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The Vexing Question of ‘Preexisting Conditions’

Michael D. Tanner

As Senate Republicans prepare for their turn in the health-care
meat grinder, it increasingly appears that the question of
preexisting conditions will be toughest to address. This is an
issue so fraught with emotion as to cry out for some straight
talk.

First, let’s be clear about whom we’re talking about when the
conversation turns to preexisting conditions: people who are
already sick or at high risk of becoming sick. Insurance is —
or should be — about managing risk. We buy coverage to
protect us against events that are unlikely to happen but would
carry a catastrophic cost if they did. Our premiums reflect both
the likelihood of those events and the potential price of the
medical care they’d require.

Consider that, in 1752, Benjamin Franklin started the
Philadelphia Contributionship for the Insurance of Houses from Loss
by Fire, the first wide-scale commercial-insurance company in the
United States. In providing Philadelphians with insurance against
the then-frequent calamity of house fire, Franklin made the
common-sense decision to charge those who lived in wood houses,
which were more likely to burn, higher premiums than those who
lived in brick houses.

There are no easy answers
to covering sick Americans’ costs of care, but understanding the
reality of the issue is a good start.

The Affordable Care Act essentially eliminated this type of
risk-management, mandating identical premiums for both brick and
wood houses, or in this case, someone in perfect health and someone
in very ill health. It is this Gordian knot that congressional
Republicans are attempting, in their usual inept way, to cut.

A lot of numbers have been thrown around about how many
Americans have preexisting conditions. Barack Obama, for example,
has suggested that the number is as high as 133 million. But these
figures grossly exaggerate the number of Americans who would be
affected by changes to the ACA’s preexisting-conditions provisions.
They include, for example, Americans on Medicare or
employer-provided health insurance, neither of which are subject to
medical underwriting. If you get your health insurance at work, the
company’s overall costs may increase to reflect its claims
experience in the event that Congress’s reform bill gives insurers
the right to charge more for those with preexisting conditions, but
your individual contribution will not increase because you have
such a condition.

Democrats have also been circulating a long list of medical
problems that meet the technical definition of preexisting
condition. Many of those conditions have little more than a
marginal impact on premiums, and others are explicitly addressed by
state laws that ban insurance companies from charging more for
those who have them. For example, some commentators have claimed
that insurers might call rape or domestic violence preexisting
conditions. But even if an insurer was willing to bear the public
outrage from doing so, 44 states currently prohibit the practice.
Those that don’t ban it explicitly, including states such as
Vermont, would enact a ban at the first hint that an insurer might
change its policies to punish a victim of rape or domestic
abuse.

This politically motivated hysteria does not make the question
of how the system should treat those with preexisting conditions
any less pertinent, of course. If you have a preexisting condition,
you are not being “insured” in any real sense, because there is no
risk to manage or spread over a larger pool. But your health-care
costs still need to be paid, and there are essentially just four
ways to allocate those costs.

We could require that people with preexisting conditions bear
all the costs themselves, either by paying an actuarially fair
premium or by forgoing insurance and paying their costs
out-of-pocket. For some the increases will be modest, more an
inconvenience than a crisis. Charity care might fill in some of the
gaps, and federal law would continue to require that hospitals
provide emergency care. Nevertheless, it is likely that many people
would not receive the care they need. As a result, virtually no one
favors this option.

Second, other people in the insurance market could pay the
costs. That’s how the ACA works. The ACA mandates that healthy
people, who are unlikely to use insurance, buy it anyway, and
charges them much higher premiums than would normally be justified
by their actuarial risk. The young and healthy essentially
subsidize care for the older and sicker. This has the perverse
effect of forcing some people who are struggling financially, such
as those just out of college, to subsidize people who might be much
better off financially. It also doesn’t work, as the ACA’s
implementation showed, because not enough healthy people sign up to
pay for the influx of sick people. Insurance companies then either
drop out of the market, cut back on high-quality providers, or
raise premiums. All of this in turn forces healthy people out of
the insurance pool, threatening to create an adverse-selection
death spiral.

Third, you can try spread the cost of insurance subsidies over
the entire tax-paying population. That’s the theory behind
high-risk pools. Individuals with preexisting conditions would be
removed from the general insurance pool, allowing premiums for the
rest of us to drop to levels reflecting our reduced risk. Most
people’s premiums will go down, while those in the high-risk pools
face much higher premiums. To be feasible, this option thus
requires government to subsidize premiums for those in the
high-risk pools. Before the ACA, some 226,000 Americans were
enrolled in high-risk pools in the 35 states that offered them.
Some state pools were well-designed and worked fairly well, while
others had problems. It remains to be seen whether a new generation
of high-risk pools would be better. The major problem with this
option is that it attempts to preserve the illusion that people
with preexisting conditions are being “insured,” when in actuality
the uninsurable are uninsurable and there is little point in
continuing to include insurance-company middlemen between them and
their health-care providers.

Finally, we can take those with preexisting conditions
completely out of the insurance market and have taxpayers pay
directly for their care, including them, for example, under
Medicaid. That is the approach advocated by Senator Rand Paul,
among others. Its biggest downside is an increased risk of adding
substantially to federal and state spending at a time when the
growth in Medicaid costs is already squeezing out other priorities
such as education and infrastructure. Another risk is that directly
paying providers might recreate the many problems plaguing existing
programs such as Medicare, Medicaid, and the VA, with the specter
of price controls, rationing, oppressive taxation, and debt looming
as costs rise.

None of these options includes a magic money tree that provides
“free care.” We are arguing about who should pay, which is a
natural and healthy debate to have in a democracy. But too much of
the discourse surrounding this issue pretends that treating people
with preexisting conditions is cost-free. Moreover, all of this
debate takes place against the backdrop of the ACA’s ongoing
implosion. The law’s protections for those with preexisting
conditions may not count for much if, in the near future, there are
no plans being sold on exchanges in their markets, or if none of
the available plans cover the doctors or hospitals they need. And
even where insurers have not yet pulled out of Obamacare, people
with preexisting conditions are currently being hurt by high
premiums and deductibles wrought by the law’s flaws.

This is not to suggest that the GOP’s proposal is in any way
coherent, of course. In their endless quest to be a little bit
pregnant on the topic, Republicans have crafted a bill that manages
to borrow the worst aspects of all the above models, and their
unwillingness to be frank about the tradeoffs involved deserves all
the derision it has received.

But if Democrats have a better answer, we have yet to hear
it.

Michael
Tanner
is a senior fellow at the Cato Institute and the author
of Going for Broke: Deficits, Debt, and the Entitlement
Crisis
.