Home > Health Care Policy, Obamacare > An Analysis of Obamacare Part I: Guaranteed Issue

An Analysis of Obamacare Part I: Guaranteed Issue

Obamacare imposes an insurance policy feature known as guaranteed issue.  This is the requirement that an insurance company cannot turn down a buyer of health insurance due to pre-existing conditions.  After thinking about the impact this will have upon insurance companies, it will be obvious why it is crucial that the government force people to buy health insurance when they do not wish to do so.  Consider the following examples that I have used with students.

You own a home and do not have a homeowner’s insurance policy.  Your house catches fire and you call up an insurance company, buy a homeowner’s policy, and place a claim.  Once the claim is paid you drop the policy until the next time you want to place a claim.

Or you have no health insurance and are told that you need an expensive operation.  You buy a health insurance policy, have the operation, then cancel the policy when you are healthy again.

Obviously, in either example, the insurance company will lose money on your policy.  But the problem for the insurance company is much worse than this.  Soon the word will get around (you’ll tell friends and neighbors about your actions) and others will do just as you did.  The insurance company will have an applicant pool increasingly dominated by people doing what you did, a phenomenon known to economists as “adverse selection.”  The implication of this feature is that, absent a requirement to buy health insurance, an individual can simply wait until he or she is sick to buy a policy, dropping the policy when healthy.  Insurance companies clearly cannot survive financially in such an environment.  This makes it clear why Obamacare seeks to force people to buy health insurance.

Empirical Evidence on Guaranteed Issue

There are states where guaranteed issue has been imposed.  As has been reported in the media, both Massachusetts and Maine have this feature, so we might look to these states to see what will happen to insurance policy prices when this insurance feature is imposed.  Massachusetts has been reported to have the highest health insurance rates in the nation, with a family policy costing in the neighborhood of $12,000 per year.  In Maine, a 30-year-old single male is said to pay $8,000 per year for a health insurance policy. Thus it is reasonable to expect that in any state where guaranteed issue does not exist, the imposition of the requirement will drive up insurance policy prices to levels comparable to those in Maine and Massachusetts.

What else might occur?  As recently stated in a Wall Street Journal interview, the CEO of a large firm that sells health insurance noted that in every state imposing guaranteed issue, there was a decline in the number of firms selling health insurance in the state.  In Kentucky, a state that imposed this insurance requirement, there were initially 45 firms selling health insurance and now there are two.  So firms stopped selling health insurance in the state because of the risks of adverse selection.

But what will happen if those risks are in every state where insurance might be sold?  There is no place to hide unless a firm leaves the industry or liquidates.  Or there may be mergers of smaller firms as an attempt to deal with the risks.  Thus there is quite likely to be a decline in the number of firms selling health insurance.  With fewer firms competing for business, there will be less competitive pressure on insurance prices.  Less competition implies higher insurance prices than there otherwise would be.

Another way of saying this is that insurance policy prices reflect the underlying risk of the insurance policies.  Guaranteed issue makes the insurance much more risky to the insurance companies selling the policies and this riskiness will be reflected in the prices of health insurance policies.

Can the Government Force People to Buy Insurance?

The discussion above makes clear why Obamacare must require people to buy health insurance since doing so eliminates the problem of adverse selection.  But can the government really force people to buy insurance?  This matter will be settled in the courts as lawsuits have been filed challenging the requirement that people buy insurance.  If those lawsuits prevail, there is a real possibility that adverse selection will drive insurance companies completely out of the market for health insurance.

Ultimately, the federal government may be the only provider of health insurance.  Put differently, we may wind up with Medicare for all, something which Barack Obama stated in the past to be his preferred manner of providing health insurance to the public.  If the lawsuit fails, then private companies may remain in the market, but that will depend upon the penalties imposed by the Obamacare law.  If those penalties are high enough — say the fine is greater than the cost of a policy — then individuals may well buy insurance when they otherwise would not wish to do so.

President Obama has stated that Obamacare will cause health insurance prices to decline.  But the implication of the analysis here is simple: in any state without guaranteed issue, Obamacare will generate a substantial rise in the price of health insurance policies, contrary to the claim made by the President.

Next Up: Obamacare and Health Care Costs

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Economics One

A blog by John B. Taylor

The Grumpy Economist

One economist's views on economic policy.

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