ObamaCare repeal collapses — will health insurance collapse too?
© Greg Nash

Some Republicans who are encouraged a yes vote on the new health bill claimed that insurance would fail if the Affordable Care Act, commonly known as ObamaCare was not repealed and replaced. However, as usual the political rhetoric is a little extreme. The short answer is no,  health insurance will not collapse, but it will change. The longer answer is that perhaps it should collapse.

The insurance companies themselves will be fine because they will either raise premiums or refuse to participate in unpredictable markets. The immediate issue concerns whether the healthcare exchanges, in which individuals purchase insurance, will remain a viable option for those individuals.

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If either the new rules or the uncertainty associated with them cause insurers raise prices too high without a corresponding increase in tax subsidies, then individuals either won't be able to afford the insurance offered on the exchange or there will be no insurers left in the exchanges.

 

Without sufficient guarantees to protect insurers from the uncertainty associated with whatever the new rules are (e.g. the elimination of the individual mandate), as was done when ObamaCare was first passed, insurers will be reluctant to participate given the uncertainty of the risks that they will face.

In fact, the longer the debate continues and the less clear it is what rules that will replace ObamaCare, if any, the more likely insurers will be to leave the individual marketplaces.

Time is running out, insurers participation for 2018 has to be decided upon by late spring. In that sense Trump has it right, either the Republicans should make the change now or move on to other things. Moving on will leave ObamaCare in place to be tweaked around the edges as necessary. Of course, politically this is less than a win for the Republicans.

However perhaps it would be better if the health insurance market did collapse, at least in the form that we know it. Most health insurance today is not true insurance and this is a problem. Insurance is a way of spreading an uncertain risk among those who may be harmed if the risk is realized.

For example, house owners face the risk that a calamity such as a fire, falling tree, etc. will damage or destroy their house. Insurance is based on the fact that it is unlikely that all houses will suffer a calamity at the same time. Because no house owner can know for sure when or if his house will suffer a calamity, it makes sense for all house owners to purchase insurance. The insurance premiums are set and collected by the insurance company and safely invested until a claim is made. Insurance companies are paid a fee for properly managing this risk allocation.

In the case of healthcare, insurance makes sense if it covers risks that are unlikely to occur for most people. For example, for any large group of people we can predict that only about 8.5 percent of them will be diagnosed with cancer. This means that 91 percent will not.

Of course cancer is not the only disease but it illustrates the idea of using the premiums of people who do not get cancer to pay for the medical care of those who do.

However, when health insurance is used to cover expenses that are not uncertain, but are sure to be incurred such as immunizations or wellness checkups it is no longer insurance, but simply a transfer payment made through an insurance company to pay for the healthcare of the poor. It makes sense to have all people receive immunizations and wellness care. The issue is how to pay for that care for those who cannot afford it, and insurance is not the answer.

In addition, our system of employer-provided health insurance has had the deleterious effect of making consumers insensitive to the price of health care. This system was developed for extraneous reasons and was not based on sound healthcare policy. After World War II Congress passed a wage freeze, but the legislation did not apply to fringe benefits including employer-provided health insurance. Companies began to offer health insurance, among other benefits, as a way of compensating employees in lieu of wage increases. Later the IRS ruled that such benefits were not taxable to either the employee or the employer.

The unintended consequence of this accidental employer-provided health care system was that employees were not responsible to pay directly their healthcare. This has led to exorbitant list prices for healthcare. Specifically, the list prices of hospitals and physicians are grossly inflated because they are not intended to be paid; rather they are intended to be discounted in negotiations with health insurance companies.

An important function provided by health insurers today is price negotiation with healthcare providers. Health insurance companies act like buyer cooperatives that negotiate prices on behalf of policyholders. But this is not true insurance.

True health insurance would be a catastrophic policy, which would provide coverage for catastrophic illnesses.

An example would be a policy providing that the insured would be responsible to pay the first $10,000 of healthcare expenses per year. This is true insurance because most people will not incur more than $10,000 of healthcare costs in a particular year and their insurance premiums can be used to pay for those few who do.

It does not make sense to use health insurance to pay for medical expenses that are certain, predictable or even commonly occurring. How could it possibly be more efficient to involve a third-party insurance company between the doctor and the patient to pay for expenses that are definitely or very likely to be incurred? This is as ridiculous as selling food insurance. It would be less expensive and more efficient to allow the patient and the doctor to negotiate a price for the services provided.

The real issues that we face concerning healthcare have nothing to do with insurance; the issues are how much can we can afford to spend on healthcare for the poor and what is the most efficient way to provide that care.

Politically, there may be an illegitimate benefit to camouflaging a rich/poor transfer payment as a payment for fictitious insurance. However, perpetuating the myth of health insurance and our broken healthcare price system will only lead to higher than necessary healthcare costs.

Who is to blame if the Republicans can’t repeal and replace ObamaCare? It is the job of  Congress to pass the bill and send it to the president for approval; if the House cannot pass it the responsibility for that lies with the Speaker Ryan rather than the president. Of course, at election time, both midterm and presidential, there will likely be plenty of blame to go around. The real blame and problem however is that the country has moved on with respect to ObamaCare.

It has, for good or bad, become well established now and the thought of repealing it without replacing it is unacceptable to many, many voters and many parts of the healthcare industry. No matter how much people may have disliked it and the process that produced it when it was first passed and for a time after, it is now established and much less uncertain that whatever will replace it.

Also, people are very reluctant to give up benefits unless they are offered at least the same, preferably more, in return. This flies directly in the face of conservative Republicans' objections to ObamaCare. This is the crux of the Republican dilemma. Employer sponsored health insurance may not make great sense, and neither may ObamaCare, however, once people have gotten used to them getting rid of them may be politically impossible.

George Nation III J.D. is a professor of finance at Lehigh University. His recent research concerns healthcare policy with a focus on restoring competitiveness to the healthcare marketplace in order to rein in exorbitant pricing by hospitals and other providers.


The views expressed by contributors are their own and are not the views of The Hill.