Tuesday, March 28, 2017

What was wrong with the AHCA -- why it was worse than Obamacare

Thank heavens the American Health Care Act (AHCA, a.k.a. Ryancare/RINOcare) was withdrawn.  It was worse than the Affordable Care Act (ACA, Obamacare).  Obamacare is unsustainable and is rapidly destroying the individual market in health insurance (this is the market where individuals purchase their own insurance, as opposed to the employer market where firms buy insurance for employees as part of their compensation.)  The AHCA would have accelerated the destruction of the individual insurance market through adverse selection, i.e. encouraging only the sickest people to sign up for insurance.  Here's why.

ACA has "guaranteed issue" provision for all health insurance, that is, an insurer may not take pre-existing conditions into account in selling insurance or determining premiums.  For example, if a potential customer shows up and has advanced cancer requiring expensive treatment, not only must the insurer sell this person "insurance," the insurer can charge no more than it would charge a perfectly healthy individual.  Needless to say, this means a healthy person has little incentive to buy insurance; waiting until one is sick is the financially responsible policy.

But that, of course, means that the people in the insurance pool, those buying insurance, will tend to be sick people. This means, in turn, insurance premiums will begin going upwards to cover the insurers' costs, and there'll be increasing use of cost-reduction methods such as higher deductibles and narrower and lower quality provider networks. Add to this Obamacare's rules of no cap on lifetime and annual payouts, and the requirement of comprehensive coverage, and insurance becomes extremely expensive.  The people who tend to drop out of the market first will be the healthier/less sick, inducing even higher costs and a death spiral of rising premiums and shrinking pool.  Adverse selection becomes a self-feeding cycle.

To try to prevent this, Obamacare also included a mandate -- people are required to have insurance, and if they don't must pay a fine tax.  This was supposed to provide an incentive to keep healthy people in the pool and thus prevent the death spiral.  Insurance expert Bob Laszewski says an insurance pool must have 75% of eligible people sign up to be sustainable.  Obamacare had 30%.  The mandate proved ineffective, as people either paid it or ignored it and it wasn't enforced (I know people who fall into each category), and adverse selection began destroying the individual insurance market.

So how was AHCA worse than this nightmare?  AHCA retained "guaranteed issue," co cap on lifetime or annual benefits, and the mandate that insurance be comprehensive, but abolished the mandate that people buy insurance.  That increased the incentive for healthy people to stay out of the insurance market, which would have accelerated adverse selection and the death spiral.  AHCA substituted a one-time one-year 30% surcharge on any uninsured person who decided to buy insurance.  So, for example, if insurance costs $10,000/yr, a healthy person could avoid buying insurance for every year they were healthy, saving $10,000/yr.  Then, when they finally became sick and needed insurance because of, say, expected medical bills of $100,000, they could spend $13,000 for full insurance.  What a deal!  No healthy person should ever buy insurance under that scheme!

Needless to say, this would destroy individual insurance quickly, more quickly than Obamacare is doing.  That's why Bob Laszewski called AHCA "mind-boggling;" to anyone who understands insurance it's so obviously destructive that it is hard to imagine its a real proposal.  Mark Levin argued this evening that the Ryan and Co. never really meant for it to pass; they simply wanted to make a gesture so that they could pretend to have tried to repeal Obamacare while actually never doing anything, since fixing this mess will be difficult and risky.  That's very likely right... although one should never underestimate stupidity as the explanation.  Maybe they really imagined this crazy scheme could work.

Regardless of the motives of supporters of Ryancare, as a system, it was a catastrophe that would have destroyed individual insurance and likely had negative effects on employer insurance.  I expect that my premium increases would have accelerated under Ryancare (Ryan himself argued the growth rate would slow -- "higher insurance premiums! but could have been worse so success!")  There were other aspects of the bill that were desirable, such as higher caps for HSA's (tax-free health savings accounts) and repeal of the Obamacare subsidies and replacement with the Rynocare subsidies tax credits.  But here's the bottom line:

If we destroy the private sector insurance market with government intervention, what follows will be nationalized health insurance and national health care -- socialized medicine.  And that's where the AHCA was taking us.  Good riddance.

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