The key issue for Obamacare’s regulation of the individual market was pre-existing conditions. The solution has often been described as a “three-legged stool.” Here’s how it works:
- The insurance companies, in a completely free market, either refuse to accept customers with serious pre-existing conditions, or charge them vastly higher rates. In order to make insurance available and affordable for these people, resources have to be shifted to them from healthy people. Theoretically, that could be done through taxes or assessments on existing insurance policies, but a more obvious model existed in the form of group policies with community rating. That was the option included in Obamacare.
- Community rating increases risks for the insurance companies and prices for healthy people. As a result, young, healthy people get a bad deal from it, and have less economic incentive to purchase insurance, which, if unchecked, could send prices into a death spiral. The legislative response to this was the individual mandate. The idea was that, yes, young and healthy people may be getting hosed in the short run, but 20 years from now, someone else will be paying higher prices to support them. In a sense, the system was built on faith in the future, like Social Security and Medicare.
- The individual mandate means that people who can’t otherwise afford it are compelled to purchase insurance. This issue is resolved by subsidies tied to income and the local price structure.
So how do the House and Senate bills address the three-legged stool?
- Intellectually, Republican politicians reject community rating, because they think bad health is primarily a result of poor lifestyle choices. That said, they cannot ignore the fact that even some of their middle-class and wealthy constituents have pre-existing conditions and would be ruined without affordable insurance, so they have been unable to eliminate community rating entirely. The House bill waters it down by providing for optional state waivers and by permitting insurance companies to impose higher prices, relative to Obamacare, on older people. Since the state waiver provision was unpopular, the Senate bill dropped it, but kept the higher prices for old people.
- The individual mandate is eliminated in both bills. In a lame attempt to avoid the death spiral, the House bill permits insurance companies to impose much higher prices on people who don’t meet a continuous coverage standard. The current version of the Senate bill does not address the death spiral at all, and is intellectually vulnerable on that ground, but there are strong indications that the bill will be amended this week to permit insurance companies to refuse to cover people with lapsed coverage for six months. Both of these approaches will make the current “job lock” problem much worse.
- The House bill makes a major ideological statement by typing subsidies solely to age–not to ability to pay. As a result, poor people lost, and relatively wealthy people won. The Senate bill, on the other hand, is just a much stingier version of Obamacare; it continues to tie the levels of subsidy to income and geographic areas.
The Senate bill keeps more of the current Obamacare framework in place than the House bill. You could call it “Obamacare Lite,” but I prefer to refer to it as Obamacare’s illegitimate child, because it isn’t intended to solve any of the issues with the existing legislation–it is just an attempt to save money for tax cuts for the rich.
What does all of this mean for the individual market? We don’t know what, if anything, will ultimately pass, but the most likely outcome is that most Americans relying on the individual market will have a choice between buying more expensive insurance with much higher deductibles and co-pays than they have currently, or deciding not to buy it at all. In other words, under Obamacare, you were legally required to buy a meaningful insurance plan; with the GOP approach, you will have a choice between “insurance” and relying on prayer and the emergency room.