by Jordan Roberts
Former Director of Government Affairs, John Locke Foundation
Election season means political ads running on most television channels. Voters will hear candidates from across the political spectrum espouse their views and attack other candidates for their beliefs. In North Carolina, Democratic former state senator Cal Cunningham is running for the U.S. Senate to unseat Republican incumbent Thom Tillis. Several of Cunningham’s ads focus on health care issues such as the Affordable Care Act (ACA or Obamacare), protections for preexisting conditions, and criticizing Tillis for his votes on ACA repeal.
According to a Gallup poll from December 2019, health care ranks as the top issue for voters. A January poll conducted by the Kaiser Family Foundation found that 83% said it was extremely or very important for Congress to make sure people with preexisting conditions continue to be protected under the ACA.
Protections for preexisting conditions are one of the ACA’s most popular provisions. However, it is also one of its most costly provisions. The true cost and function of ACA mandates are often left out of the debate. Moreover, polls find that when voters learn about the actual costs of preexisting conditions protections, support for the provision drops.
In this research update, I will look at the history of preexisting conditions protections and why there is a better way to provide coverage to those who have a preexisting condition.
Preexisting conditions are defined as a health problem that exists before enrollment in a health insurance plan. In theory, though rarely in practice, unregulated insurers could impose waiting periods for benefits to start, exclude coverage for a preexisting condition or deny coverage altogether. Changing insurers could trigger such exclusions. For the majority of people who have health insurance through their employer, changing jobs would mean changing insurers, which would then leave them vulnerable to an exclusion. This fear of losing health benefits led many people to feel trapped in their jobs. It is a phenomenon called “job lock.”
Job lock is a uniquely American problem. To understand why we must go back to WWII. During this time, the government froze wages and implemented new tax policies that exempted health benefits from taxation. Stemming from a labor shortage, the government wanted to keep prices down by freezing wages. To counterbalance wage controls, the government exempted health benefits from taxation so that employers could compete by offering benefits.
While convenient, this relationship between employment and health insurance has had negative consequences. Most notably, the employer, not the employee, owns the plan. That’s why employees may encounter insurance coverage issues when changing insurance or jobs. Insurance was less likely to cover new enrollees’ claims, leading to a denial of coverage or exclusions for preexisting conditions for those who have just recently joined the plan.
However, the urgency to do something for those with preexisting conditions before the ACA was largely overblown. The following passage from the book Overcharged explains:
Insurers limit coverage of pre-existing conditions to ensure that new applicants are not gaming the system by purchasing coverage only when they think they will need it. Historically, people who maintained their coverage were not subject to limitations on newly developed conditions at renewal time, even if they experienced, claims. Indeed, the incentive to obtain and maintain insurance coverage derived partly from the fact that renewal at standard rates was usually guaranteed. (The same was ordinarily true for people who changed jobs, as long as they had coverage at the job they left.) Most insurers in the individual market voluntarily offered continuing coverage of this sort and the 1996 Health Insurance Portability and Accountability Act (HIPPA) roped in the few who did not.
The passage goes on to explain that after the HIPPA protections were implemented, very few people were denied insurance coverage outside the individual market. The individual market itself was composed of 10 million individuals in 2008, 1.8 million of whom were first-time buyers. Of that group, 87% were able to get insurance. That left just 230,000 people, a fraction of a percent of the American public, who were denied coverage.
Individuals who suffer from preexisting conditions should have access to health coverage. The problem is that the ACA mandated coverage of these individuals by compelling all others to pay for them.
Insurance is priced based on risk. In a competitive market, a healthy individual would typically pay less than someone with a preexisting condition because relatively healthy individuals are less likely to require extensive or costly medical care. The creators of the ACA were trying to eliminate that differentiation. However, the way they chose to remedy this was to mandate insurance coverage for everyone, prohibit the use of health status when determining premiums, and force those without insurance to buy into the program.
Mandating these requirements, quite literally, equates to a massive wealth transfer disguised as health insurance. Jonathan Gruber, a health care economist and one of the ACA’s chief architects, explained how the Obama administration was able to sell such a drastic redistribution of wealth to the country:
If you had a law which … made it explicit that healthy people pay in [and] sick people get money it would not have passed…
Lack of transparency is a huge political advantage, and basically, call it the stupidity of the American voter or whatever, but basically that was really, really critical for getting the thing passed.
A more honest message to the American people would have likely resulted in the law’s failure.
I suspect that the number of problems related to preexisting conditions before the ACA was largely overstated. Regardless, the mandates for covering preexisting conditions are current law. Fortunately, there is a better way to cover those who suffer from a preexisting condition that does not require raising the price of insurance for others. This would require removing the tax exemption on employer-sponsored health benefits and properly subsidizing the state high-risk pools that were in operation before the ACA.
One of the main problems with employer-sponsored health insurance is that the employer, not the employee, owns the health plan. As discussed above, the rise and eventual domination of employer-sponsored health insurance was a direct consequence of the tax exemption placed on employer health benefits. Decoupling insurance from employment would allow individuals to purchase their insurance on their own. Instead of employers owning health plans, employees could maintain coverage throughout their lives without fear of losing it following a job change.
Furthermore, the ACA must be repealed. While repeal would eliminate preexisting conditions protections, the removal of the tax exclusion on health benefits would bolster individual markets across the country. Employers would get out of the health insurance business, wages likely would increase, and employees could use a competitive, deregulated state insurance market to purchase health insurance untethered to a specific employer. Those who are uninsurable due to a preexisting condition would be able to find coverage in a state-run high-risk pool. Provisions in the ACA prohibit insurers from denying coverage or charging higher premiums based on health status, but an adequately subsidized high-risk pool would eliminate the need for those provisions.
Of course, this plan would take time and immense political will to implement because it would mean unwinding much of the status quo. However, the status quo has rendered health insurance unaffordable for many and caused skyrocketing health care prices. There is a better way forward.