There’s a joke from the old Soviet Union that essentially goes: “What’s harder to predict in the Soviet Union than the future? The past.” At the risk of killing the joke by explanation, its point was this: people’s opinions in the present are influenced heavily by their memories of the past. Thus, any government like the Soviets’ that seeks to manage people’s political opinions must spend a lot of time rewriting history.
This week’s announcement that Affordable Care Act (ACA) health insurance exchange premiums are rising this year by 25% on average brings that old joke to mind, for no sooner was this disturbing information released than many partisans leapt into action – not to recognize and address the problems in evidence, but to rewrite the law’s troubled history for the purpose of assigning blame.
Only so much spinning can credibly be done, however, because the reasons for the cost increases are straightforward and acknowledged by experts ranging from critical analysts, like the Mercatus Center’s Brian Blase, to Clinton advisor Chris Jennings (albeit via a memo leaked without his consent). What happened was this:
- The ACA substantially expanded health insurance coverage. To a first approximation, more health insurance increases health spending and prices, because it reduces the cost share consumers pay out of pocket and thus increases health service demand relative to supply.
- The ACA also tightly restricted the extent to which insurers could charge higher premiums to individuals with higher expected health costs (due to factors such as age or a pre-existing condition). Accordingly, ACA plan finances could only be stable if the premiums paid by or on behalf of younger, healthier participants well exceeded the value of their own insurance.
- Because it is not generally to someone’s benefit to carry insurance priced higher than its value, the ACA’s authors sought to induce participation by younger, healthier individuals by levying a tax penalty on those remaining uninsured. But the penalty wasn’t set high enough to exceed the income they’d lose by carrying coverage.
- To help low-income people foot these new insurance bills, taxpayers were required to finance substantial federal subsidies heavily concentrated on the poorest participants. But that still left a lot of other modest-income people without incentives to get covered. Research has shown that, in Blase’s words, “people who do not qualify for cost-sharing subsidies have generally found exchange plans not to be worth the cost.” These people have mostly declined to enroll.
- The ACA enrollment process allows individuals to avoid coverage while healthy, then sign up when they are ill and need care. This makes the participant pool sicker on average, further driving up average costs.
- As insurance costs rise, it becomes a worsening deal for young, healthy participants. This makes them less likely to maintain coverage, exacerbating the above problems and driving average costs still higher.
This dynamic arises from the ACA’s intrinsic design. Accordingly, many experts correctly predicted all this when the law was enacted. Leavitt, Hubbard and Hennessey wrote in 2009 that, “health insurance premiums will increase dramatically for the overwhelming majority of people” and that therefore “many will choose to go without and pay the tax penalty.” The CMS Medicare Actuary projected the ACA would on balance increase healthcare costs. Health economists Brad Herring and Erin Trish also wrote that the ACA’s coverage expansion would be “likely to increase” health spending. This May, Blase found that “massive insurer losses” in the exchanges indicated the next round of premium increases “may make last year’s . . . look small in comparison.” Naturally, now that these problems are plain for all to see, each party blames the other for refusing to correct them. Of course, each has a different opinion about what correction entails.
These problems were not inevitable. A less sweeping government intervention in health financing might have sought merely to protect individuals from ruinous health care costs. This is what we do, for example, with automobile insurance; it is designed only to protect us from financial disaster while leaving us each responsible for paying routine expenses. But the ACA’s authors were more ambitious, pursuing goals including comprehensive coverage for a wide range of discretionary health services, massive income redistribution, and obscuring the incidence of costs within a complex system of premiums and subsidies. The current situation arises basically from health insurance being relied upon to do a lot more than simply protect against risk.
It was not supposed to be this way. To the contrary it was repeatedly promised that the ACA would push health costs down. It was also promised specifically that the exchanges would be self-supporting without additional taxpayer funds. This is important to understand, for some are now advocating that the government prop up participating insurance companies with additional taxpayer dollars, for example by extending the ACA’s reinsurance program.
This is where a temptation to misremember history is arising. One recent Washington Post article implied that such a bailout would be consistent with the original spirit of the law because an ACA provision included to protect insurers, known as risk corridors, “originally was not supposed to pay for itself” and that Republicans only later sought to restrict it. This is flatly untrue. A taxpayer-financed bailout through the risk corridor program would be a direct violation of how everyone initially understood the ACA would work. Specifically:
- The original Congressional Budget Office (CBO) score certifying the ACA’s benign fiscal effects assigned no net cost to the ACA’s insurer risk mitigation provisions.
- The ACA’s supporters in Congress and at the White House repeatedly touted projections of “deficit-reducing health care reform” based on these provisions having no net costs.
- CBO later provided additional documentation that no net costs under these provisions were expected.
- The Obama Administration subsequently issued guidance informing the public that the provisions would be implemented “in a budget neutral manner.”
- CBO later projected the provisions would bring “net savings to the federal government” of $8 billion over ten years.
- The ACA’s supporters inside and outside of government all pointed to the updated CBO projection to assure the public there would be no bailout, but rather net savings.
In sum, the public was explicitly and repeatedly promised there would be no taxpayer-financed bailout of participating insurance companies. Congress’s later actions reaffirmed that understanding; the bailout some are now suggesting would renege upon it.
Whenever someone makes a heavy political investment in a policy, it becomes very difficult to acknowledge mistakes in that policy. This is why we so frequently see government doubling down on policy mistakes rather than correcting them. We see that temptation here, with many advocates arguing to expand the very policies producing substantial current problems. We should therefore turn our focus away from attempting to drag admissions of error from anyone. Instead, we all need to face up to the problems arising from the ACA, make a frank diagnosis of their sources, join together in fixing them and share the credit for doing so.