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Covering Pre-existing Conditions without a Comprehensive Insurance Mandate

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Covering Pre-existing Conditions without a Comprehensive Insurance Mandate

November 9, 2015

The Patient Protection and Affordable Care Act (ACA) attempts to facilitate insurance coverage for those with pre-existing health conditions through the combination of a comprehensive coverage mandate, guaranteed issue, and community rating, among other provisions. The essays in this series validate the Mercatus Center’s solicitation of multiple perspectives, from several leading health policy experts, on the best alternatives to this controversial approach. Where one expert has left a particular angle uncovered, another has likely addressed it. The compilation as a whole presents a variety of worthy approaches, while certain themes recur throughout the series.

One such theme is the ongoing policy damage caused by the longstanding tax preference for employer-sponsored health insurance. The problems created by this tax distortion are enormous. It has distorted labor markets in favor of employee compensation in the form of healthcare benefits over wages, thereby putting upward pressure on healthcare prices and costs. It has inhibited the development of a robust market serving individual health insurance customers. And as Bradley Herring points out, the tax preference is also regressive, preferentially subsidizing more highly compensated workers. The tax distortion has also undercut market solutions to the pre-existing condition coverage problem, as discussed later in this essay.

Asking Insurance to Do Too Much

Perhaps the strongest impression left by the accompanying essays is that the ACA’s comprehensive insurance mandate is an example of legislative overkill in response to a policy challenge. That challenge is to protect Americans from financial hardship arising from high individual healthcare costs. Such high health expenditures might be either temporary or permanent, and they could arise either unpredictably or predictably as a result of a long-term condition. A workable solution must address all these possibilities.

The relevant purpose of insurance here is nevertheless narrow: specifically, to pool risk. Insurance generally exists to protect holders from the possibility of an undesirable event. This risk protection function need not necessarily be mixed with other compelling policy agendas such as broader income support goals and which healthcare services Americans should receive. Indeed, as Megan McArdle notes in her trenchant piece, it is the shoehorning of so many ill-fitting policy agendas into the health insurance system that in large part causes the purchase of healthcare to be as unpleasant as it is for so many Americans. We are simply asking insurance to do too much—more than it is equipped to do.

Most Americans do not want anything so complicated out of their healthcare financing system. They simply want good-quality service at a competitive price, just as they see successfully delivered to them in other markets. In this context they surely need financial protection against healthcare expenses surpassing what they can afford. This objective of protection against financial hardship, however, does not imply the necessity of a mandate to purchase comprehensive health insurance along parameters of government design.

Indeed, despite the initial arguments made on behalf of the ACA’s coverage mandate, it has since become clear that neither the ACA’s proponents nor its opponents regard the mandate as a necessary feature of national healthcare policy. After all, the ACA’s opponents argued against the mandate before the law’s enactment, with some challenging its constitutionality afterward all the way to the Supreme Court. The essays in this series reflect the views of many such experts: that a comprehensive coverage mandate embodies more intrusion into the insurance market than is necessary or desirable to address the policy challenge. The ACA’s proponents, meanwhile, have pronounced the law a success despite the fact that the mandate and its accompanying penalties have not generally been enforced. Given these respective behaviors, we are led to the conclusion that neither side in this polarized debate regards the mandate as truly essential to the purpose of protecting those with pre-existing conditions.

Protecting Those Who Maintain Continuous Coverage

Many of the essays here, including those of Herring, James Capretta, former Congressional Budget Office director Douglas Holtz-Eakin, and former senator Tom Coburn, advocate that individuals be held harmless from insurance underwriting based on their medical conditions, provided that the individuals meet some standard of previous continuous coverage. Capretta notes that this simple measure would largely “put an end to the problem” without relying on a provision “as unpopular as the individual mandate.” Any such continuously covered individual would be protected from having a later health condition factor into the pricing of his or her health insurance. This framework would provide a powerful incentive for individuals to enroll in coverage while their individual health costs are still low, thereby protecting themselves from costs associated with the later development of expensive health conditions.

