When Republicans released their plan to repeal and replace Obamacare on Monday night, one provision jumped out at a lot of us who follow healthcare policy for a living: a measure that would slap a 30 percent premium surcharge on those who try to apply for insurance coverage without having maintained continuous coverage over the previous year.
For any health proposal that wants to require that insurers to cover individuals with preexisting conditions, the question always becomes how to make sure that enough young and healthy people enter the market to offset the cost of enrolling those with greater medical costs. If healthy people shy away from buying coverage, then premiums go up, which makes more people drop out of the market, which then increases premiums even more, and so on.
In Obamacare, Democrats chose to impose the individual mandate to get around this problem, which slapped a penalty on individuals choosing not to purchase coverage. This has not proven effective, as not enough young and healthy individuals have been deterred from skipping out of purchasing insurance, which has meant higher premiums and mounting losses for insurers, who have been bailing on the law’s exchanges.
Republicans would do away with the mandate penalties, but they still want to cover individuals with pre-existing conditions. So their workaround is to require that insurers offer coverage to all comers who maintain continuous coverage. For those who went more than about two months without continuous coverage in a given year, they would have to pay a 30 percent premium surcharge if they try to sign up for coverage. To me, it’s not clear why this would provide much more of an incentive for healthy adults to purchase coverage than the mandate.
Somebody healthy who doesn’t want to purchase insurance might still make the calculation that they’re better off ditching insurance and saving the premiums, under the assumption that if they develop any catastrophic illness, they’d be happy to pay the 30 percent increase for a year.
Let’s just do some rough math. If somebody would normally have to spend $250 a month on insurance, then going without it for a year would save them $3,000. If they went without insurance for a year and then had a diagnosis for an expensive medical condition, they could get insurance, and would only have to pay an additional $75 per month, or $900 over the course of the next year. After 12 months, the 30 percent surcharge would go away, and they’d be back to paying the normal rate. So, on a net basis, they save $2,100, and still get coverage when they’re sick. And the longer they go without coverage, the more they save. So, if this same person went through their 20s without insurance, that person could save $30,000 in premiums vs. a $900 penalty in any year they get sick (not taking into account premium increases over the course of a decade).
Now, in theory, people would still have to wait until open enrollment to purchase insurance, so though they could hold out a few months if, say, they were diagnosed with diabetes (or another chronic illness that requires costly care over time), they couldn’t simply sign up right after a car accident at any point during the year. So there would still be an incentive toward purchasing coverage. But this is really no different from the risk of not purchasing coverage under the current system, or the one that preceded it, and both systems struggled with attracting younger and healthier individuals.
Even if one could argue that buying insurance is still the smart move, when considering whether this system will work, the important thing to weigh is not necessarily whether skipping coverage is clearly the most rational decision. Given that the population we’re talking about is already inclined to go uninsured, the important question is whether they can plausibly self-rationalize their decisions. My guess is that under this plan, the answer is yes.
