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Stethescope and money
Doctors medical stethoscope on money background - healthcare expensive concept
Donald Trump is beginning to put out vague policy statements—building the wall to shut off the southern border; immigration; drill, drill, drill. Included in the hit list is the repeal of the Affordable Care Act, also known as Obamacare. Despite over 70 attempts to repeal the ACA failed during his presidency, Trump apparently thinks it’s good strategy to try again, at the least to attract votes and donations from his base.
Closer to home here in Wisconsin, businessman Eric Hovde, recently announced opponent to Sen. Tammy Baldwin's re-election bid, also promises to repeal the ACA, confident that the free market will provide superior health insurance.
Why did 70 previous repeal efforts fail?
The main problem for Republicans attempting to repeal the ACA was not just the program’s increasing popularity; economic principles demonstrate that an unregulated “free” market cannot provide a replacement that will provide universal healthcare coverage. The natural forces of the market will lead the economy away from universal coverage.
Insurance firms do not sell a commodity, but rather a service. They collect premiums from customers and in turn protect those customers from the financial disaster of an insured-against event. They sell flood insurance, fire insurance, car insurance, accident insurance and a host of other types. The price, or “premium” they charge customers is based on the risk that the customer imposes on the firm. They place the insured customers of roughly equal risk into groupings, called “pools.” Low risk people are placed in a lower risk pool and charged a lower premium. Higher risk people are relegated to a higher risk pool and charged a higher premium. This process of price determination is called “experience rating.” In car insurance, for example, experience rating results in higher premiums for accident-prone drivers, and lower premiums for drivers with a clean driving record.
Applied to health insurance, the experience rating will be perverse, resulting in higher health insurance rates for sick people most in need of the benefits of the medical arts. We cannot expect experience rating to result in universal healthcare insurance coverage because the highest premiums will be imposed on those most in need of the system—those with pre-existing conditions, those currently ill, and of course, older Americans. As in the era before the ACA, the premiums will be driven up so high that many of them will forgo coverage. To make matters worse, they would then seek costly emergency rooms when medical care is urgent.
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The Affordable Care Act and Community Rating
The Affordable Care Act reduces reliance on experience rating; instead, the federal government can insure in a way the private market cannot by spreading risk over the long-life cycle of the average person. Policyholders are charged “community-rated” premiums in which the young and healthy pay a higher premium than a free market would charge so that older and sicker policyholders can pay less. With the passage of time, the average citizen will be both a net payor early in life and a net recipient later in life.
Additionally, the regulations in the Affordable Care Act require insurers to accept patients without regard to their prior medical history, and all policies must offer an “essential benefits package.” This requirement is designed to prevent insurance companies from tailoring policies that deny coverage for health problems a customer is most likely to encounter. The package also includes coverage of children on parents' insurance up to age 26. All such regulations work against the natural market forces that encourage insurance companies to shed risk.
If the ACA were to be repealed, as Trump and Hovde propose, the regulations that guide the market under the ACA would be removed, and so community rating would revert to experience rating. The market for health insurance would revert to what it was before 2014 when the ACA was first implemented. Premiums for the sick and elderly and those with "pre-existing conditions" would rise dramatically, inducing many to go without insurance rather than pay the high premiums.
It is not obstinate ideology that leads to this prediction but rather standard economic analysis. This was first spelled out about 30 years ago by the Heritage Foundation (once a pro-market think tank) when it designed the regulations that eventually were the foundation of the Affordable Care Act. If Trump and Hovde and other opponents of the ACA want to repeal it, let’s see their replacement first.
