As Republicans continue to debate the specifics of their plan to repeal and replace the Affordable Care Act (ACA or ObamaCare), two provisions have taken center stage: “Guaranteed Issue,” the requirement that insurers offer policies to all applicants, and “Community Rating,” the requirement that they offer all policies at the same price, regardless of risk factors like health, lifestyle, or even gender.
These rules were obviously designed to allow people with pre-existing conditions to purchase health coverage, and to equalize the premiums paid by everyone. But as nice as that sounds, the experience of different states shows that these rules don’t benefit many consumers and aren’t the best way to foster functional and fair insurance markets.
The proponents of ObamaCare say that repealing these rules will result in calamity. They paint a dire picture of the world before ObamaCare and suggest that any pre-existing condition would have prevented you from getting coverage. Nobody would take you if you had acne or a hang nail. That is a revision of history.
Before the ACA, everyone was guaranteed a policy in every state. First, employer-based or group carriers could not deny you coverage due to a pre-existing condition. Second, if you kept continuous coverage and followed the requirements of the 1996 Health Insurance Portability and Accountability Act (HIPAA), you had the right to buy an individual insurance policy with no exclusions for pre-existing conditions.
HIPAA required that a carrier could not raise your rates nor drop you if you developed a condition after the policy was in place. Sadly, the architects of the ACA misled people about these protections, saying they didn’t exist, and many people still believe that today.
There were some provisions that allowed a carrier to decide not to cover pre-existing conditions for a time if you had not kept continuous coverage for more than 63 days. This was instituted to encourage people to keep insurance coverage and to discourage them from delaying purchasing coverage until they became sick.
Unfortunately, sometimes people were not aware of HIPAA’s requirements or chose not to follow them, which forfeited their HIPAA eligibility. Even then, many people with pre-existing conditions were medically eligible for guaranteed coverage in all 50 states. The delivery of the guarantee varied depending on the state.
Seven states used the same approach as the ACA: They required guaranteed issue, and community rating, meaning insurers had to offer policies to everyone and charge everyone the same rate within certain geographic areas and age bands.
It’s too bad that our federal government didn’t look at the results from these states before inflicting these ideas on all states. While guaranteed issue and community rating may sound nice in theory, in reality, they don’t work out as intended. Unfortunately, these rules can create bad incentives. By raising the cost of insurance for healthy people, these rules can discourage some people from buying insurance until they become sick, when they will still be guaranteed a policy.
Ultimately this approach hurts consumers and wrecks insurance markets. As the CEO of Aetna has acknowledged, the ACA’s exchanges are in a death spiral, meaning prices will continue to go up, driving more consumers out, which only drives prices up more for those who remain. Insurers are exiting, leaving patients with fewer and fewer options.
We should look to the experience of other states for a better solution.
Before the ACA, 43 states allowed the sale of “true insurance.” Rates were based on your potential of claims, so carriers could inquire about your health conditions, occupation, and lifestyle choices. This provided an incentive to practice a healthy lifestyle because your premium would be lower if you did. Most applicants received very affordable rates since most people are healthy. Unlike the proponents of the ACA claimed, scores of common conditions like mild allergies and even elevated blood pressure and cholesterol were accepted. In fact, 87 percent of applicants received coverage, even with their pre-existing conditions.
Others who had delayed applying until they developed a serious condition or were expecting an expensive claim were offered a guaranteed plan through a carrier or through a high-risk pool. High-risk pools offer a variety of plans from different insurers to high-risk customers at subsidized rates. Those rates were typically up to 150 percent of standard rates and were funded partially through a state tax on carriers, the premiums of enrollees, and an occasional grant from the federal government.
These higher rates were only charged to a few people, and they were similar rates to what everyone is now paying under the ACA. As more people buy private plans before they develop a serious condition, rates will remain low and fewer people will be buying in the subsidized high-risk pools.
Guaranteed Issue and Community Rating sound like nice ideas, but we have seen the problems that arise when these rules are applied to the private market. Allowing each state to determine how they regulate insurance is the best approach: Some states may choose to keep the ACA rules, and others may prefer to allow true insurance markets alongside high-risk pools. Lawmakers should take this into consideration in their efforts to pass healthcare laws that work for everyone.
Hadley Heath Manning is senior policy analyst at Independent Women's Voice, specializing in healthcare. Manning is also the Tony Blankley Fellow at the Steamboat Institute. Follow her on Twitter at @HadleyHeath.