Community Pricing Caused the Death Spiral

I want to address an issue that Trump has already made some statements about: repealing Obamacare. Here's what Wall Street Journal reporters Monica Langley and Gerard Baker wrote after an interview with Trump:

Mr. Trump said he favors keeping the prohibition against insurers denying coverage because of patients' existing conditions, and a provision that allows parents to provide years of additional coverage for children on their insurance policies.

The BBC mistakenly referred to these as "the two pillars of the bill." Only one of them--the prohibition against denying coverage--is a key provision. The coverage for "children," that is, people up to age 26, is a small part of Obamacare.

As I've written on Econlog before, there are two key provisions of health-insurance regulation that destroy health insurance as health insurance: the combination of guarantee issue and community rating.

Either one of them on its own does not destroy insurance. Together they do, by taking the insurance out of insurance.

With guaranteed issue alone, the part of Obamacare that Trump says he wants to keep, health insurance could still function as insurance. Insurers could say, "Sure, we'll insure you even though you have cancer. That will be $50,000 a year." That is what would happen if he didn't keep community rating.

With community rating – that is, people being charged the same regardless of risk –insurance could still be insurance. Insurers could charge everyone the same but simply deny coverage to those who are too high-risk.

So it's guaranteed issue that Trump says he wants to keep; he has not addressed community rating. My fear, though, is that he meant he wants to keep both and that possibly he, or the reporters, didn't see the clear distinction.

Both provisions are, unfortunately, enormously popular, with Republicans and Democrats. They're also popular with the general public.

One data point: a self-employed guy I know who buys health insurance for him and his wife now pays approximately twice what he paid before Obamacare and it's for worse coverage. When I explained to him that it was due to these two provisions, he responded that he likes both provisions but he wants to pay less.

By the way, more recently, Megan McArdle has written an excellent piece on this.

I have no doubt that Republicans would like to vote for something they can call “repealing Obamacare.” The problem is that repealing Obamacare will involve getting rid of two provisions that are really, really popular: “guaranteed issue” (insurers can’t refuse to sell insurance to someone because of their health status) and “community rating” (insurers can’t agree to sell a policy to some undesirable customer for a million dollars a year; the company has to sell to everyone in a given age group at the same price).

These two provisions are consistently popular with voters across the spectrum. Unfortunately, they tend to send health insurance markets into what’s known as a “death spiral”: People know they can always buy insurance if they get sick, so a lot of them don’t buy insurance until they get sick. Because the sick people are really expensive to cover, insurers have to raise the price of the insurance, which means that the healthiest people left in the pool drop their insurance, which means the price of the insurance goes up. … After a few rounds of this, everyone has a guaranteed right to buy insurance -- but the sticker price is astronomical.

Obamacare is built to counter this problem -- with subsidies to bring down the price for many Americans, with a mandate for individuals to buy insurance or face tax penalties, with rules on enrollment timing to complicate "gaming the system." These are the unpopular parts of Obamacare.

Repeal will involve getting rid of the unpopular bits. But it will also involve getting rid of the popular bits. Republicans will be under enormous pressure to repeal just the unpopular parts, which would, of course, make the individual market even more dysfunctional than it is now. I wish good luck to President Trump or to any member of Congress who explains to voters that if they want the popular parts, they need the unpopular parts too. Believe me, I’ve tried.

So I suspect that “Repeal Obamacare” will meet the same fate as Social Security reform. Legislators were gung ho. Even the base was sort of theoretically in favor of it. President George W. Bush made it his signature initiative for his second term. But the more that Bush talked about what Social Security reform would actually involve, the more he spooked voters.  Even though his party had control of both the House and the Senate, Bush eventually had to admit he couldn’t get it done. His own party would not back him in the face of voter resistance.

This is adapted from EconLog