September 29, 2015

The Pre-existing Condition: Market Incentives for Broader Coverage

This essay was also published in economics21

The Patient Protection and Affordable Care Act (ACA) is a mandate-driven, regulation-heavy piece of legislation with the objective (among other goals) of insuring Americans with pre-existing conditions. Simply repealing the ACA would not result in insuring this group. This raises an important question: What is the conservative health policy approach to pre-existing conditions?

One answer is a two-pronged strategy that uses different tools to address pre-existing conditions in the current population and pre-existing conditions in the future. These approaches have the additional virtue that they not only provide insurance coverage but also infuse the market with incentives for better health care.

Dealing with Pre-existing Conditions in the Future

Policymakers should begin by anticipating that pre-existing conditions will arise. In this case, the key is better incentives. Specifically, if a person buys insurance—in whatever market (individual, small group, employer, etc.)—and stays continuously covered—again, in whatever market—then no insurance company may “medically underwrite” the individual (i.e., evaluate him or her for pre-existing conditions). The individual must be treated as a healthy policyholder.

What happens? First, there is a tremendous incentive for young (and on average healthier) individuals to buy insurance. This brings cheap risks into the pool, and provides a way for the young to lock in relatively low premiums over their lifetimes. Insurers, on the other hand, now have to compete by providing a high-value policy (low premiums, high benefits) in a pool that contains a mixture of risks, instead of competing by excluding risks. The results are more competition and coverage for pre-existing conditions.

Health care incentives are improved as well. If a young person buys an individual policy, there is a great possibility that the insurer will be responsible for bills many years into the future. Instead of making actuarial calculations based on a one-year snapshot, insurers will look forward and recognize the payoff from investing in preventive services, lifestyle interventions, and seemingly costly cures (e.g., Sovaldi, the hepatitis C cure). In short, the insurance market competition will deliver incentives to avoid future “pre-existing” conditions.

Dealing with Pre-existing Conditions in the Present

For those whose pre-existing conditions currently price them out of the insurance market, one solution is providing high-risk pools. This strategy recognizes that if the ratio of health costs to an individual’s income is too high, then the right response is not to regulate every insurance product (“essential benefits”), every sales practice (“guaranteed issue”), and every price (“community rating”). The answer is to subsidize that individual, but retain the dynamism and flexibility of a private market.

High-risk pools are vehicles for subsidies where needed. Historically, states charter a high-risk pool and its board contracts with an insurance company to collect premiums and pay claims and administer the program on a day-to-day basis. (Most high-risk pools have been nonprofits, but there is no reason not to run a for-profit pool that has sharper incentives for claims adjustment.) The pools typically offer benefits that are comparable to those of basic private plans. The insurance generally costs more than regular individual insurance; it is made affordable through subsidies.

The Patient CARE Act

The approaches described here are far from theoretical. The Patient Choice, Affordability, Responsibility, and Empowerment (Patient CARE) Act proposed by Senators Richard Burr, Orrin Hatch, and Tom Coburn in January 2014 (and proposed again by Burr, Hatch, and Representative Fred Upton in January 2015) uses these approaches quite successfully, according to analysis from the Center for Health and Economy. Specifically, the act would repeal the requirements for guaranteed issue under the ACA and replace them with requirements for guaranteed renewal.

Individuals would have to maintain continuous insurance coverage in order to avoid being charged higher premiums based on health status. In the first year of implementation, there would be an open enrollment period during which all individuals would be guaranteed that they would be issued health insurance without regard to health status. At the same time, the Patient CARE Act would give states the authority to set up federally funded high-risk insurance pools.

Conclusion

There is nothing about health insurance markets that requires a mandate-heavy, regulatory approach to solving the problem of pre-existing conditions. Nor is there anything about pre-existing conditions that precludes an approach other than the ACA. The answer is a strategy that uses different tools to address pre-existing conditions in the current population and pre-existing conditions in the future. This strategy has the virtue of providing insurance coverage while also infusing the market with incentives for better health care.