President Trump’s week one executive order on Obamacare calls for the following:
To the maximum extent permitted by law, the Secretary of Health and Human Services (Secretary) and the heads of all other executive departments and agencies (agencies) with authorities and responsibilities under the Act shall exercise all authority and discretion available to them to waive, defer, grant exemptions from, or delay the implementation of any provision or requirement of the Act that would impose a fiscal burden on any State or a cost, fee, tax, penalty, or regulatory burden on individuals, families, healthcare providers, health insurers, patients, recipients of healthcare services, purchasers of health insurance, or makers of medical devices, products, or medications.
Clearly targeted at the health insurance mandate, this order will come as good news to critics of the Affordable Care Act who have long complained about this mandate on moral and constitutional grounds. At the same time, while campaigning for the presidency Trump insisted that he wants to retain one feature of Obamacare: the mandate that insurance companies must cover individuals with preexisting health conditions. It’s difficult to see how to square this promise with the executive order; doesn’t a mandate that insurers provide coverage to those with preexisting conditions qualify as a “financial burden?” That said, Trump has been a consistent critic of the insurance industry, and he has explicitly promised that his alternative to Obamacare will be “inexpensive,” and will be “much better for people at the bottom, people who don’t have money.”
I take all of this as a prime example of the sort of bullshit I referenced in a previous blog post, the only word that can describe what Trump is serving up here. In this blog post I’m going to illustrate why I think this is so. Once again I’m not going to look at the entirety of Trumpcare. I want to look more closely at health insurance, the primary mechanism that most Americans rely on to pay for their healthcare. To illustrate the illogic of Trump’s position I want to first describe the basics of how health insurance works, begging forgiveness for anyone who finds this overly simplistic. To this end I’m going to set aside any discussion of programs like Medicare and Medicaid and focus solely on a system in which health insurance is the principle vehicle of payment for people seeking healthcare:
(1) Let’s imagine for the moment a country that has no regulations at all on its healthcare system. Insurance company X is a new for-profit insurance provider that is seeking customers. Company X advertises that it is seeking new customers, and in year one company X is able to sign up 100 new customers, each agreeing to pay $10/year for the coverage that Company X is offering (Note: of course these aren’t realistic figures, but the small numbers will help us avoid getting bogged down by the actual numbers of real-world healthcare systems).
(2) With 100 customers paying $10/year, Company X will bring in $1000 in insurance premiums, money that it will invest and, hopefully, turn into additional capital. Imagine that company X earns a 10% return on this premium income. For calendar year 1, company X will have $1100. Good news!
(3) When customers purchase insurance from company X, they are essentially paying for economic security (i.e. insurance companies are not providers of healthcare; they are corporate agents that pays providers). Company X is providing customers the assurance that if they are unlucky enough to suffer a health setback that they will be protected financially. But this is important: for Company X to be able to fulfill its promises to its customers, it needs to spend less than $1100 during the calendar year. Company X will not survive for long if it is regularly paying out more money than it is bringing in. Company X has a financial interest in keeping its expenses down, and so do the customers of Company X. A financial surplus at the end of the year allows Company X to continue offering benefits without increasing the premiums of customers. If the surplus is large enough, Company X might even be able to reduce the premiums in year 2.
(4) When a customer pays his $10/year premium he does so knowing that he may not receive $10 worth of care during that year. He still pays the premium as a way of ensuring he is protected should he be unfortunate enough to need more than $10 of care. Company X is confident that most of its 100 customers will not receive $10 worth of care during the calendar year. The company also knows that a few customers will need more than $10 worth of care, perhaps much more. Once again, Company X can sustain itself as long as the total amount of money it spends on healthcare for its customers is less than the $1100 it brings in from premiums and investment.
