Wednesday, September 18, 2013

GOP Replacement for Obamacare, A (Market) Failure

Rep. Steve Scalise R-LA.

I know that it's been quite some time since I've weighed in on any particular policy debates on my blog, but this one was just too egregious to pass up. Today, the Republican Study Committee announced that it was at long last unveiling a bill that would fully replace the Affordable Care Act. Here's what the RSC's chairman, Steve Scalise, had to say about what their bill would have in it: 
“We address that to make sure that people with pre-existing conditions cannot be discriminated against,” he said.
He promised, however, that it would not “put in place mandates that increase the costs of health care and push people out of the insurance that they like.”
It took them three and a half years to come up with that? A plan that virtually guarantees a market failure, higher costs, and ultimately does push people out of insurance that they like? 

Long-time readers of the blog will recall my defense of the individual mandate on many separate counts (see here and here). Without the mandate, outlawing discrimination in the health insurance market would be a colossal market failure. Simply put, Scalise and the RSC are trying to have their cake and eat it, too. They're simply promising something that is demonstrably impossible.

Allow me to draw upon my old explanation of why the mandate needs to exist for insurance discrimination to be outlawed:
"A health insurance plan is basically a bunch of policyholders who pay premiums that all go to the same place--the insurance company. All of these policyholders are put into one big risk pool as a means to "balance out" the healthiness of the pool as a whole, because they don't know for sure how healthy everyone is (people sometimes lie, that's where the asymmetric information comes in). So everyone pays and the company basically uses the premium money to pay for hospital procedures where it is needed. Where's the problem, you ask? Well, let's say that the younger people decide that, hey, I'm healthy, why do I need to pay thousands of dollars for this health plan? I'll talk about the problems with this later, but what this does is that the overall level of risk is driven up in the pool as the healthy leave it. With higher risk, comes higher expected costs for the insurer, so they have to raise premiums. That in turn leads to more younger people who value the insurance less to drop coverage, raising riskiness, raising the premiums again, and so on. Eventually, the premiums rise to a point that even those who desperately need insurance will be priced out of the market. That's what's known as an insurance death spiral. Congrats, the market for insurance has just collapsed."
That's what would happen if people with pre-existing conditions were to be guaranteed insurance coverage without having an insurance mandate in place. Healthy people wouldn't insure themselves and thus balance the risk pool out. Prices would skyrocket, and more people would drop their insurance because they simply couldn't afford it. 

This isn't just theoretical, either. It's been tried in states before. New Jersey, Kentucky, Maine, New Hampshire, New York, Vermont, and Washington have all tried enacting guaranteed insurance coverage without mandates. In every single case, premiums rose dramatically, insurers left the market, and the number of people with health insurance coverage actually decreased

They say that the definition of insanity is trying the same thing over and over again and, well, you know...