Tuesday, April 06, 2010

Implementing health reform: Why do Republicans oppose Obamacare/Romneycare?

Numerous bloggers on the left have pointed out that health reform is, at least as far as the insurance exchanges go, basically the same as health reform in Massachusetts. The latter was passed with a Democratic legislature, but then-Governor Mitt Romney, a Republican, signed off on it. It's important to analyze Republican opposition to the principles of health reforms, because sooner or later, they will come back to power - it's important to know and plan for what might happen.

Prior to reform, the state had very high health insurance coverage. Medical care is very expensive in Massachusetts, but standards of living are high. The state had strict insurance rating regulations, including community rating (everyone charged more or less the same price regardless of health) and guarantee issue (everyone who applies gets offered). These provisions meant that individual insurance was very expensive for young, healthy people. However, sicker and/or older people could at least get an offer of insurance.

Massachusetts created an insurance exchange in 2006. In addition to GI and CR, they imposed an individual mandate. This forced all (or most) of the young uninsured folks to get into the insurance pool and subsidize others. This was branded as a personal responsibility requirement by some Republicans. Massachusetts provides free health care to everybody under 150% of the Federal Poverty Limit through a program known as Commonwealth Care, or CommCare. CommCare also provides discounted insurance (on a sliding scale) to people from 151-300% of FPL. Everyone else in the exchange is on the Commonwealth Choice, or CommChoice, program.

Massachusetts mandates that all people eligible for CommCare receive it through the exchange. They mandate that the companies offer benefits in three broad tiers, Bronze, Silver and Gold. The deductibles and copays are standardized in each tier (e.g. all Bronze plans have a $2,000 deductible and $5,000 maximum out of pocket for individuals). Bronze plans cover an average of 65% (if I recall right) of your medical expenses. Silver does about 75% and gold does about 85%.

This level of regulation of the marketplace is objectionable to conservatives and probably leads them to think that the "Comm" in CommChoice stands for Communism. However, there is a good rationale for this. If you present people with too many choices, they will choose poorly. Evidence shows that having a large number of investment options in 401k retirement plans can cause people to not invest. Evidence shows that many people in Medicare Part D, which offers a large and sometimes confusing array of insurance companies, don't choose the plan which maximizes their savings - seniors who didn't choose the lowest cost plan could have saved an average of $360-520 by doing so. By standardizing the benefits to some degree and putting them in tiers, CommCare makes it easier for people to choose and easier for them to compare plans. It guarantees that all plans in each tier will provide about the same amount of coverage.

Even with the actuarial value specifications for each tier (i.e. the % of average expenses the plans cover), insurers can vary the designs quite a bit. They can also vary those policies to make their plans less favorable to people with certain conditions. For example, they could impose a separate and additional deductible for prescription drugs - this means that anyone with diabetes or asthma or depression would pay more, perhaps quite a bit more, on that plan, so they will choose another one. This pushes sicker people onto other plans, which raises their costs. If you allow unrestricted variation, you end up with some plans with relatively skimpy coverage and healthy people and some plans with generous coverage and very sick people. The latter plans are very expensive. This undermines the whole exchange system. Sarah Lueck of the Center on Budget and Policy Priorities has more on this topic.

Actuaries are able to do a function called risk adjustment, which is to redistribute premium payments on an exchange from the plans with healthier populations to plans with less healthy populations. This aims at correcting for insurers attempting to cause adverse selection like in the example I described above. However, risk adjustment isn't perfect. It doesn't compensate fully for people with higher medical expenditures. Additionally, it's harder to do when plans vary significantly in benefit design. And furthermore, if you have an exchange that is risk adjusted but insurers can still sell outside the exchange, then the plans will probably try to recruit healthy people outside the exchange and sicker people in the exchange. This could be as simple as a marketing campaign on college campuses or at gyms and fitness clubs. But it will undermine the exchange, because people on the exchange are supposed to cross-subsidize each other.

If we want to put up with a system of competing insurance companies, then this sort of infrastructure is required to ensure that the system runs well and pools risk properly. Some Republicans would just set up exchanges and let the companies run wild, but then they would merely be "innovating" on thousands of variations of benefit schemes with no apparent purpose other than to weed out unhealthy enrollees, instead of concentrating on improving efficiency, negotiating good prices with providers and manufacturers and managing their enrollees' chronic diseases. If and when the Republicans return to power in Congress, it is likely that they will attempt to overturn these regulations. However, doing so will cause the system to unravel, and any attempt to deregulate this system should be resisted at every opportunity.

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