The election of Donald Trump was surprising, to say the least. In a victory anticipated by few, a President Trump opens the way for repeal of the Affordable Care Act, and with it many of the provisions meant to stabilize insurance markets and broaden coverage for individuals. The provisions of a replacement strategy are currently unclear, but it’s a decent guess to say we will be moving to a system heavier on market competition and lighter on government regulation. I think we’ll likely see fewer guaranteed benefits and more “pay for your own risk” provisions, like a return to broader rate bands and narrower eligibility requirements. In simple terms: the young and healthy will pay less for coverage, and the older and sick will pay more.
From an economic theory standpoint, the big question is whether market competition will be sufficient to restrain price growth and create affordable coverage. Many of the mechanisms contemplated in A Better Way, Paul Ryan’s plan, are the same ones that were in play prior to the ACA: experience rating, no individual or employer mandate, and high-risk pools. Colorado had such a high-risk pool in the past called CoverColorado, and our experience as a state wasn’t that good: it was both chronically underfunded and unaffordable for most people. I hope the federal subsidies are better this time around, but that remains to be seen.
At the core of the conundrum: is health care a service that is amenable to market forces? My answer is yes, but only in special circumstances. Those circumstances are that the purchaser understands the cost and benefits of the service, and is able to shop for the service in advance of its need. This sounds simple, but in practicality has been seen only rarely in health care to date. Several factors make this historically difficult in health care. First, many of the services we use in health care are consumed emergently, where there isn’t an opportunity to comparison shop. Nobody asks about prices as their ambulance rolls into the Emergency Department. Second, the level of transparency in health care pricing isn’t where it should be yet, so it’s harder to shop for it than other goods and services. Third, there is often arcane and specialized knowledge necessary to make an intelligent assessment of value. For example, should I consider only the immediate effect, or should I factor in the long-term consequences of a procedure? If I get a CT that I don’t need, what is the cost in terms of the radiation exposure I got, raising my cancer risk down the line? Was that included in the price of the scan?
Ironically part of the problem with returning to a pre-ACA state is that it may achieve the intended effect of reducing expenditures, but at a cost in outcomes. Moral hazard is the tendency of individuals to buy more of things when they are subsidized. If a service that actually costs $10 only cost me $1 because insurance pays the other $9, I’m likely to buy more of it. It’s been demonstrated in studies, most notably the RAND Health Insurance Experiment in Oregon.
Rationally, to reduce moral hazard, you have to reduce insurance and have people pay for services with some of their own money. In other words the thinking is that you need them to be less insured than they are under the ACA. In this obvious way, reducing health care coverage is likely to reduce health care expenditure. But that also means quite possibly, absent a robust subsidy scheme, there will be individuals whose needed care will exceed their ability to pay for said care. The very forces that make care affordable and accessible also incent its consumption, and conversely reducing affordability reduces consumption. The RAND study also says markets don’t make a clear distinction between “necessary” and “unnecessary” care. Both go up with more insurance, and down with less.
What is the right balance of insurance and individual financial responsibility to get each person the “right” level of care? This is the struggle we will watch as the Republicans put together the “replace” part of repeal and replace. But clearly from what they’ve put forth to date, it will involve less insurance and more individual responsibility for health care costs. For the federal budget, that may be good news, but for sick individuals, not so much. This tension between individual and collective good is inherent in government, and we as a nation are about to wrestle with it again in health care in a very personal way.
About the Author: Jay Want is CIVHC's CMO. Contact him at jwant@civhc.org