Wednesday, November 15, 2017

GOP's Obamacare Tax Scheme Will Create an Insurance Nightmare for the Middle Class

Senate Republicans just announced that the repeal of the individual mandate (in the form of reducing the penalty tax to zero) will be in the Senate Finance Committee's version of tax reform.

The individual mandate has never been successful toward the objective of attracting people to the program. There are much better ways to do that.

But killing the mandate while simultaneously opening up the market to cheaper stripped down alternatives would combine to create unintended consequences the Republicans haven't appeared to comprehend.
Recently, President Trump encouraged his administration to craft regulations that would enable insurance companies to sell short-term medical policies with a duration of 12 months.

These short-term medical policies would not have to comply with the Obamacare benefit mandates. They could exclude people with pre-existing conditions.

Today, buying one of these policies would trigger the individual mandate tax penalty because a person had not purchased qualified coverage.

But, if the individual mandate tax penalty is repealed as part of the Republican tax bill there would be no such penalty to buy one of these policies.

I could easily see the individual health insurance market bifurcated into a sick and healthy pool because of these changes:
  • The sickest taking advantage of the guarantee issue protections in the Obamacare compliant market.
  • The healthiest buying a succession of these "short-term" 12 month policies while guaranteed to be able to opt back into the Obamacare market when they got sick. In fact, I could see these "short-term" policies sold on a calendar year basis so those prohibited from renewing, because of a recently acquired condition, would be able to conveniently opt into the Obamacare guaranteed insurability market when their short-term coverage expired right in line with the annual open enrollment.
I can envision these "short-term" policies offering a fairly comprehensive medical and hospital benefit set even though they did not cover all of the mandated benefits. These policies could also be much cheaper by excluding things like pregnancy and mental health and substance abuse coverage.

I could easily see these policies costing half of what the Obamacare compliant policies cost.

So, the healthy would have the best of both worlds––cheap and even arguably attractive coverage while still being guaranteed to be able to opt into a much more comprehensive Obamacare policy every January 1st if they got sick.

It's not hard to see what would happen. We would have two risk pools:
  • The very expensive Obamacare compliant risk pool with only the very sickest left in it, and
  • The very cheap "short-term" policy risk pool with the healthiest people.
And, the unsubsidized cost for those who acquired a pre-existing condition and were forced to opt back into the Obamacare compliant market, would be simply astronomical. Remember, 40% of those in the individual health insurance market make too much to qualify for a premium subsidy.

In other words, this scheme works much better than what we have today––until you get sick. And, everyone ultimately acquires a pre-existing condition.

A health insurance system that works only while you are healthy is not a health insurance system.

Obamacare is a disaster because it only works best for the sickest and those with the lowest incomes. As a result, the healthy have disproportionately stayed away driving the costs up to unaffordable levels for those who don't get the big subsidies. And, only 40% of those who are subsidy eligible are now participating.

This Republican scheme would work best for the healthiest. It would also work well for the poor because the premium subsidy system would protect them from the even higher costs inside of Obamacare.

But the Republican scheme would be devastating for those in the unsubsidized middle class who would not be able to afford coverage once they got sick.

Ironically, the people the Republican scheme would hurt the most would be those in the middle class (the unsubsidized) that have been most vocal in calling on the Republicans to fix the system.


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