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Are ObamaCare’s Community-Rating Regulations a System of Price Controls?

ObamaCare’s community-rating regulations generally bar insurance companies from using any factor other than age to determine premiums, and prevent insurers from charging 64-year-olds more than three times what they charge 18-year-olds. I have long maintained community rating is nothing more than a system of government price controls, and should meet with the usual scorn economists universally heap on such boneheaded policies.

An esteemed colleague challenges my claim that ObamaCare’s community-rating is a system of price controls, because “the government doesn’t set a price.” Here is how I responded:

Price controls don’t always take the form of a fixed integer. Sometimes government sets prices using ratios.

Premium caps control prices by limiting this year’s premium to a ratio of last year’s premium. Medicaid’s prescription-drug price controls set prices as a ratio of the average wholesale price. Medicare’s price controls involve all sorts of complex ratios.

ObamaCare’s community-rating regulations control prices by (a) setting the ratio of premiums for healthy vs. sick people within each age category to 1:1, and (b) setting the ratio of premiums for young vs. old to 1:3. Insurers would not voluntarily follow those ratios, with good reason. But community rating forces insurers to set prices according to those ratios. Thus it is a price-control scheme.

Is ObamaCare Conservative?

That’s the thesis of a Washington Post opinion piece titled, “Why replacing Obamacare is so hard: It’s fundamentally conservative” by Northwestern University professor Craig Garthwaite. A lot of ObamaCare supporters find this claim appealing. If true, then it makes them look moderate and open to compromise, and makes ObamaCare’s conservative opponents look duplicitous and partisan. But is it true?

No. Not by a long shot.

I’m not a conservative. (I was, once, in my youth, but I’m feeling much better now.) So I will let the editors of National Review explain what a conservative approach to health reform is, as they did in this unsigned 2007 editorial. Spoiler alert: it’s a far cry from ObamaCare.

Against Universal Coverage

By The Editors — June 21, 2007

The Democrats running for president are competing over whose health-care plan gets closest to “universal coverage.” The Republican presidential candidates, meanwhile, have been mostly silent. Their inattention to the issue is a mistake. A great many voters are anxious about health care, and better government policies could alleviate that anxiety. The Republican candidates have an opportunity to present a distinctively conservative set of reforms.

Those reforms should begin with the rejection of the goal of universal coverage. Deregulating health insurance would make it more affordable, and thus increase the number of Americans with coverage. But to achieve universal coverage would require either having the government provide it to everyone or forcing everyone to buy it. The first option, national health insurance in some form or other, would either bust the budget or cripple medical innovation, and possibly have both effects. Mandatory health insurance, meanwhile, would entail a governmental definition of a minimum package of benefits that insurance has to cover. Over time, that minimum package would grow more and more expensive as provider groups lobbied the government to include their services in the mandate.

The health-care debate has centered on the uninsured. That so many people do not have health insurance is a consequence of foolish government policies: regulations that raise the price of insurance, and a tax code that ensures that most people get their insurance through their employer. If you don’t work for a company that provides health insurance, you’re out of luck. People locked out of the insurance system still have access to health care. But they often end up in emergency rooms because they did not receive preventive care.

For most people, however, it is another aspect of our employer-based health-care system that causes the most trouble: the insecurity it creates. People worry that if they switch jobs, they will lose their health insurance. They worry that their company will cut back on health benefits. Universal coverage is not necessary to address these worries. Making it possible for individuals to own their health-insurance policies themselves, rather than getting them through their companies, would solve the problem. It would also reduce the political momentum behind socialized medicine.

Most universal-coverage plans accept the least rational features of our health-care system — its reliance on employer-based coverage and on “insurance” that covers routine expenses — and merely try to expand that system to cover more people. Republicans should go in a different direction, proposing market reforms that make insurance more affordable and portable. If such reforms are implemented, more people will have insurance.

Some people, especially young and healthy people, may choose not to buy health insurance even when it is cheaper. Contrary to popular belief, such people do not cause everyone else to pay much higher premiums. Forcing them to get insurance would, on the other hand, lead to a worse health-care system for everyone because it would necessitate so much more government intervention. So what should the government do about the holdouts? Leave them alone. It’s a free country.

Senate Republicans Offer a Bill to Preserve & Expand ObamaCare

Yesterday, I posted “Five Questions I Will Use to Evaluate the Phantom Senate Health Care Bill.” The phantom bill took corporeal form today when Senate Republicans released the text of the “Better Care Reconciliation Act.”

So how does the Senate bill fare with regard to my five questions?

1. Would it repeal the parts of ObamaCare—specifically, community rating—that preclude secure access to health care by causing coverage to become worse for the sick and the Exchanges to collapse?

No. The Senate bill would preserve ObamaCare’s community-rating price controls. To be fair, it would modify them. ObamaCare forbids premiums for 64-year-olds to be more than three times premiums for 18-year-olds. The Senate bill would allow premiums for the older cohort to be up to five times those for the younger cohort. But these “age rating” restrictions are the least binding part of ObamaCare’s community-rating price controls. Those price controls would therefore continue to wreak havoc in the individual market. The Senate bill would also preserve nearly all of ObamaCare’s other insurance regulations. 

2. Would it make health care more affordable, or just throw subsidies at unaffordable care?

The Senate bill, like ObamaCare, would simply throw taxpayer dollars at unaffordable care, rather than make health care more affordable.

Making health care more affordable means driving down health care prices. Recent experiments have shown that cost-conscious consumers do indeed push providers to cut prices. (See below graph. Source.)  

How Cost-Conscious Consumers Drive Down Health Care Prices

Five Questions I Will Use to Evaluate the Phantom Senate Health Care Bill

Rumor has it that tomorrow is the day Senate Republican leaders will unveil the health care bill they have been busily assembling behind closed doors. So few details have emerged, President Trump could maybe learn something from Senate Majority Leader Mitch McConnell about how to prevent leaks. Even GOP senators are complaining they haven’t been allowed to see the bill.

