November 2, 2015
Some observers might question the usefulness of ongoing policy discussion about health insurance coverage for pre-existing conditions. After all, as of January 2014, insurers are barred from excluding such conditions from their policies, even for short periods, by the Patient Protection and Affordable Care Act (ACA). Moreover, insurers are no longer allowed to charge higher-than-average premiums to consumers with higher-than-average expected health costs. In short, many would say the ACA has solved the problem, so there’s nothing more that needs to be discussed.
There is little reason, however, to presume that the ACA’s approach to addressing the issue will work as planned. Implementation of the law’s insurance regulations is still in an early stage, with the major changes in effect for less than two years. Moreover, the ACA’s reforms closely track previous efforts tried in several states, including Kentucky and Washington, in the 1990s. Those state-led efforts eventually collapsed because premiums soared and insurers fled the marketplace. The problem was one of distorted incentives. Like the ACA, these state laws barred insurers from excluding pre-existing conditions from coverage, required insurers to take all comers, and strictly limited the use of medical underwriting in setting premiums. The healthy responded to the new rules by dropping coverage because they knew they could re-enter the market later with no penalty. Meanwhile, many consumers with expensive health problems jumped at the chance to buy insurance with strictly regulated premiums. The result was an unbalanced risk pool that could not be sustained.
The ACA is different from these state efforts in one important respect: individuals are ostensibly required under the new federal law to enroll in health coverage—the so-called “individual mandate.” The state efforts from the 1990s had no such requirement. The intended effect of the mandate is to prevent the healthy from fleeing the market.
Read the full article at Economics 21: Exploring Superior Approaches to the Affordable Care Act