The Pre-existing Condition Problem

Blog Post - The Pre-existing Condition Problem

 

Much of the debate about repealing Obamacare is centered around the “pre-existing condition” problem, and rightfully so. The fact that people that are sick or injured and cannot find insurance is a scary predicament for most people, one that nobody wants to find themselves in. It is however, important to note this was a problem that affected a small percentage of Americans.

Another reason it’s the most talked about aspect of Obamacare is that insurance for people who are injured, or very sick, is costly, and the only way to pay for it is to distribute the costs among the young and healthy by inducing them to sign up under the penalty of the Obamacare tax.

This is one of the main reasons for the jump in premiums. The obvious unintended consequences of this policy is that many people will opt to only buy insurance when they get sick, and prefer to pay the less costly penalty when they are healthy. This is known in economics as adverse selection. 

But what is seldom mentioned let alone addressed in any proposal to date, or in the media, is the root causes of the pre-existing condition problem, and they are two-fold:

1. The passage of the Economic Stabilization Act of 1942 during the Roosevelt administration and its effects. While most of the American workforce was off fighting World War II, the Roosevelt administration worried that demand for workers would be much greater than supply, leading to much higher wages and runaway inflation.

The law created price ceilings for many occupations and required federal approval for any changes.

But benefits, such as health insurance, were not covered under the law, inducing employers to use this form of compensation to compete for labor. The loophole was then insulated from legislation that may have rectified the problem when a federal court ruled that employer sponsored health insurance was exempt from taxation.

This system incentivizes moving dollars away from salary to health insurance, disproportionately helping higher earners when considering state and local taxes. Those higher earners pay a significantly higher percentage of their taxable income to state and local governments meaning their non-taxable dollars towards their health insurance policies will provide a much more generous health insurance plan. Talk about income inequality…

The real effect of this law is to create the “pre-existing condition” problem in the first place. When people get injured at one job, and try to switch to another, they have a gap in their health insurance plan. The new insurer is now stuck with the high costs of care for those previously insured that paid into a different plan for just such an occasion.

Think of people who are covered but get fired, laid off, or need to quit their old job and then get sick or injured while unemployed. The new insurers are forced to charge a higher premium in order to pay for the care of the new enrollee.

The obvious solution is to make sure people have “continuous coverage” meaning that the individual has their own plan, irrespective of their employment. This would even out the costs over time, and make their treatment in times of need a smaller percentage of their gross contributions.

2. The obvious problem: health insurance is too expensive

A corollary of the employer tax exclusion is that many individuals aren’t in the market of purchasing insurance for themselves. This diminishes the incentives for people to shop for value and plans tailored to their individual needs. A third party being responsible for purchasing health insurance for others will be far less sensitive to the costs.

The other effect is that the employer market crowds out the individual market. So few Americans use it that insurance companies struggle to create a pool of people that can effectively spread risk among the young and healthy and the old and sick.

Making insurance into an actual market, one where less advantageous forms of coverage aren’t subsidized by government policies would be one step in the right direction.

Sources:
https://www.aei.org/pu…/ how-to-cover-preexisting-co nditions/
http://www.manhattan-institute.org/pdf/ir_28.pdf

 

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