Here are five questions I will be asking about the Senate health care bill if and when it sees the light of day.

  1. Would it repeal the parts of ObamaCare—specifically, community rating—that preclude secure access to health care for the sick by causing coverage to become worse for the sick and the Exchanges to collapse?
  2. Would it make health care more affordable, or just throw subsidies at unaffordable care?
  3. Would it actually sunset the Medicaid expansion, or keep the expansion alive long enough for a future Democratic Congress to rescue it?
  4. Tax cuts are almost irrelevant—how much of ObamaCare’s spending would it repeal?
  5. If it leaves major elements of ObamaCare in place, would it lead voters to blame the ongoing failure of those provisions on (supposed) free-market reforms?

Depending on how Senate Republicans—or at least, the select few who get to write major legislation—answer those questions, the bill could be a step in the right direction. Or it could be ObamaCare-lite.

Legislative Malpractice: the CBO Scores the American Health Care Act

The Congressional Budget Office’s cost estimate of the American Health Care Act confirms what health-policy scholars have known for months: the AHCA is bad health policy that will come back to haunt its Republican supporters.

Premiums on the individual market have risen an average of 105 percent since ObamaCare took effect. Maryland’s largest insurer has requested rate hikes for 2018 that average 52 percent. Yet the CBO estimates the AHCA would saddle voters with two additional premium increases before the mid-term elections—a further 20 percent increase in 2018, plus another 5 percent just before Election Day. Even worse, the bill’s ham-handed modifications to ObamaCare’s most harmful regulations would accelerate the race to the bottom that ObamaCare has begun. Voters will blame Republicans for their skyrocketing premiums and lousy coverage, deepening what appear to be inevitable GOP losses in 2018.

Free-market reforms would reduce premiums by up to 90 percent, make access to care more secure for people who develop expensive medical conditions, reduce taxes and health care prices, and give states the ability and flexibility to cover preexisting conditions. It might even give the GOP’s base a reason to go to the polls in 2018.

The AHCA is not free-market reform.

AHCA’s Medicaid “Reforms” Would Encourage States to Expand Medicaid

The Epoch Times quotes me on how the American Health Care Act’s Medicaid provisions create almost identical incentives to ObamaCare’s Medicaid expansion:

While both the per capita matching funds and the block grants seek to unleash innovation, they provide the states with very different incentives, according to Michael Cannon, director of health policy studies at the Cato Institute.

“The current per dollar matching grant system provides an unlimited entitlement to federal funds,” Cannon said. “The per capita matching grant system allows the states to keep that unlimited entitlement to federal funds going if they keep expanding enrollment, and so it creates enormous pressure for states to expand enrollment.”

Because able-bodied adults consume less health care than those who are more vulnerable, the per capita matching grants have an unintended consequence, according to Cannon. They will give states incentives to enroll able-bodied adults in preference to others who are more needy.

Cannon prefers giving the states block grants, which have the benefit of limiting federal expenses to a fixed amount, making the program financially sustainable.

For more, read my Philadelphia Inquirer op-ed, “Fulfill Promise to Repeal ObamaCare.”

The AHCA Does Not Materially Improve ObamaCare, and MacArthur Waivers Don’t Materially Improve the AHCA

The most remarkable thing about Rep. Tom MacArthur’s (R-NJ) amendment to the House leadership’s American Health Care Act is how little the conservative House Freedom Caucus got in exchange for supporting an ObamaCare-lite bill they had previously opposed.

The MacArthur amendment would allow states to apply for waivers that would:

  1. Exempt their individual and small-group insurance markets from ObamaCare’s “essential health benefits” coverage mandates as early as 2018;
  2. Allow insurers in those markets to consider the health status of previously uninsured applicants (if the state sets up some more direct form of subsidy for people with pre-existing conditions, either within or outside the commercial market) as early as 2019; and/or
  3. Allow states to loosen ObamaCare’s “community rating” price controls as they apply to age early as 2020.

These waivers may never happen. They certainly won’t happen in time to save consumers from the AHCA’s rising premiums, or to save Republicans from the inevitable backlash against the AHCA. But even if they did happen, they would increase the penalties ObamaCare imposes on insurers who offer quality coverage for the sick, and thereby accelerate ObamaCare’s race to the bottom.

The opt-out concept is not irredeemable. But the MacArthur amendment would require dramatic changes to make it even a modest step toward ObamaCare repeal.

The Secretary Can Block MacArthur Waivers

Supporters claim the amendment prevents the federal government from blocking or forcing states to alter waiver applications because it requires the Secretary of Health and Human Services to approve any and all waivers that provide the necessary information. But this is not quite true.

The amendment requires waiver applications must “demonstrate[]that the State has in place a program that carries out the purpose described” in the parts of AHCA that create subsidy programs for people with preexisting conditions. The Secretary could deny waiver applications on the basis that a state’s program does not adequately carry out the purpose of those parts of the AHCA, and refuse to approve the waiver until the state makes whatever changes the Secretary requires. The Secretary could also reject waivers on the basis that the information provided in the application is otherwise not truthful or accurate.

Donald Trump’s HHS Secretary Tom Price might not. But Secretary Bernie Sanders would.

MacArthur Waivers: Too Little, Too Late

Though the amendment allows states to waive the EHB mandates as early as January 1, 2018, the earliest states could do so would be 2019.

So even in states that are eager to provide premium relief, consumers would still feel the pinch of ObamaCare’s rising premiums, plus the 15-20 percent premium surcharge the AHCA would impose, in 2018—a year with mid-term elections, no less.

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