Fixing Obamacare

Now that the election is over and President-Elect Trump has begun the transition to his administration, there has been some discussion of reforming the market for health insurance. I have written previously that Obamacare is in the process of collapsing because of its structural defects. For example, the Obamacare feature of guaranteed issue has caused a phenomenon known as adverse selection which is driving insurance companies out of the health insurance exchanges (links to other posts on Obamacare are given below). Here I thought it would be useful to outline some changes that seem to be sensible reforms to the currently-available flawed system.

  1. Nationwide Competition.  This seems a no-brainer. The more competition in the marketplace, the better the quality of product offerings and the cheaper the policies will be, all else the same. We allow competition across state lines in most products, including insurance. Why is it sensible to restrict competition in health insurance, particularly when we are concerned about making the insurance affordable to the public?
  2. Stop Central Planning. Obamacare dictates the types of coverages that must be made available and states engage in price-approval programs for insurance, a mild form of price controls. Firms should be free to develop products tailored to the needs of their customers and nationwide competition should exert market pressures to keep prices at competitive, as opposed to, noncompetitive, levels. Price controls are always a mistake as any Econ 101 student can tell you.
  3. Allow Insurance Companies to Price Risk. One of the fatal flaws of Obamacare is that it limits the ability of insurance companies to price the risks of applicants for insurance. This essentially forces the firms to treat everybody as a bad risk because, if they don’t, they risk bankruptcy. This feature of Obamacare harms those who are the good risks in the applicant pool by forcing them to pay more than they should. The higher the price of the insurance, the fewer policies will be sold so this provision incentivizes people to avoid buying the insurance, precisely the opposite of what the designers of Obamacare claimed to want.
  4. Eliminate the Risks Attached to Guaranteed Issue. An important reason why private insurers are leaving the market for health insurance is because individuals buy insurance, get the medical services they need, and then drop the insurance. It should be obvious that insurance companies cannot stay in business when this behavior is allowed. Eliminating this problem requires insurance contracts to be written which provide incentives for people to stop dropping the insurance. For example, my cable company gives me a good deal for cable service on a one-year contract but this plan penalizes me if I drop it before one year is up. If individuals are significantly penalized for dropping health insurance after they have had the services they need, they have an incentive to keep their health insurance. I can’t say why these contracts do not exist but I suspect that the government will not permit them.
  5. Provide Health Insurance Vouchers for Low-Income Individuals. If the insurance subsidies are means-tested, then the government can provide insurance vouchers to help those at the low end of the income distribution who are in need of health insurance. The vouchers obviously are targeted to insurance and nothing else.

There are certainly more reforms than these five items that would need to be implemented to reform Obamacare but the five principles given above should be part of the foundation for a functional marketplace in health insurance where people can buy products that are suitable to their needs, at prices that are not astronomical, and where insurance companies are not driven into bankruptcy.

Of course omitted from this discussion is how we finance the subsidies in this healthcare system. I follow standard political practice by pretending that we don’t need to consider this aspect of the program, a fantasy that will be harder to carry out as we approach the oncoming entitlements crisis.

Previous Posts on Obamacare

Obamacare Slowly Implodes

More Fallout From Obamacare

The Affordable Care Act As Lawyer Relief Act

Enforcing Obamacare Fines

Health Care Competition

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Economics One

A blog by John B. Taylor

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One economist's views on economic policy.

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