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Pre-Existing Conditions and The Great Compromise

Posted by Jeff Gasser on May 17, 2017

compromise.jpgThere has been so much hysteria about potential changes to the healthcare law that I feel compelled to attempt a level-headed view of things and suggest an idea.  There are a lot of moving parts here, but I am going to stick to the pre-existing conditions portion as that one seems to get the most angst or at least the most television news coverage. The acronyms for the ACA and the ACHA are so close, let me simply call them Obamacare and Trumpcare for clarity.  I heard Warren Buffett the other day call healthcare "the tapeworm of the U.S. economy".  Pre-existing conditions are a main food source of the tapeworm.   There are others for sure.  Some of us get sick, really sick every year.  Insurance is built for that event and handles it pretty cost effectively.  Some of us get in car accidents and the insurance industry handles that.  Pre-existing conditions are not the auto equivalent of insuring a bad driver.  It is the equivalent of providing unlimited benefits to an uninsured motorist after they have had a head-on collision. 

Now people's health is different than automobile insurance.  I get that, and yes I have been impacted in my life by a loved one being unable to obtain insurance because of a pre-existing condition.  I think most people want to find a way to provide that coverage, but it is expensive.  The top 1% of patients spend an average of about $130,000 a year.  40% of them stay in the top 1% year after year, and some of these people spend well over $1 million a year.  So, if you want to provide insurance to someone for $5,000 a year and it is known that this person will spend $130,000 a year, who pays?  Not the insurance company.  Ultimately it is all of us.  This is an over simplification, but essentially Obamacare put the burden on policyholders.  Some of those policyholders have subsidies for premiums, but the burden is reflected in both premiums and extremely high deductibles.  Think of it this way, if the average deductible is $5000, then over 90% of people with Obamacare are uninsured because their bills are less than $5000 a year.  One person in the top 1% of annual claim costs that come onto a plan on the exchange raise premiums by $100 a month for over 100 people.  That is the math.

Trumpcare proposes to take all of those people with costly pre-existing conditions and set them up in state funded high risk pools specifically for people like that.  So imagine an insurance plan where the average participant spends $130,000 while paying a $5000 annual premium.  The only way that works is the government must fund the $125,000 annual difference.  I think there is no doubt that this will greatly reduce the cost of insurance to people without pre-existing conditions and it will continue to provide coverage to those with pre-existing conditions if there are sufficient subsidies to these risk pools....and there's the rub.  As I have documented before, I think the required funding annually for this is at least $60 billion and maybe as high as $100 billion.  I have not heard numbers anywhere near this amount, as the latest AHCA draft sets aside only $15 billion in a federal high risk pool, so I am a skeptic to say the least.

So, how about this.  If we want to improve premiums for the vast majority of Americans while protecting the folks with pre-existing conditions, let's define what those conditions are and make those people eligible for Medicare.  We do this already for dialysis patients.  My estimate is that making this relatively small group Medicare eligible would save at least $25 billion a year than we would spend subsidizing their expenses through private insurance due to provider rate differentials.  People who stand up for the rights of these folks should be satisfied because they will have the protection of Medicare.  The vast majority of us on the exchanges will see premiums and deductibles drop.  To be sure, it is not as simple as it sounds.  Rules would have to be established to keep people from gaming the system including employers who provide most health coverage to working aged people.  However, given where we are and the factions that exist politically, perhaps this is a compromise that might work.  Would love to hear anyone else's thoughts.

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