Who Should Pay to Cover Pre-Existing Conditions?

Among the most vexing of our national health care policy challenges is the question of who should pay (and how) for the medical care of those with pre-existing health conditions.  Advocates propose a broad array of answers to this question, explanations of which rapidly grow complicated. The purpose of this column is to simplify as much as to explain – to provide a cursory thumbnail guide to the basic value judgments underlying these complex proposals.

Disagreement over how to handle pre-existing conditions is a big part of how we came to our current impasse over national health care policy.  The promise that the Affordable Care Act (ACA) would guarantee coverage for those with pre-existing conditions was one of the most popular provisions of an otherwise unpopular law, and a central motivation for its passage.  Donald Trump, while a candidate for president, expressed support for maintaining a pre-existing condition coverage guarantee even as he opposed the ACA as a whole.  More recently, congressional Republicans have been working to bridge internal differences over how to handle pre-existing conditions in a repeal-and-replace bill, resulting in the draft MacArthur amendment to the AHCA.  

We have a tendency to use “pre-existing conditions” as a euphemism for “expensive health care needs” but the two aren’t quite the same.  If you and I are both healthy today, and both participating in the same insurance plan, the pricing of our insurance should already factor in the probability that one of us will someday face a health problem requiring expensive treatment – and the plan should be able to handle it when we do.  But a sick person without insurance (or looking to change plans) is in a different situation; their need for health treatment is a certain problem rather than a merely possible one, and hence the average expected cost is much higher.  Technically, what they need is not insurance against a possible, unknown problem, but rather help paying for a certain, known problem.

There’s no way around a simple truth: treating an expensive health condition costs (someone) lots of money.  There are four basic approaches that can be taken to this problem.

1. Leave sick people to face the costs of their own treatment, whether out of pocket or through high-cost insurance, no matter how ruinous those costs become.
2. Mandate that other, healthier people overpay for the value of their own health insurance, so that sick people can underpay for the value of theirs.
3. Spread the costs of paying expensive health bills throughout society, for example by having taxpayers pick up the tab.
4. Require a targeted group to shoulder the costs.

Let’s summarize these approaches in turn:

#1: Leave sick people to face the costs of their own treatment, no matter how high they get. Theoretically (albeit callously) we could leave people with expensive health conditions to their fates, forcing many to first bankrupt themselves and later be denied essential care.  The cost of insuring against such expenses would be enormously high, so the sick would face a choice between paying their bills out of pocket without insurance or carrying far more expensive insurance than everyone else.  American society appears to wholeheartedly reject this approach, which suggests we must find an alternative.

#2: Force other, healthier people to carry insurance and overpay for its value, so that sick people can underpay for the value of theirs.  This is, in effect, the approach taken under the ACA.  The ACA sought to mandate that everyone carry insurance and to impose “modified community rating” – i.e., an individual’s health history could not be the basis for charging them a different premium amount. 

This approach requires that healthy people pay far more than the value of the health services they expect, while sick people pay far less than the value of the services they expect.  The key word here is “expect.”  Under all insurance, people who make more claims receive more value for their premiums than those who make fewer.   But more typically, the individual only chooses to carry the insurance in the first place if he believes that the likelihood of his making a claim is such that it justifies paying the assessed premium amount.  Community rating and mandatory coverage by contrast create a very different dynamic – forcing many people to pay premiums well in excess of the expected value of their claims, so that others can pay premiums that are far less than the expected value of theirs.

The value judgment made in the ACA is a defensible one.  Simplified, it is like saying, “We want to ensure that those in our society facing ruinous health care costs are shielded from those costs.  We are choosing to have this done through our health insurance system.  Paying for their treatments will cost money.  So, all the rest of you will pay extra for your own health insurance, to cover not only your own average expected health care costs but theirs as well.  We believe this is the right thing for a compassionate society to do.” 

Had this fundamental value judgment of the ACA been forthrightly explained to voters, it might have sustained more popular support.  Instead, however, Americans were repeatedly told that the ACA would simultaneously provide for the sick while lowering everyone else’s insurance costs, reducing the federal deficit, and extending Medicare solvency at the same time.  When people realized they were being forced to bear additional costs through their own insurance – and when some of these people were hit much harder than others due to patterns in their particular markets -- they felt misled and grew angry in a way they perhaps might not have if they had agreed to this trade-off from the beginning.

#3: Spread the costs throughout society, for example by having taxpayers pick up the tab.  An alternative approach is to straightforwardly say: “We want to help sick people meet their health expenses.  There’s no particular policy rationale for hiding these expected costs in insurance premiums, since this isn’t really an insurance problem so much as one of straightforward financial support.  Therefore, we’ll just have taxpayers pay for it directly.” 

There are a lot of ways this could be done.  One option is through “high risk pools” – coverage programs funded by states specifically to finance such costs, and a model Republicans are considering as a successor to the ACA.  And while the ACA generally reflected option #2 above, it also featured taxpayer-provided subsidies per option #3, in the form of tax credits for low-income individuals to offset their insurance premiums.  Other examples of approach #3 include the support taxpayers provide for both the ACA and non-ACA portions of Medicaid, and for much of Medicare as well (though none of those programs are targeted specifically on people with pre-existing conditions).

Some advocates are concerned about taking approach #3 because they believe government funding will be inadequate to cover the costs of treating pre-existing conditions.  Another potential objection is the argument that all participants in the health care system should share in these costs, not just those who pay income taxes.

#4: Require a targeted group to shoulder the costs. This is just another way of saying “find someone else to pay, other than the sick individual, the taxpayer, or other mandated participants in the insurance pool.”  Possibilities are theoretically endless, though few of them would have a compelling policy rationale. 

One of the few potentially interesting versions of this approach would be to require insurance companies to shoulder the costs, by grandfathering in guaranteed issue and modified community rating for those with pre-existing conditions who gained coverage under the ACA, while relieving other participants of the coverage mandate and associated penalties.  For those with pre-existing conditions, this approach would implement President Obama’s promise that “if you like your health care plan, you can keep it.”

This would destabilize these plans and force insurance companies (and, by extension, investors in them) to accept substantial losses.  To the extent that insurers withstand these losses and continue to operate, voters might regard this outcome as preferable to, or a useful amelioration of, shifting these costs to taxpayers and healthy participants.  The ACA permitted insurers to pursue the upside of a potentially lucrative bet – participating in the ACA’s insurance marketplaces so long as the new coverage mandate led to additional profits, but pulling out if the marketplace plans proved unprofitable.  Option #4 would effectively force insurers (and their investors) to accept the realization of downside risk from having made that bet. 

Regardless of who shoulders the costs of caring for the uninsured, someone will bear those costs unless that care is denied. The complexities of the various policy options facing lawmakers should not obscure a more fundamental societal value judgment that must be made: specifically, who should bear those costs.