As the Obamacare debate continues, Congress will have a choice of whether to maintain the status quo, or to pursue a minimalist legislative fix, comprehensive reform, or something in between. I propose something in between – a moderate and relatively light package of reforms to the individual health insurance market including some changes that are more consistent with past recommendations from the political left and some changes that are more consistent with past recommendations from the political right.
With the latest Republican efforts to ‘repeal and replace’ Obamacare having failed, some bipartisan interest in reinforcing the current policy framework appears to be emerging. The most likely direction for such efforts will probably be a narrow legislative fix such as explicitly appropriating funds for the cost-sharing reduction payments. Whether or not a narrow legislative fix is passed, some groups will undoubtedly be looking for an opportunity to replace Obamacare with something rather different in the mid to long term. Some policymakers may opt to pursue a comprehensive set of reforms such as the blueprint recently released by a bipartisan group of governors. As a potential middle ground between a narrow legislative fix and comprehensive reform, I propose two program changes that, if made, would alter some of the fundamental characteristics of Obamacare while reducing premiums and increasing choice: (1) ongoing reinsurance with a low attachment point; and (2) voluntary auto-enrollment.
Increase Plan Competition and Choice by Establishing Publicly-Funded Reinsurance
One of the most frequently-voiced critiques of Obamacare has been that people in many markets only had one or two (or no) options on the individual marketplace. Until recently, it was looking like there would be a number of counties across several states where no carrier intended offer coverage on the individual marketplace. Although carriers have now filed plans to cover all counties across the country for the 2018 calendar year, there remain many counties with only one or two carriers. One option for increasing consumer choice on the individual marketplace would be to make it much easier for different types of organizations to offer plans by establishing a publicly-funded reinsurance mechanism with a relatively low attachment point.
Reinsurance, which is often described as insurance for insurance, is not specific to health insurance. The idea is that when an insurance company’s losses, on either an individual or aggregate basis, exceed some attachment point (the dollar amount at which the reinsurance policy ‘attaches’ to the underlying insurance policy), then the reinsurance policy kicks-in and covers most, if not all of the cost above the attachment point. Typically, an insurance company purchases reinsurance, and thus includes the cost of the reinsurance in its own premiums, but it’s certainly feasible to have publicly funded reinsurance, which would reduce premiums and reduce public expenditures on premium assistance subsidies. Although no longer in effect, a transitional reinsurance program was included in the original Affordable Care Act (ACA) as part of the trio of premium-stabilization features (the three ‘R’s – risk adjustments, risk corridors, and reinsurance) to allay carrier concerns about adverse selection and excessive risk, but it was explicitly temporary, and only authorized through 2016.
Publicly-funded, ongoing reinsurance with a relatively low attachment point across the whole individual health insurance market could make many new types of organizations eligible to be carriers. Some of the biggest barriers to entry in the health insurance market are the reserve requirements that allow carriers to cover a wide range of claims experiences. In order to be licensed to sell insurance in a state, an organization must be able to demonstrate that it has the financial capacity to cover significant medical losses (i.e., claims levels several standard deviations above the expected level). This typically creates a significant barrier to entry because organizations other than large insurance companies cannot meet the necessary reserve requirements.
Establishing a publicly-funded reinsurance program across the individual health insurance market would change the underlying economics such that regulators could reasonably allow much smaller organizations to be carriers, which would open the market to substantial competition. Suddenly, any number of different local provider organizations would be able to serve as health insurance companies. If it could have been possible for a small hospital or large physician group to step in and act as the carrier without needing to have the large reserves that generally act as a barrier to entry, we might have been able to avoid the recent and ongoing experience of bare counties or minimal choice. (Recognizing that any provider organization trying to do such a thing would still need to establish an adequate provider network and meet other relevant requirements.)
Improve the Risk Pool by Eliminating the Individual Mandate and Establishing Voluntary Auto-Enrollment
Although some believe that the individual mandate is necessary for forcing healthy people to buy-in to the individual health insurance market, even a key health economist who served as an advisor on Obamacare has determined through rigorous quantitative analysis that the individual mandate has had a minimal effect. Far more significant in getting individuals of all levels of health to buy-in to the individual health insurance market has been the income-based subsidies that ensure that the components of the premiums for which subsidized individuals are responsible for paying are no more than a certain proportion of their income.
While the individual subsidies are clearly important for increasing enrollment, some additional policy mechanisms could be implemented that would increase the number of healthy individuals enrolling in the marketplaces even more. In particular, a mechanism could be established whereby individuals would be automatically, but voluntarily, enrolled in the individual health insurance marketplace, potentially in conjunction with their individual income tax filing. Such a mechanism could also support the payment of premiums through the tax refund or automatic payroll deduction.
Importantly, such an approach need not be construed as a mandate; it could just be an established default that individuals could opt-out of. As noted in the behavioral economics literature, individuals who are automatically enrolled in programs, even if given the option to disenroll, generally stay enrolled. Auto-enrollment paired with aggressive marketing would lead to higher levels of individuals purchasing health insurance through the individual health insurance marketplace, which, in turn, would lead to lower premiums as the risk pool expands, all without mandates.
Whether or not the forthcoming efforts to stabilize the individual health insurance marketplaces are successful, there may be a desire to change Obamacare in more fundamental ways. Fortunately, there are some clear opportunities for doing so, some elements of which may even enjoy bipartisan support and give Republicans an alternative to Obamacare that is both sufficiently different and more likely to succeed than the options that have been proposed to date. In particular, establishing publicly funded reinsurance and voluntary auto-enrollment should reduce premiums, increase consumer choice, and eliminate the individual mandate, all stated goals of Obamacare critics.
Establishing universal reinsurance across the individual health insurance marketplaces with a low attachment point should significantly reduce barriers to entry into the market. Increasing enrollment in the individual health insurance marketplace through auto-enrollment and aggressive marketing will bring more healthy people into the market and put downward pressure on prices at the premium level. While it may not be the ‘repeal and replace’ proposal that some Republicans are awaiting, a policy package that includes drawing more people into the individual health insurance market while eliminating the individual mandate and increasing competition at the plan level would be a fiscally responsible and programmatically effective way to resolve the current health care reform debate.