In an interview the other day, J.D. Vance said that Donald Trump will promote more choice in our health-care system and not have a one-size-fits-all approach that puts a lot of the same people into the same insurance pools.
In no time at all, left-wing critics pounced.
Trump and Vance would permit insurance companies to discriminate against people with preexisting conditions, wrote Jonathan Chait. They would allow insurers to charge less to the healthy and more (much more) to the sick, added Josh Barro. Thats exactly how health insurance worked before Obamacare, said Paul Krugman.
Yet it is the critics who dont understand how Obamacare is working and how it needs to be reformed. When insurers are forced to sell to everyone at the same price, they have strong incentives to attract the healthy (on whom they make a profit) and avoid the sick (on whom they incur losses). That is what is happening today.
Obamacare didnt solve a problem; it merely changed the nature of the problem. In the old days, some chronic patients couldnt get health insurance. As I show below, today they can get insurance, but they may not be able to get health care.
So, whats the answer? It begins by recognizing that almost everyone in America today who buys private health insurance is getting a tax subsidy for their purchase. People who get insurance from an employer have that benefit excluded from their taxable income. People who buy in the (Obamacare) exchange are getting tax credits, which are transferred to the insurers along with the buyers payment.
Part of the premium we pay is coming out of our pockets, and the rest is picked up by government. Even if our part of the premium is community-rated (that is, the same price regardless of health status), there is no reason why the governments share has to be restricted in that way.
In an ideal system, the governments share would vary with health status. The total amount received by the insurer (personal + government payment) would equal the actuarially fair value of the insurance (the expected cost of care). Were this to happen, the healthy and the sick would be equally attractive to the insurers. There would be no incentive for insurers to discriminate based on health conditioneither in cost-sharing, benefit design, or choice of provider networks.
If insurers were fully compensated to take on chronic patients, many would specialize and develop lower-cost, higher-quality systems of care. We could have what Harvard professor Regina Herzlinger calls focused factories, entities that excel in the treatment of various forms of chronic illness. Far from having everyone in the same risk pool, we could have separate pools for diabetics, heart patients, and those with other chronic conditions.
Some readers may wonder if this idea is practical. Could it actually work?
We are already doing it. What I just described is how the Medicare Advantage program was designed, and it is serving the needs of more than half of all Medicare enrollees. Although originally bipartisan idea, this approach to health care has become increasingly associated with Republicans.
Medicare Advantage is the only place in the health care system where health plans receive risk-adjusted premiums that reflect the health status of the enrollees. The enrollees pay the same premium, regardless of their health condition. But the governments additional premium payment makes the total amount the health plan receives equal to the expected cost of the enrollees health care. Although not perfect, it is the most sophisticated risk-adjustment system in the world.
Medicare Advantage is also the only place in the health care system where a doctor who discovers a change in a patients health condition (say, the detection of cancer) can send that information to the insurer (in this case, Medicare) and receive a higher premium payment for the health plan, reflecting the higher expected cost of care. This means plans are rewarded, not penalized, when they find and treat medical problems.
Finally, Medicare Advantage is the only place in the health care system where insurance plans can specialize. There are special needs plans for diabetes, for patients with respiratory problems, heart problems, cancer care, etc.
Boston University professor Laurence Kotlikoff and I have argued that the Medicare Advantage model is exactly the right way to reform the Obamacare exchanges.
Right now, the individual market is great for the healthy and lousy for the sick. If you have average income and no health problems, the insurance is free (or almost free). But if you have a costly health problem, the out-out-pocket exposure this year is $9,450. For a family it is twice that amount. This is the highest penalty for being sick found anywhere in the health insurance system, and victims have to bear that cost every year.
Compared to employer-sponsored plans, the plans in the exchanges have very narrow networks that often exclude the best doctors and the best medical facilities. And if you go out of network, the plan pays nothing.
With rational risk adjustment, people would not have to be trapped in a one-size-fits-all system. They could go outside the exchange to purchase short-term plans, sharing plans, and other plans not subject to Obamacare regulations. In fact, we could have a fully free market for health insurance, comparable to the markets for other kinds of insurance.
And, although I have referred to government as the risk adjuster, the kind of system I am describing is what probably would have developed privately had the insurance market been allowed to evolve on its own.
What Trump and Vance are talking about doesnt mean we have to return to the (pre-Obamacare) bad old days. It means we can look forward to a much better future.