Herring observes in his essay that individual health insurance products have long included such guaranteed renewability provisions; nevertheless, they were often unavailable to individuals moving from employer-provided insurance, leaving plans featuring medical underwriting to dominate the individual insurance market. The absence to date of a market solution to this problem appears to be another adverse effect of the tax preference for employer-provided health insurance; Herring suggests that the tax distortion has resulted in a “large number of middle-aged adults with chronic conditions seeking individual insurance for the first time.”

Subsidizing Those in Need through High-Risk Pools

Holtz-Eakin acknowledges that a continuous coverage system does not by itself overcome the challenges facing “those whose pre-existing conditions currently price them out of the insurance market.” And as Coburn notes, any system that preserves liberty will involve some individuals who make “an informed decision to forgo insurance” even if there were powerful monetary incentives to carry it. We thus need a policy that would provide for those who have an expensive health condition when they enter the health insurance market, whether this has resulted from choice or uncontrollable circumstances.

Given that our societal value judgment favors providing support for those facing high healthcare costs, the simple answer, according to Holtz-Eakin, is to subsidize those for whom “the ratio of health costs to [individual] income is too high.” McArdle offers a simple and transparent way to accomplish this by doing away with the maze of complicated federal health entitlements and having the government act solely as the “insurer of last resort,” picking up the tab for health expenses exceeding a defined share of an individual’s income.

Several of the essays endorse high-risk pools as a straightforward approach to insuring individuals with high healthcare costs. This too would have the important virtue of increasing transparency—an attribute too often evaded by political actors, but indispensable to voters and taxpayers attempting to make informed judgments about public policy. A high-risk pool is a mechanism governments can use to subsidize insurance coverage for those with large healthcare bills. Rather than concealing the extent of such support through a complex and opaque system of insurance cross-subsidization that drives up everyone’s healthcare costs, high-risk pools would transparently concentrate such subsidy support where Americans agree it is most appropriate. Herring observes that the need for high-risk pools should decline over time the longer that guaranteed renewability is in place.

Conclusion

In the end, however, Robert Graboyes’s observation bears emphasis: our national discussion about healthcare has been “mired in a furious, partisan debate over how to distribute fixed stocks of resources” which, no matter how it is decided, can never please all the participants. Indeed, the ongoing debates over such particulars as guaranteed issue, community rating, and even the general subject of covering pre-existing conditions are essentially arguments about how to distribute benefits and burdens assuming a fixed supply of healthcare services. Yet Graboyes also observes that today “residents of the humblest villages in the developing world carry phones more powerful than 1980s supercomputers,” a distributive achievement paradoxically made possible by prioritizing innovation over distribution. To the extent that national healthcare policies focus narrowly on redistributive questions rather than on improvements in healthcare quality, they will fail to fulfill Americans’ healthcare desires. Any decisions we make to protect those facing expensive health conditions must not have the effect of constraining the rate of broader healthcare quality improvements. This may be the best reason of all for replacing an overly prescriptive comprehensive coverage mandate with an alternative approach that fosters the development of a vibrant healthcare market.

Editor’s note: How to finance care for individuals with pre-existing medical conditions has long been one of the thorniest, most challenging issues in health care policy. The Affordable Care Act’s solution was a vast, complex clockwork of individual and employer coverage mandates, guaranteed issue, modified community rating, multiple subsidies, and other provisions. As commentators spanning the political spectrum warned prior to the law’s passage, this approach faces daunting logistical and financial hurdles. 

In a new set of essays commissioned by the Mercatus Center at George Mason University, seven leading policy experts share alternative ideas on how to solve the pre-existing condition challenge. While their approaches exhibit differences as well as similarities, their unified goal is a humane, equitable, fiscally sustainable solution to a conundrum that has driven and strained the entire post-World War II health care debate.

The previous essay, the final in a seven-week series, is by Charles Blahous, a senior research fellow at the Mercatus Center at George Mason University and director of its Spending and Budget Initiative research program. He has also served as a public trustee for Social Security and Medicare. Blahous specializes in domestic economic policy and retirement security with an emphasis on Social Security, as well as federal fiscal policy, entitlements, demographic change, and healthcare reform.

The full collection of essays, titled “The Pre-existing Condition: Innovative Solutions to America’s Thorniest Healthcare Challenge,” is now available as an e-book at Mercatus.org.

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