On Oct. 25, 2013, the Baker Institute Health Policy Forum hosted its fourth biennial conference on health care reform. This series of blogs discusses the implications of the 2010 Affordable Care Act for the U.S. health care system and the well-being of the population.
Read other posts in this series:
- How health care reform changes employers’ incentives to offer coverage
- Vertical agreements in health care can be pro- or anti-competitive
The American Enterprise Institute-sponsored health reform proposal offered by Jay Bhattacharya and colleagues is interesting and challenging for many reasons. One of them is the authors’ endorsement of risk rating by insurers — the antithesis of the community rating that is current practice among employer-sponsored plans and fundamental to the design of the Affordable Care Act (ACA).*
The ACA’s (age- and smoking status-modified) community rating of exchange plans is one, though not the only, motivation for the individual mandate. With community rating, the premiums of the healthy subsidize those of the sick. The fact that a healthy person’s premium is higher than the person’s actual risk would require is an enrollment disincentive. However, the individual mandate’s tax penalty acts as a counterweight, encouraging enrollment. (Subsidies, for those who are eligible, also play this role.)
Bhattacharya and colleagues highlight another role of the mandate tax penalty — to recover the cost of stabilizing care required by hospitals under the Emergency Medical Treatment and Active Labor Act (EMTALA). This cost is, in large part, paid by taxpayers through the Disproportionate Share Hospital (DSH) program. This gives rise to the Samaritan’s dilemma:
Society will continue to provide basic care to patients in dire medical need, regardless of their insurance status. Absent any government action, all patients — rich and poor, healthy and sick — will come to count on the availability of “free” care that protects them against the contingencies of accidents and acute illness. Health insurance becomes less necessary as a bulwark against catastrophe and its use falls, particularly among younger, healthier groups whose participation in health insurance markets could substantially drive down average costs.
Bhattacharya et al.’s plan includes a tax penalty for this reason. Individuals who obtain insurance that provides coverage for such emergency care would be exempt. This is not unlike the ACA’s mandate penalty, though the tax would be lower than that of the ACA because its only purpose is to recover EMTALA costs, not to also offset the disincentive of community rating. The authors also advocate that the tax be progressive, which — other than for hardship exemptions — is not the case of the ACA tax.
The authors comment on the role that state-based benefits mandates play in raising the cost of insurance. There are two mechanisms at work here. The first is that benefits mandates directly increase insurers’ costs by requiring coverage of more services. This pushes premiums higher in an obvious way. The second is that state-based mandates also play a role in limiting the scope of competition, since plans designed in one state don’t necessarily comply with the mandates of another state. (This is not the only obstacle to interstate competition; the authors address others as well.)
Bhattacharya et al.’s proposal also includes mandated benefits — their basic plan sets a floor on what must be offered — but they have the virtue of national scope. If all plans in the nation need to comply with the same minimum benefits requirements, one of the obstacles to interstate competition is removed. The more competitive insurance market that could arise has the potential to reduce premiums, though this is not assured if the market is too fragmented. What a national benefits mandate certainly doesn’t do is remove the direct cost-raising role of mandates articulated above. A mandate still carries costs, whether it’s national- or state-based.
* Harold Pollack and I debated this aspect of the proposal in a series of posts and a webcam chat. Links can be found in this post.
Austin Frakt is a health economist with an educational background in physics and engineering. He has appointments with Health Care Financing and Economics at the VA Boston Healthcare System, U.S. Department of Veterans Affairs and with the Department of Psychiatry and the Department of Health Policy and Management at Boston University. Since 1999, he has studied economic issues pertaining to U.S. health care policy with a recent but not exclusive focus on Medicare and the uninsured. Frakt has authored numerous peer-reviewed, scholarly publications relevant to health care financing, economics and policy, and he is the creator, co-manager and a primary author of The Incidental Economist.