Who Knew Healthcare Could Be So Complicated? Part 1

Dear Donald –

Seven years in development, and we finally have the GOP healthcare bill to replace the Affordable Care Act (aka Obamacare). And it’s bad.  Really bad. Despite all of the promises they’ve made over the years, this bill is really a slapdash of conservative talking points without any real cohesive vision. As you said, who knew healthcare could be this complicated? (other than anyone who’s watched the news or read a paper in the last decade or so) so I figured it’d be worthwhile to take some time and send you a few notes about some of the main pieces to help you understand what’s really at stake. 

Let’s start off with the basics. Insurance is about pooled risk. That means that it’s all about getting enough people to buy into the program to cover the costs of just a few of them needing payouts. For example, if I’ve got 100 people in my insurance pool each paying $1,000 then I’ve got $100,000 to make payments. If the folks I’m insuring need $150,000 in payouts, then I’m losing money. The whole idea is to balance high risk people with low risk people, preferably with a focus on the low risk ones so there’s money left over to pay salaries and such. 

Prior to the ACA, people with preexisting conditions had a hard time getting insurance coverage, mostly because the risk of payout was too high for insirers  As a result, people had to forego coverage for those conditions or join what is known as a “high risk pool” – a group of people whose risk of payout was much higher than normal, so the premiums were much higher. Needless to say, many folks couldn’t afford to join these high risk pools and just didn’t have coverage. 

One critical feature of ACA is what is known as “guaranteed issue,” which means that insurance companies have to offer insurance to everyone, regardlesss of preexisting conditions. However, the standard approach of insurance companies to guaranteed issue is simply to charge those higher risk people more money. To make sure that people can actually afford coverage, the ACA required guaranteed issue at the standard rate, meaning that they couldn’t charge high risk people more. That creates a problem for insurers though, because then individuals with these conditions have no incentive to maintain coverage, as they can wait until they get sick to buy insurance, meaning that the only people in the insurance pool are costly and the insurer can’t charge them more. We’re stuck again with a $100,000 pool needing $150,000 in payouts. As a result, the insurance company needs to raise the standard rate to cover the payouts. Now, they want to charge those 100 people $1,500 each to cover the payouts. That price increase will drive more people out of the market who don’t need the costly payouts. That means less money into the pool while the remaining people are sicker than average. And on and on and on. This is the “death spiral.”  Insurance companies have to keep raising rates to offset costs which drives more people out leaving sicker people behind. 

To stop the death spiral, insurers need a crop of healthy low risk people to offset the costs of the sicker, high risk people. And that’s the individual mandate. By making everyone buy insurance, the ACA protected insurers against the death spiral.  The individual mandate was enforced by assessing a penalty on anyone who didn’t maintain coverage and continued to assess it as long as they remained uninsured. Those funds went to the government to help finance the expansion of Medicaid for low income people who couldn’t afford to buy private insurance. 

Now that everyone’s got to buy insurance, you’ve got to make sure that (1) they’re not being charged exorbitant prices and (2) they’re actually receiving something worth buying. To address the first issue, the ACA capped the profit margins that insurance companies could have. If insurers neded up making more than a certain percentage profit, it meant they were overcharging the pool of consumers for their own benefit. In such an instance, insurers are required to reimburse consumers. They still get a profit, but that profit isn’t unlimited, recognizing that consumers, under the individual mandate, don’t have be option not to participate in the market. 

To address the second issue,the ACA required all insurance plans to offer a basic level of coverage. Think of it like car companies being required to offer a minimum range of safety features in their vehicles – they have to have headlights and seatbelts and turn signals and brakes. You can make a car with less features, but you can’t drive it on the road legally because it would put both the driver and other people on the road at risk. An insurance plan that didn’t cover basic items still put consumers at risk of catastrophic expenses that would go uncovered,  making them just as good as uninsured. Additionally, it put all other consumers at risk because if they couldn’t pay the cost of that extra uncovered illness, the costs would get passed on to everyone else. 
So, yeah, healthcare is complicated. But it’s also pretty straightforward. If you start with the premise that people with preexistingcinsitions should be able to get insurance and they shouldn’t have to pay exorbitant rates, you pretty quickly get to ACA. That’s just the way it is. Tomorrow, we’ll start to discuss how your Republican friends are screwing it all up. 

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