting health insurance if Obamacare is repealed.” A 2017 KFF report said pre-ACA state high-risk pools covered around 2 percent of individual market enrollees but were notoriously underfunded, provided skimpy coverage, and turned away potential enrollees; the ACA’s 2010-2014 temporary Pre-existing Condition Insurance Program (PCIP) enrolled around 115,000 people.

So how many pre-ex patients exist? It’s anyone’s guess.

3) The projected per capita costs of pre-ex coverage vary widely. The 2017 KFF report said PCIP enrollees cost an average of $32,108 in 2012—versus $12,471 under traditional state high-risk pools. Costs depend heavily on how generous and comprehensive the insurance plans are, how plans outside the high-risk pools are performing, who is allowed into the high-risk pools, etc.

4) Institutional arrangements to cover pre-ex patients may raise costs and jeopardize coverage for non-pre-ex enrollees. The ACA imposed guaranteed issue (insurers must sell to all comers) and modified community rating (insurers can’t raise premiums for pre-ex people). This has meant higher costs, scantier coverage, and unstable insurance markets for healthy people. High-risk pools touted by Republicans shift the burden to taxpayers; for many, lower insurance premiums would be offset by higher tax burdens. 

My colleague Charles Blahous says there are four ways to handle the pre-ex problem: Have sick people pay for themselves (which no one suggests). Look for mysterious deep pockets (harder than it sounds). Ask younger, healthier insurance purchasers to subsidize sicker people (the ACA’s general approach). Or have taxpayers subsidize pre-ex coverage (the AHCA’s approach).

Blahous said the ACA’s approach was defensible but that in selling the law, proponents claimed healthy purchasers would experience lower costs and better policies. The eventual bait-and-switch infuriated millions.

The AHCA reflects Republicans’ traditional preference for high-risk pools. Laying pre-ex cost burdens on taxpayers is also morally defensible. The question is whether Republicans, like Democrats before them, are low-balling cost estimates of the pre-ex promise.

For a back-of-the-envelope calculation, suppose 250,000 people enter high-risk pools at an average annual cost of $40,000. This not-unreasonable scenario would require $10 billion per year. While the giant numbers (129 million, 52 million, etc.) are certainly overblown, a million (or a few million) pre-ex enrollees is not inconceivable—especially given that qualification for such pools depends partly on regulatory whim, general economic conditions, and the condition of employer-provided insurance and public programs like Medicaid.

The best long-term strategy may be to level with the American people—allocating enough money to finance this expansive promise or moderating the promise itself. At the same time, remember that the pre-ex debate does nothing about the high cost of care—only about who pays. Our real challenge is to enable innovators to bring the costs of care down—as we saw with information technology over the past 25 years.