Was Obamacare designed to fail? The question asked in this article is one of the most politically charged questions of the health-care debate.
Republicans frequently say the Affordable Care Act (ACA) was merely an intermediate step toward a single-payer system. Democrats are offended by that proposition, insisting that the ACA has provided millions of Americans with insurance.
To be able to answer the question, one has to understand the history of health-care delivery and financing in America.
In an attempt to put the brakes on inflation during World War II, the government imposed wage and price controls. Attempting to retain and incentivize workers, business started providing medical insurance as a benefit.
After the war, providing health-care benefits became an accepted practice. Today approximately 60 percent of Americans obtain health insurance through their employer.
Other industrialized nations did not follow suit; after World War II, most adopted some sort of national program for all residents. Most chose single-payer systems in which the government financed and/or subsidized health care services.
Issues arose in the U.S. and other countries because the demand for health care services skyrocketed as the recipients of those services did not directly pay for them.
In 1989, The Heritage Foundation, a conservative think tank, undertook an extensive study of the health-care system and published a study proposing a radical new system balancing the interests of patients, providers and insurance companies.
The proposals underwent many changes. Variations of them were adopted by several countries that effectively turned their health-care delivery systems into a regulated utility, balancing the interests of the various stakeholders.
Common features are financing delivery through private insurance, putting their entire population into a single insurance risk pool, subsidizing the insurance costs of low-income people, and balancing the risks among insurers through government subsidies.
In the U.S., we have multiple delivery and financing platforms, each comprising a separate risk pool. There is Medicare for those 65 and over, Medicaid for the poor, the VA, employer-provided insurance and individual insurance.
Each subset of the community has different demographics, different needs and different costs. The sickest people tend to be poor and people who purchase individual insurance.
When the ACA was debated, a conscientious effort was made to minimally disrupt well-served constituencies such as those with employer-provided insurance.
The ACA mandated insurance for everyone, creating exchanges through which insurance policies could be obtained. However, those seeking insurance through the exchanges included those who could not otherwise get insurance — many of whom are chronically ill.
One of the keys to managing the costs of these folks is to put them in the same insurance pool as the rest of the population. That is what the other countries do.
Not only did the ACA fail to put everyone into a single pool, it mandated that insurance could not be sold across state lines, thereby further restricting the risk diversification. Undiversified risk results in higher insurance premiums.
As a result, the cost of insurance skyrocketed and many insurers bailed out of the program.
In other countries, insurers mitigate risk by reinsuring and by participating in a risk corridor. Reinsurance involves one insurance company buying a policy from another insurer to insure against excessive claims.
A risk corridor is an arrangement whereby the government assumes a portion of the greatest risk in exchange for participating in a portion of the profits from insurers bearing the least risk. The key is for the profits to cover the additional risks. If they don’t, the government has to fund the shortfall.
Most risk corridors are imperfect as they encourage insurers to assume greater risk to gain market share. This incremental risk is effectively passed on to the government.
Most governments subsidize the risk corridor to keep insurance premiums affordable.
The ACA allowed for a risk corridor for 2014-16. During those years, the government’s share of the profits was only 12 percent of the cost of covering the higher insurance risks.
The ACA provided no mechanism for funding the shortfall. The Republicans in Congress refused to fund the shortfall, calling it a “bailout for insurance companies.” This resulted in increased premiums and insurers pulling out of certain markets.
Based on what I have read, I have concluded that the ACA lacked critical components to be viable over the long term.
A risk corridor with a source of funding was not implemented. Furthermore, as with other countries, a successful corridor must be applied to the entire population, not just to plans sold through the insurance exchanges that cover proportionately more sick people.
Jim de Bree is a retired CPA who resides in Valencia. This is one in a series of columns he is writing about the Affordable Care Act
