Why 'If You Like Your Plan' Can't Be Fixed

NYT columnist Ross Douthat says there's no good way to let people keep their health plans within the context of Obamacare (and he's right).

Instead, he suggests an approach the President might take to placate people who are losing lower-cost coverage that they liked:

Obamacare's regulations could be rewritten to allow insurers to sell less comprehensive plans on the exchanges. This wouldn't require doing away with every new regulation, or rolling back the pre-existing condition guarantee, which is what liberals argue the Upton bill currently being considered in the House would do. But it could involve heeding the recent hint from the University of Chicago's Harold Pollack, a card-carrying Obamacare advocate, that perhaps in the wake of the last month's developments the government should "revisit just how minimal the most minimal insurance packages should be," which in turn could open the door to allowing many more people to buy the kind of high-deductible catastrophic plans that the law currently allows insurers to only sell to twentysomethings.

I don't think this can work, either. Broadly, there are three reasons people who buy individual market insurance may be facing premium increases due to Obamacare. The Douthat/Pollack approaches don't go very far in addressing them:

1. Plans are getting more expensive because they close coverage gaps: This is the "junk insurance" issue liberals like to talk about. Old plans may have had annual benefit limits, or excluded key items like prescription drugs or maternity coverage.
2. Plans are getting more expensive because they have lower patient responsibility: Old plans may not have covered 100% of the cost of preventive care and may have had higher deductibles and out-of-pocket maximums than are allowed under the ACA.
3. Plans are getting more expensive because they are community rated: Old plans had "experience rating": People who were young and healthy and male and otherwise expected to consume little health care paid low premiums; people who were sick and expensive to cover paid high premiums. Now, "community rating" means everyone will pay the same price, except that a limited degree of age-based variation will be allowed.

Douthat's idea would address point (2) and Pollock's idea (which is different) would go to point (1), but point (3) is the big elephant in the room here that nobody can fix because it's a key policy aim of the ACA.

Douthat wants to allow everybody to buy the catastrophic plans that the ACA currently contemplates just for 21- to 30-year olds. For people over 30, the minimum plan you can buy from an ACA exchange and comply with the individual mandate is a "bronze plan," which is supposed to be designed with an actuarial value of 60%, meaning on average it will pay 60% of a participant's medical bills.

The ACA does not set a minimum actuarial value for catastrophic plans, but the formula the ACA uses for risk adjustments assumes it will be 57%. And this is the problem with Douthat's idea: a "bronze plan" is only very slightly more generous than a "catastrophic plan." That's because bronze plans are already high-deductible plans. Anthem Blue Cross offers a Bronze PPO in California with a deductible of $5,000 for a single adult. In New York, Aetna's Bronze EPO has a $3,000 deductible.

We should expect that catastrophic plans will be about 5% cheaper than bronze plans. Opening these plans up to the broader market would help a little with sticker shock, but not very much. The insurance consultancy Milliman warns that ACA rules "may make it hard to differentiate" between catastrophic and bronze plans, since the catastrophic plans and bronze plans must both limit out-of-pocket expenses to $6,350 for an individual subscriber.

Pollock's suggestion is to tweak the definition of "essential health benefits" under the Affordable Care Act. In other words, he'd hold down premiums by letting insurers exclude more items from coverage. But it's not clear what these exclusions could be, and Pollack doesn't make specific suggestions. The additions that add lots of cost (mental health coverage, prescription drugs, substance abuse treatment) tend to be pretty important components of health care.

We can tinker a little with the comprehensiveness of coverage, both in terms of what services of covered and what fraction of the bills the insurer will pay. But there is no "fix" to the fact that the ACA creates a shadow fiscal transfer by charging higher health insurance premiums to healthy people in order to subsidize coverage for the sick.

This was a key design feature of the law. It is not a bug. And it will lead to premium increases for a few million people. The president can say he's sorry all he wants, but rate shock is one of the key financing mechanisms for the ACA. Without coming up with a new way to finance the law, it can't be fixed.