Deregulating the Individual Market Will Not Lower Overall Health Costs
Many Republican policymakers in Congress and some officials in the Trump administration continue to confuse insurance deregulation in the individual market with unleashing market forces in health care. They are not the same thing. Thinking otherwise leads to misplaced emphasis on ideas that might help some insurance enrollees in the short-term but will have very little effect on their lifetime costs.
The primary problem with the provision of medical care in the U.S. is the absence of an overall system of cost discipline. Unlike other sectors of the economy, medical services are not bought and sold in a well-functioning marketplace that rewards value, innovation, and efficiency. There are many reasons for this, including the large imbalance in information between suppliers of services and patients, which leads to market failure. Further, despite the existence of many government rules for health insurance and the provision of medical care, the U.S. also does not have effective regulatory control over total costs. Instead, what we have is a mishmash of large public subsidies for insurance enrollment, government regulations, and some private activity and incentives too.
Unfortunately, the sum of these parts does not add up to a coherent whole. Instead, U.S. health care suffers from rampant waste, inefficiency, high administrative costs, and uneven quality.
Instead of trying to bring more market discipline to this dysfunctional status quo, many Republicans remain focused exclusively on changing regulations for insurance premiums in the individual and small group markets, which are now governed by rules imposed by the Affordable Care Act (ACA). In particular, these Republicans would like to see more products available in these markets that are exempt from the ACA’s requirements on covered benefits and community rating. This would allow younger and healthier consumers to purchase plans with premiums that are far lower than what is available today.
This is an understandable objective. The individual insurance market has always been small and somewhat unstable, and it appears to be deteriorating under the ACA. Insurance premiums in this market rose by an average of 32 percent in 2018, and there is an expectation that premiums will rise rapidly again in 2019. The ACA protected households with incomes below 400 percent of the poverty line from premium increases, but the unsubsidized middle class has been fully exposed to the rising premiums and deductibles in this market, which is why many of them are unhappy with the law.
The Trump administration has offered two new rules to give these consumers more options. The first would allow them to buy less-regulated “short-term” plans that would be sold outside of the ACA’s requirements. If allowed by the states, these plans could offer less generous benefits than is permissible under current rules, and they could adjust their premiums based on the health status of potential consumers. A second regulation would make it easier for small businesses to join Association Health Plans that are also exempt from the ACA’s benefit requirements and premium regulations.
When these proposed rules are made final, which is likely to occur in the coming months, many middle-class consumers will be able to exit the ACA-regulated markets for less expensive options. But overall costs will not decline. Insurers will simply shift higher premiums onto those who remain in the current market, which in turn will mean the federal government will pay higher subsidies for those eligible for premium assistance. Consumers who exit the ACA-regulated market next year for lower premiums would have the option to return to the more regulated market at some later point if they ever got very sick.
Shifts back and forth between a more and less regulated individual insurance market, which covers less than one-tenth of the overall population, will affect the distribution of premium payments across some insurance enrollees and taxpayers. The problem is that it won’t make much of a difference one way or another on overall costs.
Lowering premiums for all Americans of every age and condition will require something far more difficult and significant than deregulating insurance premiums for a small slice of plan enrollees.
The nation’s vast network of hospitals, physician groups, clinics, labs, and others would have to be forced to compete vigorously with each other on price and quality in a functioning marketplace for medical services. This would require making sure consumers have strong financial incentives to seek out high-value, low-cost care, which in turn requires significant changes in employer-sponsored coverage, Medicare, and health savings accounts (HSAs). Among other things, the current open-ended tax benefit for employer plans should be capped, Medicare enrollees should choose each year from among competing coverage alternatives, and pay more if they choose less efficient options, and the government should help HSA enrollees shop in a market with transparent prices for standardized packages of clinical services.
All of these changes would force suppliers of medical services to compete with each other in ways that do not occur today, and thus would have more of an effect on how medical care is supplied and consumed than would insurance deregulation in the individual market.
The ACA-regulated market is not working well; it needs to change. There are a number of adjustments that should be considered, including giving non-subsidized consumers better options than they have today. But none of these relatively small changes will have much of an effect on the overall cost of care in the U.S. If lawmakers want to tackle rising costs, they will have to propose something much more ambitious.
James C. Capretta is a RealClearPolicy Contributor and a resident fellow at the American Enterprise Institute. He is the author, with Joseph R. Antos, Ph.D., of “Bringing Market Discipline to Health Care is Complex, Difficult, and Necessary,” published by AEI.
