How To Insure The "One Percent"

The brouhaha over California's premium rates (see Will Wilkinson's terrific coverage for a good summary) is largely dying down, especially as the NSA is now commanding the attention of many journalists. Largely, the debate over California's proposed premiums for 2014 centered around three issues:

1) Are premiums they increasing?
2) Are benefits more comprehensive?
3) Will people pay less?

Thanks to Avik Roy's fantastic coverage and analysis, we know the answers to all three questions. Rates will increase for most young people (the large plurality of the uninsured), even when taking into account subsidies, and even for benefits comparable to Obamacare's minimum requirements.

So, at least in California, there will certainly be rate shock for young people, which may hamper the ability of Obamacare to offer affordable rates to the rest of the incoming uninsured.

But amidst the debate over how much who will pay, one piece of the question was ignored - what is the fundamental goal of expanding coverage? Austin Frakt highlights four options - for my purposes, I would argue that maximizing coverage while minimizing premium increases is the primary goal. And certainly, few would argue that maximizing coverage of young, healthy people in particular, isn't important in minimizing premiums. Therefore, it seems safe to say that in order to maximize coverage while minimizing premium increases, you need to ensure that a large number of young and healthy people sign up for coverage, to balance the risk pool.

Indeed, even more specifically, one could argue that the goal of Obamacare is to expand coverage to those who are unable to get it - that is, those with pre-existing conditions who may be denied coverage or may be charged exorbitant rates. This is why the law includes a pre-existing condition exclusion (rating on health status is no longer allowed) and limits age-rating. The goal is to redistribute from the healthy to the unhealthy - which is why the individual mandate and the premium subsidies are necessary as sticks and carrots, respectively.

It seems odd, then, that we rarely question whether pre-existing conditions are a massive problem in this country. According to HHS, somewhere between 50 and 129 million people under 65 have pre-existing conditions that could preclude them from purchasing individual insurance policies. This number is almost certainly inflated, but even taking it at face value reveals that most of these people likely have employer-sponsored coverage or Medicaid - 160 million Americans receive coverage through their employers; around 56 million receive coverage through Medicaid.

What about the uninsured population? HHS claims that some 25 million uninsured Americans suffer from a pre-existing condition. This is more than likely far from being within the same universe as the real number - data from the Society of Actuaries puts the number of uninsured in poor health at around 500,000; less than one percent of the total number of uninsured. Even taking into account those considered to be in "fair" health, the number rises to about 2.7 million - only about 5 percent of the uninsured.

So if this is the case, that those in poor health make up, at most, 5 percent of the uninsured, an important question comes to mind - is there a better way of covering these people? The fact that California's largely unregulated individual market has become the largest in the country indicates that the majority of the uninsured (the young and healthy) could probably get relatively affordable coverage with minimal intervention. It makes little sense, then, to force an expensive and comprehensive insurance product on them, to cross-subsidize those in poor health. A more straightforward, and less distortionary approach would use high-risk pools to enroll those that truly have pre-existing conditions and are uninsured. To be fair, states have tried high-risk pools in the past, but they have suffered from a lack of funding and significant obstacles (Minnesota being one of the few success stories) - but these issues are easier to address than the adverse selection created by pricing young people out of insurance exchanges to help cover the 1 percent.. 

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