NCPA - National Center for Policy Analysis

Playing the (Bad) Hand You're Dealt: Prop Up Obamacare or Kill It?

April 7, 2017

NCPA Senior Fellow Devon Herrick writes at Townhall:

The Affordable Care Act (ACA) was predicated on what is sometimes referred to as a three-legged stool. If any one of the legs breaks or is removed, the stool topples along with anyone using it. The first leg is insurance regulations that guarantee everyone access to coverage regardless of pre-existing conditions. In addition, premiums cannot vary by health risk.  

The regulations (that is, guaranteed issue/community rating in industry parlance), are an attempt to increase cross-subsidies in health insurance. The idea is to force the young to subsidize the old and the healthy to subsidize the less healthy. Of course, these conditions are never stable; they require coercion to maintain. Thus, the second leg is an individual mandate requiring everyone to have health coverage -- even if the coverage is a poor value. Finally, the third leg is subsidies to help those who cannot afford coverage on their own.

Without a mandate, healthy people have an incentive to remain uninsured until they become sick or need a medical procedure. Say, a young woman who is perfectly healthy and then becomes pregnant. She signs up and gets $30,000 worth of care for the price of a few months in premiums before dropping coverage once her baby is born.  

There are numerous perverse incentives built-into Obamacare. It is common sense that the people who would most want to enroll in Obamacare are those whose health status is such they can anticipate to receive coverage far cheaper that their expected costs. These individuals will consume medical care far more than their premiums cover.  By contrast, the least likely to enroll are those young, healthy people. Lacking health concerns, they were always the least likely to think they needed health coverage.

Keep in mind, about half the population spends little if anything on medical care during the year -- accounting for less than 3 percent of medical expenditures. The remaining 50 percent of the population consumes 97 percent of medical spending. Indeed, the healthiest 80 percent of the population only consumed 20 percent of medical care.
 
Obamacare made most people worse off by design. The federal law was predicated on forcing the healthy 80 percent to pay far more than their expected costs in order to shoulder more of the cost for the sickest 20 percent. This is why in most states the Affordable Care Act is in a death spiral -- a phenomenon where sick people sign up in far greater numbers than healthy people. With more unhealthy individuals, premiums shoot up causing even more healthy folks to drop coverage.
 

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