A Repeal and Replacement Primer, Editorial by Arnold Buchman, Senior Advisor to The Margolin Group

Arnold Buchman, a trusted Margolin Group Senior Advisor – and retired CIGNA Corp. financial and benefit-delivery group health insurance attorney – poses in his newest article questions lawmakers should ask themselves before proceeding with “repeal and replacement” of the Affordable Care Act.

Arnold writes:

In attempting to understand the impending battle over repeal and replacement of the Affordable Care Act, it is important to keep in mind what ACA is: a program of individual health insurance to enable people to have affordable health coverage free from excessive financial risk.

Like all insurance, it operates by pooling the premiums of members of large classes to pay the losses actuarially predicted to be incurred by some of them. The Law of Large Numbers tells the actuaries that the more people in the pool, the more predictable the losses will be of the actual losses experienced.

Through ACA, an estimated 20 million people gained coverage. The nonpartisan Congressional Budget Office estimates when ACA is repealed, virtually all of them will lose their insurance within the first year. Leaving popular ACA provisions, such as the prohibition of pre-existing limitations, in place, health premiums will increase dramatically. Assuming no replacement, premiums in the individual insurance market would double by 2026.

Questions Raised

Why did the number of insureds dramatically increase under ACA, why will millions lose their coverage if it is repealed and why will premiums dramatically increase?

Underwriting Health Insurance

Insurance underwriters evaluate the risk and exposures of potential clients. They decide how much coverage clients should receive, how much they should pay for it, or whether even to accept the risk of insuring them. Prior to ACA, insurers underwriting individual health insurance policies refused to cover individuals with pre-existing conditions or excluded the conditions from their coverage, charged women and seniors higher premiums because they were generically more at risk, cancelled policies if customers used them too much or rescinded the policy if, upon the filing of a claim, a minor or unrelated pre-existing condition was found to have been undisclosed on the original application.

The underwriting limitations imposed on individual policies were thought necessary to make a profit. Without them, insurers could not make money. But, they also put adequate insurance at a reasonable price beyond many individuals and small businesses.

ACA Solution

Underwriting for a group presents a more limited risk if the group is balanced between the healthy and unhealthy in a sufficiently large, able-bodied group such as an employer-sponsored plan covering working individuals. ACA attempted to overcome the risks inherent in individual insurance by requiring everyone to participate, thereby creating a large, balanced group.

To make it affordable, premium subsidies geared to income were provided. To make it adequate, certain benefits were mandated. To make coverage understandable, Exchanges that presented prescribed coverage/premium options in terms allowing direct comparison between competing insurers were created. To entice risk-wary insurers to participate in the Exchanges, underwriting losses were limited.

Repeal

The initial steps taken by Congress and an executive order signed by President Trump have further shaken an already unsettled insurance market. The prospect of eliminating all or parts of ACA has made hospitals and doctors nervous and confused and scared patients that mandated benefits such as pre-existing condition limitation exclusions, preventive care and caps on annual and lifetime out-of-pocket costs — even in group policies covering 150 million people – will no longer be provided.

Thus, insurance premiums for individuals can be expected to grow beyond reasonable reach for all but the upper class. And for groups as well since exorbitant profit-taking by drug and device companies, medical equipment makers, labs, and supposedly “nonprofit” hospitals will no longer be curtailed by ACA.

As this happens, fewer and fewer healthy individuals buy insurance leaving more and more unhealthy people in the insurance pool generating more and more claims requiring higher and higher premiums; a process known in the insurance industry as the “death spiral” as the risk becomes too great to underwrite.

Coupled with the uncertainties of “repeal and replace,” insurers inevitably will exit.

Replacement

“Free market” solutions have been offered up; however, as David Brooks points out, the American health care system is not like a normal market. Consumers’ needs for health care are mostly unpredictable and providers who know everything about medicine don’t give much information on comparative cost and quality to their patients who know virtually nothing. Patients “under the knife” for emergency have little choice and see the bill only after care is provided. Fees for services are often determined by how many procedures are performed, not whether the problem is fixed, and the bill is only vaguely related to the services they’ve received.

Coverage is not access. Access is the opportunity or ability to obtain coverage. So, proposed free market solutions providing access rather than coverage fall short of achieving the ACA goal of affordable coverage that enables people to actually obtain adequate health services free from excessive financial risk.

Relying on traditional underwriting concepts in replacing ACA turns on the questions of whether health coverage is a right of citizenship and what having insurance means. Is it simply making access more affordable to people able and willing to pay for it? What of access for those whose income is below the federal poverty line? Should out-of-pocket and premium costs be capped at an affordable fraction of every citizen’s income? Should subsidies be provided and, if so, in the form of tax deductions? Credits? Vouchers?

Can the group to be covered be made big and diverse enough without compulsory participation so the Law of Large Numbers yields accurate underwriting? Can the opponents of ACA devise a competitive, free market health care system that can deliver good care at lower costs when the developed world has yet to do so? And, of course, where will the money to pay for all this come from?

Such are the policy questions that need to be resolved in judging whether a program replacing ACA is meaningful. Or, whether Retain and Repair ACA would not be a better approach than Repeal and Replace.