Monday, November 10, 2014

Obmacare's Mandate of Pre-Existing Condition Coverage Doesn't Fix Health Care

Prior to the enactment of the majority of Obamacare provisions on January 1, 2014, there were certain insurance policies that would not cover expenses due to pre-existing conditions. For the purpose of this discussion, a pre-existing condition is a health condition that existed prior to the writing and signing of a contract. Whether the pre-existing condition was covered after a period of time or never, proponents of Obamacare used this "common-sense policy" to as part of the plan to gain sympathy and pass the bill. At first glance, it might seem heartless and cruel to use the pre-existing condition rule to prevent millions of innocent people access to health care. In this scenario, it would at best end up being prohibitively expensive to buy insurance if you are branded with a pre-existing insurance. But is that what's going on here? Why would such a rule exist in the first place? And does this prohibition help the health care system or make it worse?

If I had to summarize the reason for excluding based on pre-existing condition in the first place, I would summarize it in two words: adverse selection. For an insurance agents to most accurately figure out what your monthly premium should be, they need to assess for factors such as age, gender, tobacco usage, geographic location, family history, marital status, profession, and as much as it kills some people, one's current health, without which, why not just set up arbitrary pricing that makes no sense when developing a risk pool? Without allowing underwriters to do their job, all you do is shift the costs to the young and/or healthy, which unsurprisingly has caused health care premiums to greatly increase since Obamacare has been enacted into law. It's equally unsurprising that there is a youth enrollment problem with Obamacare because if Obamacare guarantees coverage of pre-existing conditions, why should healthy people purchase insurance prior to becoming sick, G-d forbid? You know that Obamacare is a raw deal for young and/or healthy people when you have to coerce them to take it with the individual mandate.

American Enterprise Institute scholar Mark Perry puts it quite succinctly as to why not allowing for pre-existing conditions makes no sense. "You call State Farm the day after your car has been in a major accident, and inquire about getting a quote for car insurance, hoping that your extensive 'pre-existing body work' will be covered?" Although Perry uses three other types of insurance as examples, the point remains: If pre-existing conditions aren't covered by other forms insurance, why should health care? Factoring pre-existing conditions into account while determining insurance premiums isn't discriminating against the sick. It's simply the way risk assessment works for insurance.  

Those who pushed for Obamacare wanted to use scary numbers to make you think that so many people would have been denied health care coverage. Former Health and Human Services Secretary (HHS) Kathleen Sebelius went as far as reporting that 129 million would be deprived of health care if we didn't do something about pre-existing conditions. Although that claim can be construed as "technically true" when looking at the raw data (although if you look at the Government Accountability Office report, the number of those considered with pre-existing conditions range from 36 million to 122 million), using that claim is as emotionally charged as it is egregious because it didn't take into account other factors, such as the number of individuals that were actually getting denied coverage because of pre-existing conditions. This is more true when considering that government safety nets such as Medicare, Medicaid, and even employer-based health insurance exist. These data count diseases like asthma, hypertension, back issues, diabetes--all health issues that can theoretically, but practically speaking would not really have been put into play. The vast majority of Americans are covered either by government insurance or employer-based health insurance, the latter of which is covered by regulations for its conditionality to allow for the so-called tax break.

Plus, if this were the case, why hadn't millions upon millions been denied coverage prior to Obamacare based on their "pre-existing condition?" You'd think we would have noticed all these people without health insurance by now, but alas, that's not the case. One in eight individuals applying for health insurance could have potentially been denied health insurance based on pre-existing conditions. Considering that only about 27 million directly purchased health insurance when this was a hullabaloo in 2009 (Census, Table C-1), we're talking 3.4 million people. 3.4 million people is a far cry from 129 million, don't you think? Plus, if pre-existing conditions coverage were that big of an issue, why was it that the peak coverage for Obamacare's Pre-Existing Condition Insurance Plan was only 115,000 individuals prior to the prohibition of such exclusions? I guess the demand for such insurance was not nearly as large as the scare-mongerers wanted us to believe.

Not only was there no real concern for this to affect millions of Americans, but it doesn't get at the heart of the problem, which is twofold: 1) Why is health insurance for the vast majority of Americans tied to one's job? 2) Why bother assessing risk when the federal government has made a de facto promise to cover any losses in the short-term?

Even if leaving 3.4 million individuals "in the dark" is unacceptable, it still does not address the major issues caused by employer-sponsored health insurance, one of which is notably that the importability of health care. The problem with employer-sponsored health insurance is that being covered is very much contingent upon you staying at your current job. If you lose your job or decide to quit, then you have to find another way to be insured, which not only creates headache of having to find and acquire new health insurance, but also triggers the pre-existing condition status. If I currently had a health insurance program I liked and were able to take that insurance with me once I left my current employer, any change in my health status wouldn't translate into anything pre-existing because I would already be covered.

Repealing the tax breaks given employer-sponsored health insurance would be the most sound policy reform to limit pre-existing conditions. The issue is that we would have to contend with the complex system of subsidies and regulations that have created this pain. Until we can untangle this mess, we need to come up with some shorter-term solutions in the interim. One is to have state-funded, high-risk insurance pools. Another is to have "continuous coverage" protection coverage for those in transition between insurance brokers, which at least comes with portability that is required in a functioning marketplace. If you're going to allow for protections in employer-based health insurance, you can allow for those same protections for individual health care until the government can do something to actually reform the system. Or how about the Cato Institute's suggestion of health-status insurance?

Mandating coverage of pre-existing conditions is pretty much like any other price control: a lack of a feedback loop between producers and consumers is a disaster. Until people in people in power realize that a freer health care market, and not more government regulation, is the solution, we're just going to continue to have the same, intertwined, convoluted problems with health care prices skyrocketing in comparison to other developing countries, which I can tell you hardly makes America's health care the envy of the world.

11-16-2015 Addendum: The Mercatus Center recently put out an e-book entitled The Pre-existing Condition: Market Incentives for Broader Coverage.

3-7-2017 Addendum: The Foundation for Economic Education put out a nice article on how the current pre-existing condition rules make the sick worse off. 

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