Four Things Josh Barro Gets Wrong About Health Insurance

insurance (Photo credit: Alan Cleaver)

Josh Barro writes that ObamaCare isn't the departure from the status quo ante that you might think. And that, in a nutshell, is the main problem with ObamaCare.

Our health care sector is a mess - prices are too damn high and quality is too low - thanks to mandates, subsidies, and price controls imposed at both the state and federal levels. ObamaCare doesn't do anything to reduce the underlying cost of medical care, or improve the quality of care, or make access to care more secure. It just doubles down on those failed policies.

Barro argues that private health insurance in the United States is largely a government program. He's correct, in that the exclusion of employer-paid health insurance premiums from federal income and payroll taxes, coupled with various regulations on employer-sponsored insurance, have converted 90 percent of the market for 'private' health insurance into a government-directed enterprise. We call the tax exclusion for ESI a tax 'break,' but when you think about it, it operates more like a tax hike. It coerces (Barro's word) workers into handing control over $11,000 of their earnings to their employers, who then choose the workers' health plans for them. Does that sound more like a free market, or a government program? Before you answer, remember that we're being coerced into buying an odd species of health insurance - ' crappy,' in the parlance - that disappears when you get sick and can't work anymore. Would you buy that kind of health insurance if you weren't being coerced? Employer-based insurance further operates, as Barro notes, under the yoke of government price controls that prohibit premiums from reflecting individual risk. Employer plans are therefore vulnerable to adverse selection, which results in the further crappification of 'private' insurance by forcing employers to make their plans less attractive to sick people.

But Barro stumbles when he claims the remaining 10 percent of the private health insurance market - the so-called 'individual market,' where consumers buy directly from an insurance company - is also essentially a government program. Allow me to quote him:

Individually-purchased health insurance is usually a one-year contract. But these insurance policies are subject to a federal policy called 'guaranteed renewability.' Once an insurer covers you, it has to offer you renewals as long as you want them, and it's not allowed to raise your premium based on new information about your health.

This rule, created by the bipartisan Health Insurance Portability and Accountability Act of 1996 (HIPAA), is basically rent control for health insurance. It benefits the sick by obligating health insurers to write policies at a loss; they make up the difference by charging more to the healthy.

Barro is correct that guaranteed renewability means your insurer won't jack up your premiums to reflect the fact that you got diabetes or cancer. Everything else here is just wrong.

Guaranteed renewability (GR) is not rent control or any other type of price control. It is insurance. As John Cochrane explains, GR is a separate type of insurance that protects you against the financial risk associated with developing a long-term illness that causes your premiums to jump. Cochrane calls GR a form of 'health-status insurance,' but you can also think of it as 'premium-increase insurance.'

Nor does GR 'oblig[e] health insurers to write policies at a loss.' Insurers don't write GR policies at a loss any more than they price any other type of insurance at a loss. Mark Pauly and Bradley Herring have shown insurers cover the cost of GR the same way they cover the cost of all insurance: by charging people a risk-adjusted premium before the insured-against loss occurs. Carriers add a GR surcharge on top of the medical-insurance premium you pay to cover your medical bills in Year One. Those funds then cover, in Year Two and beyond, the cost of offering standard-rate coverage to everyone who develops a long-term illness in Year One. (In Year Two, the surcharge covers the cost of providing standard-rate coverage to everyone who develops a long-term illness in Year Two, and so on.) Pauly and Herring have shown that there is no reason for healthy consumers to defect from this arrangement. That's because they're not being taxed to subsidize someone else. They are voluntarily buying something for themselves that has the glorious effect of subsidizing others.

Nor was GR created by Congress. Yes, HIPAA mandated that all individual-market policies include a GR component. But Pauly and Herring report that 75 percent of individual-market policies were GR before Congress imposed that mandate. (It's easy to see why GR would dominate in an competitive health-insurance market. If Plan A costs $600/month but then jumps to $6,000/month if you get sick, while Plan B costs $800/month no matter how sick you get, which would you choose? Some will choose Plan A if circumstances dictate. But most would find Plan B's GR feature to be worth the added cost.) Saying that HIPAA created guaranteed renewability is like saying ObamaCare created health insurance. Sometimes, stuff happens before Congress mandates it. Which means that individually purchased health insurance is usually not a one-year contract. GR insurance covers your medical expenses in Year One, but also provides sick people additional protection in Year Two and beyond. And it works - at least, it did work, until ObamaCare encouraged carriers to start depleting their GR reserves, by giving to healthy people the money that was supposed to help the sick.

All of which is to say that despite all the things that federal and state governments have done to hamper it and hinder it and crowd it out, the individual market has worked quite well. Guaranteed renewability is a market success. It has enabled the individual market to provide more secure access to health care for sick people than the type of insurance the federal government coerces 90 percent of Americans into purchasing. It does so without the distortionary effects that ObamaCare supporters admit the law's community-rating price controls will create. Cochrane predicts that without such price controls or the tax preference for ESI, markets would spur further innovations that make access to care more secure. (Imagine insurance companies aggressively competing to cover the sick.) Even as Congress was drafting ObamaCare, the individual market was innovating right underneath Congress' nose with new products that would make coverage more secure. But such innovation cannot happen with ObamaCare in place.

Like many on the Left, Barro appears not to like the fact that in a free market, private health insurance companies will charge sick people higher premiums than they charge healthy people. He therefore supports imposing government price controls on private health insurance. (Supporters never call ObamaCare's 'pre-existing condition provisions' price controls, for obvious reasons, but that's what they are.) But Barro speaks as though this policy preference is just The Way Health Insurance Markets Work. That's also just wrong. His enthusiasm for price controls should be tempered - but he should be heartened - by what Pauly has to say here:

We find that regulation modestly tempers the (already-small) relationship of premium to risk, and leads to a slight increase in the relative probability that high-risk people will obtain individual coverage. However, we also find that the increase in overall premiums from community rating slightly reduces the total number of people buying insurance. All of the effects of regulation are quite small, though. We conjecture that the reason for the minimal impact is that guaranteed renewability already accomplishes a large part of effective risk averaging (without the regulatory burden), so additional regulation has little left to change.

ObamaCare does not merely expand on a type of price control that already existed in the individual market (though community rating did exist in a few states). It substitutes a government guarantee for a market guarantee that was already besting the government's previous foray. It's a radical departure from what previously existed in the individual market, and it will make that market more prone to adverse selection as healthy/sick consumers try to minimize/maximize community rating's implicit taxes/subsidies. ObamaCare will also heighten the incentives that carriers face to provide lousy coverage to the sick.

Nevertheless, both what Barro gets right and what he gets wrong should be helpful in convincing the fact-checkers and sundry other ObamaCare apologists that, yes, this law is, at a minimum, the last phase in the federal government's takeover of health care.