Covering Pre-Existing Conditions in a Market-Driven Health System

Published June 24, 2013


Opponents of Obamacare have recently been in a vigorous debate over what, if anything, should be done to help people with pre-existing conditions when Obamacare is repealed. This debate was triggered when House GOP leaders signaled their intention to bring to the floor a bill that would have drained an open-ended Obamacare fund — now being used to finance and promote the law’s “exchanges” — and used a portion of the resulting savings to bolster high-risk pools for persons with expensive health conditions.

Some opponents of Obamacare objected to this legislative maneuver. They questioned why the GOP would want to support a new federal funding stream for high-risk pools when most states already have such pools in place. Further, they argued that the whole point of Obamacare repeal is to disentangle the federal government from the health care system, not extend its reach, and a new federal funding stream flies in the face of that core objective.

These are reasonable arguments that deserve an answer.

It’s important to understand the political context within which this issue is being debated. The entire Obamacare edifice rests on the deceptive assertion that the law’s primary purpose is to cover persons with pre-existing conditions. The president and his team never defend the vast majority of the law’s provisions. What they do claim is that Obamacare was necessary to protect Americans, especially the sick, from the unregulated abuses of the health insurance industry. That argument, misleading as it is, resonates to some degree with the public, which is why the administration keeps repeating it over and over again.

And why does it resonate? Because, while the problem of pre-existing conditions is far narrower than we are led to believe, it does exist. In an article I coauthored with my American Enterprise Institute colleague Tom Miller, we estimated the number of people who have a pre-existing condition and are unable to gain access to affordable coverage at about 2 to 4 million people, or perhaps 1 percent of the U.S. population. The administration would like voters to think that tens of millions of Americans are facing this problem, which is not true. Most Americans who have expensive chronic ailments or have experienced a significant illness or injury in the past are already enrolled in very good insurance plans, mostly sponsored by their employers. Moreover, federal law already allows them to move between job-based insurance plans without fear of getting charged higher premiums based on their health history.

But there are cracks in today’s system. The main problem is that health insurance is owned by the employers, not the workers. When an employee needs to leave job-based insurance for the individual insurance market — for any number of possible reasons — the insurers providing coverage in that market can, under most circumstances, charge higher premiums to their potential customers who have, or had, serious health problems, even persons who have been in continuous insurance coverage for a very long time. This accepted practice in the individual market strikes a lot of people as unfair.

Those who seek to repeal Obamacare need to coalesce around a solution to the problem that is minimally intrusive because, without a practical alternative, it will be very difficult to dislodge the existing law.

Of course, solving the problem does not require anything remotely close to the massive interventions contained in Obamacare. But it does require change.

Which brings us back to the legislation — called the Helping Sick Americans Now (HSAN) Act — GOP leaders would like the House to consider. Some opponents of this legislation have in mind the possibility that the problem of pre-existing conditions can be resolved with deregulation and a more functioning marketplace for health insurance. And it is certainly true that the problem is caused — in part — by the favorable tax treatment granted to employer-paid insurance premiums. This encourages heavy reliance on job-based insurance that is not owned or controlled by the workers, and can’t be taken with them when they leave their jobs. The discontinuity in insurance coverage that therefore occurs in the United States compels a regulatory solution to ensure that workers who switch insurance do so without incurring significant financial risks. We would be far better off if the market for private health insurance had developed differently, with individuals purchasing and owning their coverage more, as they do with most other insurance products.

But there’s no sense in ignoring reality. Today, about 160 million Americans are enrolled in job-based insurance plans, and mainly they are satisfied with what they have. If Obamacare is repealed, there’s little prospect of wholesale change to this insurance system. Therefore, opponents of Obamacare need to promote solutions for pre-existing conditions that presume the continuation of job-based insurance as the dominant form of coverage.

The way to ensure stable insurance for persons with pre-existing conditions in a reform plan that emphasizes markets, not government, is to create a new protection for people who stay continuously insured. They should be allowed to move seamlessly between job-based and individually-owned insurance products without fear of being risk-rated based on their health status. Enacting this kind of protection will necessarily mean that many more people with histories of significant ailments will move into the individual insurance market, and thus potentially drive up premiums for current enrollees. To prevent the market from destabilizing during the transition period, it will be necessary to subsidize the premiums for the very costliest cases. That can be done with properly funded high-risk pools.

Some believe that the federal government should not involve itself in high-risk pool funding at all, ever. But the concept of “continuous coverage” protection for insurance enrollees will only work if it applies nationwide. After all, we have a national labor market, with people moving across state lines for new jobs very frequently. It will thus require federal legislation to ensure these workers are protected in every state, which also means that the high-risk pool funding necessary to make it work and stabilize premiums will need to be enacted at the federal level too, in the same legislation.

The HSAN does not go nearly this far in addressing pre-existing conditions. All it does is provide federal funding for state high-risk pools. It is a relatively small change, crafted mainly to deliver a political message. And on that score, it will succeed if given a chance.

But substantively it is also on firm ground. There’s nothing unsound or contrary to conservative principles about federal funding of high-risk pools. Indeed, a realistic plan to solve the problem of covering persons with pre-existing conditions — without mandates and drastic and intrusive regulations — will necessarily entail some federal funding of such pools. Done right, the end result won’t be “Obamacare-lite” but a market-driven health system in which the federal government’s role is dramatically scaled back, not expanded.

James C. Capretta is a senior fellow at the Ethics and Public Policy Center and a visiting fellow at the American Enterprise Institute.

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