The Challenges the ACA Needs to Address

[Note: This is a response I gave my sister regarding a piece she wrote for her local paper on the proposed ACA legislation]

I just now read your health care piece on the currently proposed healthcare reform.  It's very good and I agree wholeheartedly that the legislation focuses on just half the problem (coverage) and ignored the problem that needs to be addressed first (cost).  Fixing the latter will go a long way in fixing the former.  Still, there are a couple of challenges that are very difficult to address from a purely free-market approach.

The first is that with every type of insurance, the more that risk is spread, the lower the cost of coverage.  Imagine you ran a lottery that guaranteed a million dollar payout if the winning number is drawn, regardless of how many people played.  You wouldn't sell tickets for a dollar if only 1,000 people played - the risk of someone winning might be tiny, but you'd go broke if you had to pay out.  You'd have to charge $1,000 per ticket just to ensure you broke even.  But if two million people played, you could charge a dollar, pay the prize and make a million for yourself (nice gig if you can get it).

Now, change that to health insurance. If you agree to insure one person against illness, you might be lucky and get a person who never gets sick - or you might get someone with diabetes who is going to be taking medication for life, suffer potential circulatory problems, blindness, amputations and more. The cost can be hundreds of thousands of dollars.  So how much are you going to charge to cover that one person?  You might not charge much if they're healthy, but you're still going to charge plenty to cover your risk. You are going to charge even more if they're at risk - a lot more because you need to cover your risk of payout.  But if you are insuring a thousand people, the risk is spread and you can charge everyone far less. Perhaps more than you would the single, healthy person, but still less than the single at-risk person.

Therein lies challenge #1.  When a company or individual signs up for health insurance, the insurance company considers them their own individual group. So an individual is a group of one, a small business a group of fifteen (or however many are covered), General Electric a group of 200,000. In each case, the insurance company will charge premiums to cover the cost of caring for the individuals in the group.  If a GE employee gets sick, the cost is spread among 200,000 premiums. If a small-business employee gets sick, it's spread over 15 premiums. If the individual gets sick, the individual will eventually pay the whole load (I once hired a person whose husband  had heart disease - that one hire increased my premiums $24,000/year. Since I only covered 12 employees, that worked out to $2,000 per employee per year. They couldn't afford to pick up that tab, so I had to eat it).

So let's say individuals band together and form their own group. They get better rates. Eventually, one member of the group gets sick and premiums go up 20%  But then another insurance company approaches one of the healthy people in the group and tells them they can get coverage individually for the original premium - so the person bolts the group, driving up premiums even more for those who remain in the group.  This makes individual coverage attractive for even more people in the group, so they also bolt and the cycle repeats. Eventually, the group is down to just the sick folks and they can't afford the coverage.  So the question becomes how can we build groups that healthy people won't bolt? Or, if we do allow them to bolt, how do we keep premiums low for those who remain? Any attempt to address the latter will violate all the rules of actuarial risk taking, unless we somehow subsidize the remaining people.

Challenge #2 involves those healthy people who choose not to buy insurance. Sure, they may be healthy now, but what happens when they get sick?  We don't turn them away, so in effect, they're covered though they are not paying. My brother-in-law is a perfect example. He was young, healthy and uninsured when he had a serious auto accident that required Air Care to the local trauma hospital, where he was in critical condition for days.  His hospital bill came to $48,000.  His dad negotiated that down to $4,800, which my brother-in-law paid over several years. So who paid the other $43,200?  Those of us with health insurance. In effect, the uninsured are technically part of everyone else's "group", but they are largely getting a free ride. Is that fair? Should they be required to contribute to covering potentially catastrophic illness, or should we just say tough luck and refuse them treatment? You know how that would play on the evening news ("Uninsured six-year old allowed to die after getting hit by car. Film at 11").

These aren't challenges that are easily fixed - or even possible to fix - through purely free-market solutions.  In a column years ago, I suggested a psuedo-public option. Allow small businesses and individuals to buy into the health insurance plan available to federal employees. These plans are private insurance plans, so it maintains a free-market component. But they also cover millions of people who are not going to bolt the group, so the risk is spread widely.  The fact that it involves government employees scares people, but it's not a solution I'm ready dismiss out-of-hand.  And I do believe that people who choose not to be insured should either be required to get basic insurance to cover emergency catastrophic care or be made to pay a tax that funds a catastrophic care program.  Doing so will shift the burden from those who are effectively paying for that coverage (us) to those who are getting a free ride. The alternative is to tell them tough luck when they need help, and I'm not prepared to do that.

It's an incredibly complex problem. Still, it doesn’t need an equally complex solution.  I think it could be fixed with a 20-page bill, not a 1,000+ page one. Unfortunately, that's not how our government thinks.