AHCA’s Central Planning of Health Insurance: Pitting Young Against Old

Note: As this article is being written the outcome of the vote on the American Health Care Act is uncertain. Whether the bill passes the House today or not the issues discussed here must be addressed if health care and particularly health insurance is to truly become patient-centered and affordable as promised.

When a person decides to purchase life insurance they are asked about their health status and history and are, in part, charged a premium based on their answers to those questions. When a person decides to purchase a long-term care policy, that person is also asked about his or her health status and history, which is reflected in their premiums. Similar to investigating the driving record of someone purchasing auto insurance, this information is integral to determining the actuarial risk associated with the potential insurance customer. It is probably safe to assume that there are very few people, particularly those who apply for these kinds of policies, who do not expect such questions to be asked or who consider those kinds of questions to be unreasonable given the nature of the insurance being purchased.

And yet, because of a central tenet of Obamacare that is being fully embraced by most Republicans in Congress and is part of their proposed American Health Care Act (AHCA), the providers of health insurance, the one kind of insurance where a person’s health history would be most important to consider, are not allowed to ask any questions regarding an applicant’s health status or history. In fact, under the legislation proposed by Speaker Paul Ryan and being backed by President Donald Trump, it would be illegal for a government recognized health insurance provider to base any part of the premium it charges on the actual health risks associated with the person being insured.

In 2009, President Obama decided to use the federal government to take complete control of and centrally plan the health insurance industry.  As part of this, the government forced insurance companies to adopt a system of rate determination called “community rating,” where insurance companies can only use a few criteria in determining what rates can be charged to different customers and none of them include health status or history. In fact, rates cannot be charged on the basis of individual circumstances at all but only on the basis of certain class related criteria. The most important of these was age. While other plans could be sold, the purchasers of such plans would not be recognized as having health insurance at all and would be subject to fines under the individual mandate.

Under the mandated system of community rating, an insurance company may charge a person over 55 years old up to three times the amount that it charges a younger person, say a 30-year-old, living in the same geographical area. This is regardless of how unhealthy or fit either the younger person or the older person is. In other words, the health insurance company is allowed to use age as a blunt proxy for health status, not for individuals but only for entire classes based on age. Typically, proxies, in any situation, are used when actual information is unavailable or inaccessible. This is not the case for health insurance. As with life and long-term care insurance, the health status of individuals can easily be determined through questionnaires, but the idea of doing that was inconsistent with Obamacare’s vision of health care coverage being a social entitlement, like Medicare or Medicaid, rather than actual insurance.

The American Health Care Act not only fully embraces this principle that is a central part of Obamacare but, in fact, continues with idea that the health insurance industry needs to be centrally planned from Washington, DC. The AHCA continues to require that, in determining health insurance premiums, insurance companies must ignore the potential policy holder’s actual health risks. Furthermore, it continues to pit older ratepayers against younger ones by only allowing companies to differentiate premiums based on age. The only difference between Obamacare and the AHCA is that the wedge between older and younger policyholders is widened even further. Instead of allowing insurance companies to charge three times more for the older person’s policy than the policy of a younger person, as is the case under Obamacare, with no reference to the health status of either the younger person or the older person, the Republic sponsored AHCA allows insurance companies to charge five times more for the older person’s policy.

What this means is that under the Republican plan, an unhealthy 30-year-old who is obese, never exercises, has high blood pressure and high cholesterol, and generally lives an unhealthy lifestyle is likely to be paying one-fifth of the premium for the same policy as a 55-year-old who is physically fit, walks three miles a day, eats healthily, and has normal blood pressure and cholesterol. It should also be noted that while the individual mandate is gotten rid of in the Ryan/Trump plan they have put in place an alternative enforcement mechanism. The tax credit for purchasing health insurance would only be available if the insured purchases one of the AHCA approved plans.

It should also be noted that not only will the system of community rating be continued under the AHCA, putting the government in charge of health insurance pricing, but so will all of the insurance mandates, the so-called “10 essential health benefits” that exist under Obamacare. (Note: As this is being written the possibility of eliminating at least some of these is being discussed as an amendment to the AHCA.) This means that not only will the price of health insurance continue to be centrally determined from Washington but so will with the coverage.  Despite all of the rhetoric about returning health care decisions to the consumer, all important decision about what a health insurance policy looks like and how much it will cost will remain in the hands of politicians and bureaucrats.

Many of the more conservative and libertarian members of Congress have, for a host of reasons, taken to calling the AHCA “Obamacare light,” but if it is passed and signed into law without addressing the issue of community rating, the Cato Institute’s Michael Tanner may have labeled it even more accurately: “Obamacare forever.”