Thursday, June 2, 2016

Large Health Insurer Withdraws Further from Obamacare and the Economics of Pre-existing Conditions

Bad news for the Affordable Care Act this week as United Healthcare--the country's largest health insurance company--announced it's going to withdraw from two more state healthcare exchanges, this time in California and Illinois. This comes on the heels of announcing plans to withdraw from most of the other states as well, as Zero Hedge reports.

This is all occurring after health insurance companies discovered that the expenses of covering new enrollees on the healthcare exchanges greatly exceeded the new premiums. It was well understood that many of the people that gained coverage on these new exchanges would tend to be sicker people--the exchanges exist, in part, to increase accessibility to people who didn't have coverage before. One of the main reasons they did not have had coverage before is that they may have had an expensive pre-existing condition that meant insurance companies either wouldn't cover them, or wouldn't cover them for an agreeable fee. Obviously, taking on many new sick patients is not a good business proposition from the perspective of insurance companies. However, the hope was that there were many uninsured healthy people as well, who would flock to the exchanges as well for fear of paying the tax penalty imposed on those without coverage. This was intended to offset the losses from taking on new sick patients. And in case even this force proved insufficient to make the insurance companies whole, there was also the vaguely named risk corridor program, that was designed to cap losses of the insurance companies that participated in the exchanges (that is, subsidize them).

In practice, covering new patients on the statewide exchanges generally proved to be even more unprofitable than originally anticipated. The risk corridor program quickly ran out of resources to subsidize insurers hit hardest, and thus, health insurance companies are basically left with two options: rapidly raise premiums or withdraw from these exchanges altogether and focus resources elsewhere. They have been doing a combination of the two. And the pace of the premium hikes being planned shows just how dire the situation is. Here's a chart of some of the most incredible increases planned around the country, courtesy of the Wall Street Journal:

From a policy or economics perspective, perhaps the most important issue here is the question of pre-existing conditions. The case for disallowing insurers to discriminate on pre-existing conditions is, I'll grant, superficially persuasive--the idea of a senior with cancer getting denied care precisely because they have cancer is clearly appalling. But understanding economics often means tracing things through, recognizing how we got here, as well as the likely short-term and long-term effects of any given solution. Economic laws take effect over a period of time, so it's best to avoid making decisions based on a snapshot.

To understand the issue properly, we must first ask what is the purpose of insurance? The answer is that it is intended to protect us against unforeseen events and tragedies. Individuals occasionally have tragedies befall them, but on the whole, our society is remarkably safe, healthy, and prosperous. Thus, insurance allows us to share the risk with all these other people, most of whom will go relatively unscathed, so we all bear a small cost but no one will suffer a massive loss. The insurance company earns a profit for coordinating this risk-sharing mechanism.

When we think of pre-existing conditions, it's best to consider an analogy with less emotional baggage to see the issue clearly. Let's try homeowner's insurance.* This exists to protect against, among other things, the possibility of a fire burning down your house. It doesn't happen often, but if it does, homeowner's insurance will give you the money to rebuild. In my experience, when you go to buy homeowner's insurance, they will have you fill out a form to describe your house (square footage, bedrooms, garage, year built, closest fire station, etc.) and they may even conduct a brief inspection to see if your home appears to be a reasonable risk. And obviously, it goes without saying that, if your home was already burned down / burglarized / etc., they would not insure your house against that damage. To do so would be financial suicide.

Now suppose the government passes a law prohibiting insurers from discriminating based on existing fire damage. Obviously, everyone with a recently burned down house will apply for coverage. The insurance companies will be forced to provide coverage, promptly pay out large amounts of money, and go bankrupt. If the policy exists long enough and is thoroughly enforced, the end result is that no home insurer will be left standing.

Bringing it back to health insurance, this is essentially what we're doing with respect to pre-existing conditions. Effectively, the Affordable Care Act forces insurance companies to place bets (that is, provide coverage) that they know they will lose. The economics of this are straightforward. If it persists long enough, it will destroy all health insurance companies, unless they can find legal ways to deny coverage to sick people, which many are currently attempting to do.

Note that the above line of reasoning is making no moral judgments whatsoever. It's not saying that people with major pre-existing conditions are bad people, deserve to suffer, are mooching off the system, or anything of that sort. It's simply analyzing the predictable economic consequences of such a policy, consequences which are unfortunately beginning to show. And here's where the divergence between short-term and long-term effects is quite striking. In the short-run, requiring companies to cover pre-existing conditions is likely to be beneficial to those sick patients in reducing their immediate costs and/or increasing their care. But in the long-term (which isn't that long), it's liable to destroy health insurance for everyone, sick and healthy alike.

Now we can bring in the moral dimension properly. Supporters of the Affordable Care Act certainly try to claim the moral high-ground on this subject by pointing to the short-term benefits noted above. Meanwhile, opponents are cast predictably as heartless, insensitive, greedy, etc. But is it really morally superior to support a system that offers some short-run benefits at a cost of total collapse in a few years? The answer probably depends on where you're sitting. If you're a very sick person with only a couple years to live anyway, and won't be around for the collapse to follow, it's a good deal. For society at large, however--even counted in purely utilitarian terms--it's difficult to see how deliberately putting health insurers on a unsustainable course will make us all better off.**

Economist John Maynard Keynes once famously dismissed criticisms of the long-term consequences of his ideas by saying that "In the long-run, we're all dead." However, one wonders if he would have felt the same if he knew that the "long-run" turned out to be just a few years hence. In healthcare, that increasingly appears to be the reality.

*I apologize if you've heard this analogy before as it's far from original. But it illustrates the point well, so hopefully you'll forgive the redundancy.

**I should note here that I've heard speculation that this was actually the deliberate plan of the Obama Administration all along, to bankrupt the insurers and thus make way for a single-payer system by default. If that is the true intent, then requiring coverage of pre-existing conditions makes perfect sense strategically. The above discussion focused instead on the more official justifications offered for the policy. Also, we should note that a single-payer system is unlikely to be the panacea its supporters hope for, for many of the same reasons that other central planning activities tend to fail, but we'll leave a full discussion of that to another day.

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