By John Garen
Much of the coverage of the Affordable Care Act has focused on the inept rollout of the exchanges, but all this misdirected attention neglects the law’s more fundamental flaws. Even if the exchanges worked seamlessly, the ACA is fraught with perverse incentives—for recipients, providers, and many others—that will lead to ever more adversities. Fortunately, there are market-based alternatives to the law that would truly reform healthcare.
Accounts of the few operational exchanges show a number of poor and unhealthy individuals who are enrolling in plans previously not available to them. But just as prevalent are stories of people being denied renewal of their plans and forced to take undesirable options at vastly higher premiums. This is the essence of the ACA’s financing scheme and is the crux of the matter. Is it necessary to ruin the health insurance plans of so many in order to help the unfortunate few? The answer is “no,” but our political process is failing to facilitate a better way.
A key provision of the ACA is the “individual mandate,” which requires everyone to buy government-approved insurance. To assist lower-income Americans’ purchase of insurance, the law creates a system of subsidies through state and federal exchanges and expands Medicaid.
Noble as this plan may sound, there are serious flaws in its design. Another provision of the ACA requires “community rating” of insurance premiums, where everyone pays nearly the same premium for insurance, regardless of their needs. Consequently, young people and young families will face dramatically higher premiums – and be forced to buy plans they do not want – in order to subsidize the unhealthy. Why put the burden of assisting those in poor health on the backs of healthy young people? Because of this burden, many young people have a strong incentive not to buy insurance with the knowledge that they can get coverage if and when they get sick.
Many aspects of the ACA are detrimental to those receiving subsidized coverage. Since healthy people’s premiums are overpriced and unhealthy participants’ premiums are underpriced, insurers make money on the former and lose on the latter. Thus, the system imposes a financial penalty on insurers who serve a disproportionately large number of the unhealthy. Insurers’ very survival depends on avoiding a customer base with too many of the unhealthy–in fact, they’re now better off avoiding the very folks the system is intended to help. Moreover, the unhealthy may become a second-class subset of customers that insurers attempt to circumvent.
The ACA also includes an employer mandate requiring firms of over 50 employees to provide insurance, raising the cost of hiring workers and impeding job growth. It’s likely that this will negatively impact the low-wage workers that the ACA is supposed to help. Furthermore, many small firms may choose to cancel their plans, putting more people on a subsidized exchange at the expense of taxpayers.
Thus, the new healthcare law does collateral damage to the low-income Americans it intends to help and relies on young, healthy people to pay inflated premiums for insurance they don’t want.
There is a better way to reform health insurance--embrace market competition and consumer-directed healthcare to keep costs low, quality high, and increase access. This, by itself, will enable many to acquire affordable and high-quality insurance and health care.
Market-based reforms encourage competition among health-care providers and insurers, eliminating unneeded regulations that increase costs. Additionally, the pre-ACA individual market featured plans with guaranteed renewability so that those who get sick are not denied coverage.
These free market reforms would enable most everyone to buy the coverage they want at an affordable price. Those with low incomes, poor health or current preexisting conditions could be helped through a premium assistance program that allows them to participate in this system as regular customers, not as second-class citizens. There is no need to ruin the health insurance and health care experiences of many to assist an unfortunate few.
Regrettably, the ACA does just this for significant segments of the population. It’s no wonder the law has caused political upheaval and fed our deep political divisiveness. It’s time for politicians to cut through these divisions and embrace market-based reforms to enable high-quality healthcare coverage for all Americans.
John Garen is the Gatton Endowed Professor of Economics at the University of Kentucky.