(5) Now imagine that in calendar year 1 Company X ended up spending $1200 on the healthcare expenses of its customers, $100 more than it received from premiums and investments. Not good! For calendar year 1 the company is operating at a deficit, a real problem for the long-term viability of the company. Company X needs to balance its budget. To this end, Company X could do one or more of the following in year 2:
- Company X could raise premiums on all of its customers. If the company paid $100 more than it took in during year one, it could balance the budget by raising the yearly premium to $11/year. The Board of Directors will likely feel the need to address the year 1 loss as well, so they will need another $100 for this purpose. In year 2, then, the same pool of customers will need to pay $12/year, not the $10/year they paid in year 1. As in year 2, company X will invest this money and hope to reap an investment return that will improve the financial bottom line of the company.
- Company X could also try to seek more customers willing to pay $10/year. Important to this approach, the company needs to ensure that additional customers are likely to be those customers receiving less than $10/year in healthcare provision. The financial health of company X is not improved if most of its new customers are chronically ill and likely to incur exorbitant healthcare expenses. To the contrary, adding a larger number of sick, high-cost customers will only exacerbate company X’s financial woes.
- Company X could shift its premiums program in a way that charges less to healthy customers and more for those who are more likely to incur significant healthcare expenses. Sally, the 21 year old afflicted with Crohn’s Disease, will need to pay $15/year to be covered by Company X, while other healthier customers will continue to pay the standard $10/year rate.
- Company X could simply opt out of entering into contractual agreements with customers like Sally. Faced with the choice of providing coverage to a chronically ill woman who will always need more healthcare than she is able to pay for, the company could simply say no to this contractual exchange.
- Company X could agree to cover Sally but include in the contract a clause that precludes coverage of healthcare expenses related to her Crohn’s Disease.
- Company X could also work with healthcare providers, entering into contractual relationships with specific providers (doctors, hospitals, etc.) that provide special discounts to their customers when they rely on these providers for care.
(6) There may be other options than the six I outline above, but note that each of these options offers a different way for Company X to address the problem of cost. When Company X pursues one or more of these options it is not motivated by greed, callousness, or indifference to the plight of customers like Sally. Company X needs to ensure that it remains financially viable if it is to be able to fulfill its promises to its customers. It is in the interest of company X to keep healthcare costs down for itself. It is also in the interest of customers of company X that this happen.
Let’s connect this to the real world. Health insurance remains a critical vehicle for accessing healthcare for many Americans. Company X is imaginary, but in the real world the plight of Company X is the plight of real insurance providers. Prior to the Affordable Care Act (ACA), insurance companies could control costs by refusing to cover preexisting conditions (#5 above) or by simply opting out of providing coverage to people so sick that they could only harm the financial bottom line (#4). After passage of the ACA, insurance companies were required to provide coverage to applicants without regard to preexisting conditions (“guaranteed issue”). In other words, #4 and #5 above are no longer options for insurance providers. Supporters of the ACA are okay with this, as is Trump, and as are most Americans (74% of Americans and 62% of Republicans according to one 2016 poll. I’m interested to hear if my conversation partner in this series of posts, Jeff Hammond, agrees with this majority sentiment).
One does not need to look hard to see the problem. Advocates of the ACA support the guaranteed issue mandate as part of a larger system that also mandates that every individual have insurance. As advocates observe, the reform plan needs the individual mandate. Requiring that individuals purchase health coverage is one way to ensure that company X will have a large enough population of healthy people paying their $10/year to ensure that Sally’s chronic health expenses do not overwhelm the system (i.e. #2/above). Absent some mechanism that gets healthy people to pay into the system, the risk is that insurance companies will collapse as more and more Sally’s seek coverage that the state says these companies must provide. We want Sally to get the care that she needs, and we want healthcare providers to be compensated for this care; we need healthy people to pay into the system for these thingsd to happen.
Republicans have been markedly vague about how they intend to ensure the financial stability of an insurance system defined by a bipartisan commitment to guaranteed issue. Promising insurance for all without paying the costs associated with this promise is impossible. You cannot have your cake and eat it too. However imperfect, Obamacare in principle offers a coherent way of addressing this problem. What about Trumpcare?