Health in­surance

Try­ing to gain an un­der­stand­ing of this com­plex in­dus­try


The U.S. health in­surance sys­tem is opaque and labyrinthine, and at times pur­posely so. The cur­rent de­bate over whether to re­peal ma­jor pro­vi­sions of the Af­ford­able Care Act (ACA), oth­er­wise known as Oba­macare, comes down to whether con­sumers should sub­si­dize ser­vices they never ex­pect to use. But who pays for what, and how, is not straight­for­ward.

Widely held mis­con­cep­tions abound, in­clud­ing:


House Speaker Paul Ryan de­ployed this myth when de­fend­ing re­peal, which the Con­gres­sional Bud­get Of­fice re­cently es­ti­mated would in­crease the num­ber of unin­sured peo­ple by 22 mil­lion by 2026. “It’s not that peo­ple are get­ting pushed off a plan,” Ryan said. “It’s that peo­ple will choose not to buy some­thing they don’t like or want.”

That rea­son­ing echoes the late Supreme Court Jus­tice An­tonin Scalia, who dur­ing a 2012 chal­lenge to the ACA sug­gested that the law’s in­di­vid­ual man­date started the fed­eral gov­ern­ment down a slip­pery slope. “Ev­ery­body has to buy food sooner or later,” he said. “There­fore, you can make peo­ple buy broc­coli.” And no one wants broc­coli, right?

But both be­fore and af­ter the ACA, most of the unin­sured con­sis­tently have re­ported that they want in­surance. In a 2009 De­part­ment of Health and Hu­man Ser­vices re­port, 48 per­cent of unin­sured peo­ple un­der age 65 said they didn’t have health in­surance be­cause of the cost, 38 per­cent cited life changes (they had lost their jobs, left school or changed their mar­i­tal sta­tus) and an­other 12 per­cent said their em­ploy­ers didn’t of­fer it or they’d been de­nied cov­er­age. Those who “did not want or need cov­er­age” were lumped into an “other” cat­e­gory—along with peo­ple who had re­cently moved, were self-em­ployed or didn’t spec­ify—rep­re­sent­ing fewer than 8 per­cent of re­spon­dents.

Be­fore the ACA, the unin­sured rate had not budged since the pas­sage of Medi­care and Med­i­caid in 1965. Each year, 45 mil­lion peo­ple re­ported that they were unin­sured for the en­tire year. Be­tween 2010 and 2016, how­ever, 20 mil­lion peo­ple gained cov­er­age, al­most en­tirely through Med­i­caid and mar­ket­place sub­si­dies.

Un­der both the House and Se­nate plans to re­peal ma­jor fund­ing pro­vi­sions of

the ACA, the Con­gres­sional Bud­get Of­fice es­ti­mates that the unin­sured rates will rise for all age groups, and most sub­stan­tially for those who earn un­der 200 per­cent of the poverty line. That’s be­cause the plans would both re­duce the num­ber of peo­ple el­i­gi­ble for Med­i­caid and lower (in some cases elim­i­nate) the sub­si­dies for peo­ple who buy in­surance on the mar­ket. Of the 22 mil­lion Ryan was asked about, 15 mil­lion would lose Med­i­caid and 7 mil­lion would lose mar­ket in­surance.


The Obama ad­min­is­tra­tion sold the ACA to skep­tics on the prom­ise that it would limit health-care cost growth over time. Health­ier peo­ple need less care, the ar­gu­ment goes. If lack of in­surance is a bar­rier to health care, and if health care im­proves health, then ex­pand­ing cov­er­age should im­prove health. If poor health is costly, then ex­pand­ing in­surance should also lower costs.

Seem­ingly in vin­di­ca­tion, real health spend­ing growth re­mained his­tor­i­cally low for sev­eral years af­ter the ACA’s en­act­ment. Com­pared with the prior decade, when health-care spend­ing grew at an av­er­age an­nual rate of about 3 per­cent, from 2010 to 2013 an­nual growth av­er­aged 1.6 per­cent. But ev­i­dence points to the dregs of the re­ces­sion as the driver of th­ese re­sults, and, as the ma­jor in­surance ex­pan­sions took ef­fect in 2014, cost

growth again be­gan to climb.

Costs from in­creased de­mand for health ser­vices over­whelmed sav­ings from im­proved health (granted, it has been only three years since the ma­jor ex­pan­sions, and health ef­fects may take longer to man­i­fest than bud­getary ef­fects). The Rand Health In­surance Ex­per­i­ment—which ran from 1973 through 1981—and decades of sub­se­quent work have doc­u­mented that more gen­er­ous in­surance in­cen­tivizes greater use of health ser­vices and in­creases costs. Econ­o­mists call this phe­nom­e­non, more gen­er­ally, the law of de­mand.

The myth that in­surance ex­pan­sion will save money high­lights the fal­lacy that a pro­gram must save money to be valu­able. Ex­pand­ing health in­surance is costly, and per­haps costs even more than it saves, but it is also valu­able, be­cause it im­proves peo­ple’s ac­cess to care, fi­nan­cial sta­bil­ity and over­all well-be­ing.


To strengthen the case for re­form, pro­po­nents of the ACA scape­goated pri­vate in­sur­ers in the de­bate lead­ing up to its pas­sage, blam­ing out­size pre­mi­ums and skimpy cov­er­age on un­eth­i­cal be­hav­ior. In a 2009 ra­dio ad­dress, Obama cited in­sur­ers’ un­due “prof­its and bonuses.”

