The Republicans’ rallying cry on health care reform is that the marketplace – relying on the forces of supply and demand – is the best way to run our healthcare system. Government involvement in health care interferes with the magic of markets and makes us all worse off.
The problem with this argument is that markets for health insurance are subject to significant market failures. Without regulatory intervention to fix these problems the market system will not provide what the market systems promises, widely available health care at the lowest possible price.
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Health care insurance reform with the promise of near-universal coverage at affordable rates must rely upon what analysts have called a “three-legged stool.” If for example, we want to provide affordable health insurance for people with pre-existing conditions, a regulation requiring insurance companies to provide coverage to everyone, pre-existing condition or not, is needed. But that is not enough. If people with high expected health care costs are grouped together and rates set accordingly, it will likely be too expensive for them to purchase.
But if they are grouped together with people with lower expected health care needs, the cost of insurance will rise above what relatively healthy individuals are willing to pay and they will drop out. They can always get emergency care if something catastrophic happens and the high cost of that sort of treatment can often be sloughed off to others (those with insurance). As they drop out, the average expected health care costs of those still covered rise leading to more dropouts and eventually a pool of just the high-cost individuals with unaffordable premiums.
But if they are grouped together with people with lower expected health care needs, the cost of insurance will rise above what relatively healthy individuals are willing to pay and they will drop out. They can always get emergency care if something catastrophic happens and the high cost of that sort of treatment can often be sloughed off to others (those with insurance). As they drop out, the average expected health care costs of those still covered rise leading to more dropouts and eventually a pool of just the high-cost individuals with unaffordable premiums.
So, providing coverage to people with pre-existing conditions necessarily involves a mandate requiring people to sign up. And, for some people, it will still be too expensive so subsidies are needed for those at the lower end of the income distribution. If we don’t do this, many people will wait until their health has seriously deteriorated before seeking care, and at that point, it will be very expensive. It’s less costly for society to help them get insurance and the regular health care that avoids the “pay me now or pay me much more later” problem. And unlike when there is no insurance at all, with subsidized insurance they are at least paying some fraction of the costs of their healthcare.
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Interestingly, despite their public rhetoric Republicans seem to recognize that these features will be needed in whatever health care reform package they put forward, assuming they can eventually agree on a plan. The plan has been evolving over time, and that evolution seems to have brought it closer to Obamacare with a new name, perhaps in no small part due to the resistance they have met in town hall meetings with constituents.
For example, a leaked draft of the Republican plan to replace Obama care requires insurance companies to cover people with pre-existing conditions. The qualification to this, which differs from Obamacare, is that high-risk individuals with pre-existing conditions can be charged higher health insurance rates if they fail to maintain continuous coverage (this is, in essence, what replaces the mandate for coverage in Obamacare, instead people are penalized if they have periods where they do not have health insurance). It also has subsidies for lower income households, though it is not as generous as the subsidies under Obamacare. And with all their criticism of the “Cadillac tax” – the tax on generous health insurance coverage available through the workplace – it will remain in place though with a different cutoff. They have to pay for the plan somehow.
There is nothing surprising about how the Republican health care policy has changed over time. As reformers begin to seriously think about what is needed, they invariably find a way to overcome the market failures that plague insurance markets. There are generally multiple ways to attack a market failure (think of carbon taxes versus cap and trade, which are essentially the same policy), and Republicans will likely choose mechanisms they can tout as “market-based” rather than “regulatory.” But whatever the political advantages of selling their proposal in this way, if they want to provide coverage as broad-based as Obamacare it will end up looking much the same.
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So far, however, although there has been evolution, the proposal is still bad news for those with low incomes and – surprise! – it is very beneficial to those with considerable means. Republicans want to reduce the degree to which the wealthy fund health care subsidies for low-income households, and that means those at the lower end of the income distribution do not do as well under the Republican proposal as under Obamacare. Even worse, they want to eliminate Medicare expansion, and if they are successful that would further reduce health insurance coverage for those who need it most. The plan also increases premiums for people in their 50s and 60s.
Republicans are skilled at making noises about how much they care for people who are struggling economically, and not just with health insurance. If and when they finally do have a proposal I expect it to make small nods to the poor – the equivalent of giving them a tax cut of $100 while those at the top save millions. The real test will be how the proposal affects people who cannot afford health insurance. Will they be helped or hurt? The answer seems preordained.