In­sur­ers, how­ever, were not earn­ing par­tic­u­larly high prof­its then. A 2010 Con­gres­sional Re­search Ser­vice study showed that among large, pub­licly traded health in­sur­ers, prof­its av­er­aged 3.1 per­cent of rev­enue. In com­par­i­son with other health-care play­ers,

that put them in the mid­dle of the pack, well be­low phar­ma­ceu­ti­cal and biotech com­pa­nies and med­i­cal-de­vice man­u­fac­tur­ers, on par with phar­macy com­pa­nies, and above hos­pi­tals.

Yet this rhetoric has per­sisted in both lib­eral and con­ser­va­tive out­lets. “The ACA gets blamed for ris­ing pre­mi­ums, while in­surance com­pa­nies are reap­ing mas­sive prof­its,” a Sa­lon ar­ti­cle de­clared in Oc­to­ber. A Weekly Stan­dard piece pub­lished around the same time pointed to ris­ing prof­its among the health in­sur­ers on the For­tune 500 as “an­other fine ex­am­ple of the nat­u­ral al­liance be­tween Big Gov­ern­ment and Big Busi­ness.”

But the be­gin­ning of the ACA co­in­cided with the end of the re­ces­sion. From 2007 to 2009, 8 of the 10 largest in­sur­ers had dou­ble-digit losses, and one, Wel­lCare, had triple-digit losses. In a phe­nom­e­non econ­o­mists call “re­gres­sion to the mean” and fi­nan­cial an­a­lysts call “the busi­ness cy­cle,” prof­its across all in­dus­tries re­cov­ered around the same time the ACA was im­ple­mented.

A na­tion­wide study of in­sur­ers sup­ports the ar­gu­ment that their prof­its are more aligned with eco­nomic growth than any­thing else. In 2013, when GDP growth was slower, in­sur­ers on av­er­age op­er­ated at a loss; but they re­cov­ered by 2014 when growth picked up. More­over, the bulk of in­surer prof­its were from in­vest­ments rather than en­rollees.


The White House’s Kellyanne Con­way is among those who have pro­moted this myth, telling Fox News re­cently that Med­i­caid has ex­panded be­yond the truly needy. “If you’re able-bod­ied and

you would like to go and find em­ploy­ment and have em­ployer-spon­sored ben­e­fits, then you should be able to do that” and not rely on Med­i­caid, she said.

His­tor­i­cally, Med­i­caid has not re­quired re­cip­i­ents to work, but the Trump ad­min­is­tra­tion and con­gres­sional Repub­li­cans have pro­posed a pro­vi­sion to en­cour­age states to link ben­e­fits to work. “We be­lieve it’s im­por­tant for folks to have a job, that they con­trib­ute not just to so­ci­ety but they con­trib­ute to their own well­be­ing,” Health Sec­re­tary Tom Price said in March.

Th­ese re­quire­ments, how­ever, would not be par­tic­u­larly im­pact­ful. Most Med­i­caid re­cip­i­ents who can work do. Al­most two-thirds have full­time or part-time jobs, and more than three-quar­ters come from fam­i­lies where some­one has a job. (Th­ese jobs, though, tend to be in low-pay­ing sec­tors, such as agri­cul­ture and food ser­vice, where em­ployer-spon­sored health in­surance is gen­er­ally not an op­tion.)

More­over, Med­i­caid is not a pro­gram that largely cov­ers peo­ple who can “go and find em­ploy­ment.” Only 30 per­cent of en­rollees are able-bod­ied adults, con­sti­tut­ing 20 per­cent of spend­ing. Chil­dren make up nearly half of en­rollees (44 per­cent), while the aged and dis­abled ac­count for more than half of spend­ing (60 per­cent).


Although firms may boast about of­fer­ing gen­er­ous health-care ben­e­fits, the costs of cov­er­age are largely borne by em­ploy­ees, in the form of lower wages than a com­pet­i­tive mar­ket would oth­er­wise sup­port. That helps ex­plain why in­fla­tion-ad­justed wages have re­mained flat, even while pro­duc­tiv­ity has in­creased. It’s all go­ing to cover ris­ing health-care costs.

Also, the dis­tinc­tion be­tween the pub­lic and pri­vate in­surance sec­tors is not so sharp as many peo­ple imag­ine. By ex­empt­ing em­ployee and em­ployer pre­mi­ums from in­come and pay­roll tax, the gov­ern­ment for­goes hun­dreds of bil­lions of dol­lars in tax rev­enue each year. In 2016, this sub­sidy was worth $275 bil­lion. (In con­trast, the to­tal sav­ings pro­jected from ei­ther the House’s Amer­i­can Health Care Act or the Se­nate’s Bet­ter Care Rec­on­cil­i­a­tion Act, which in­clude sav­ings from cut­ting fed­eral cost-shar­ing sub­si­dies in the state mar­ket­places, do not ex­ceed this num­ber in any year.)

The gov­ern­ment sub­sidy is what ties em­ploy­ment to in­surance. Tax­ing pre­mi­ums would break the link, al­low­ing in­di­vid­u­als to choose jobs based not on the avail­abil­ity of health in­surance but on their skills and pref­er­ences. Fur­ther, sub­si­dies en­cour­age overly gen­er­ous poli­cies, which put up­ward pres­sure on prices. Elim­i­nat­ing sub­si­dies could help bring the costs of health-care pre­mi­ums down.

As with any pol­icy, there are dis­ad­van­tages to tax­ing health in­surance. For ex­am­ple, it may dis­cour­age younger, health­ier work­ers from join­ing their job-based plans and prod them to seek in­surance in the in­di­vid­ual mar­ket, where they would not be pooled with older and sicker co-work­ers. Pre­sum­ably, the ben­e­fit sav­ings would be passed on in the form of faster wage growth, but this tran­si­tion could be slow.

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