Experts: Individual Health Insurance Market Functioned Better Before Obamacare

Experts debate Obama, Democrat claim that health insurance market has improved

The full printout of Obamacare legislation / AP
November 19, 2013

Health care experts said in interviews with the Washington Free Beacon that claims by President Barack Obama and Democrats that health insurance plans in the individual market prior to Obamacare were substandard are vastly overblown.

Amid cancellations of millions of insurance plans and a federal website beset with technical and security issues, President Barack Obama has maintained one thing about the Affordable Care Act, his signature health care legislation—it is better than what Americans had before.

"Remember, before the Affordable Care Act, these bad-apple insurers had free rein every single year to limit the care that you received or use minor pre-existing conditions to jack up your premiums or bill you into bankruptcy. So a lot of people thought they were buying coverage, and it turned out not to be so good," Obama said during an Oct. 30 speech in Boston.

"Before the Affordable Care Act, the worst of these plans routinely dropped thousands of Americans every single year," he continued.

The president called health insurance plans in the individual market "cut-rate" and "substandard" during that speech. Sen. Tom Harkin (D., Iowa) described them as "junk policies" last week.

However, health care experts pointed to peer-reviewed studies indicating that the individual market before the ACA, commonly known as Obamacare, offered a glimpse of a better-functioning health care market.

Mark Pauly, professor of health care management at the University of Pennsylvania’s Wharton business school, said it has been illegal for insurers to drop individual plan holders since enactment of the Health Insurance Portability and Accountability Act (HIPAA) of 1996. Section 2742 of that law mandates "guaranteed renewability" for individual plans.

"With all this trashing of the individual market, the claim that a lot of people got their coverage canceled, that’s not right—that’s not what happened," Pauly said. "It wasn’t legal to do it since the late 1990s."

Pauly said there were instances where insurers terminated plans because of wrong information on applications—a provision that was "interpreted fairly generously to favor insurance companies" and led to lawsuits at times—but those were increasingly rare. One estimate is that plans were dumped less than four-tenths of 1 percent of the time in the individual market, where less than 10 percent of Americans, about 19 million people, receive private health insurance.

For example, Obama said in a May 2010 radio address that an insurer was "systematically dropping the coverage of women diagnosed with breast cancer," an oblique reference to the health insurance giant WellPoint, the company said. WellPoint chief executive Angela Braly sent a letter directly to the president in response. She said the insurer spent almost $2 billion on treatment for 200,000 women with breast cancer in 2009 and canceled just four policies because of fraud or misrepresentation.

Pauly has extensively studied the individual health insurance market, which has been heavily scrutinized since Obamacare was proposed and passed. In a 2008 peer-reviewed study for Health Affairs, Pauly actually found that people in poor or fair health had a greater chance of losing coverage in the small group insurance market, rather than the individual one.

That is because the individual market offered guaranteed renewability, regardless of a change in health status, he said. People with employer-based plans, which are tax-subsidized and often cheaper, do not have those protections because workers can leave or be fired.

The individual market in effect provided better protection against high premiums as long as people purchased insurance before they developed a high-risk condition, Pauly said.

"If you told the truth on your application and in the idealized version you were a healthy person to begin with and something bad happened to you—you were diagnosed with diabetes [for example]—you had protection in the individual market," he said. "If you got insurance on your job, you basically only had protection as long as you had your job."

That all changes under Obamacare. Because of regulations like "guaranteed issue," insurers offering coverage on new health care exchanges must now accept anyone who applies, regardless of pre-existing conditions. Everyone not already covered by federal programs or employer-based plans is required to purchase insurance under the law’s individual mandate, and individuals who make between 100 and 400 percent of the federal poverty line will receive tax credits to help defray the cost.

Still, studies note that millions of younger people could save at least $500 next year by not signing up and paying a penalty, which will be $95 or one percent of a person’s income in 2014 and will rise to $695 or 2.5 percent by 2016.

If enough young and healthy people do not sign up, it could lead to a "death spiral" in which the insurance exchanges fill up with older and sicker people and premiums skyrocket, said Devon Herrick, senior fellow at the National Center for Policy Analysis. He said the average age of people who have been able to sign up in the exchanges so far is 10 years higher than insurers had hoped.

"[The exchanges] will implode" if enough young and healthy people don’t enroll, he said. "It will cease to be a place where you can get affordable coverage."

Many people who lost their individual market plans because of regulations in Obamacare, at least 3.5 million Americans according to the Associated Press, already face higher premiums and smaller provider networks on the exchanges.

One of those regulations, community rating, further distorts health care markets, Herrick said. As a result of community rating, a 60-year-old diabetic would hypothetically end up paying only three times more than a 22-year-old aerobics instructor, even though the older person might be wealthier and costs 10 times more to the insurer.

"The trouble with having regulations like guaranteed issue and community rating is they take young folks already less apt to have insurance, because they don’t see a need for it, and say ‘you need to pay more so people who are older and richer can get a bargain,’" he said. "That’s a fundamental problem."

Pauly said some lower-income people with pre-existing conditions will benefit, but the law seems to create "kind of a haphazard pattern of winners and losers."

A better approach would be to provide a uniform tax credit to everyone and encourage them to sign up for a "personal and portable" plan before they develop a serious condition, Herrick said. More people would gradually shift to the individual market with former protections like guaranteed renewability, he added.

Pauly advocated a similar approach with tax credits plus high-risk pools for people with pre-existing conditions. He also took issue with the "minimum essential benefits" mandated in Obamacare, including maternity care, mental health and substance abuse treatment, and prescription drugs.

Studies have shown that more generous insurance coverage does not necessarily translate into better health outcomes, he said.

"An alternative would be a much less regulation-heavy approach, one that says ‘go get some insurance as long as it’s not really terrible’ and not try to do all of this social engineering around the edges," he said.

Obamacare takes a different tack, he said.

"It particularly raises premiums and makes the insurance a bad deal for low-risk people, and then we’re surprised when they still don’t want to be insured," he said.

"It’s the opposite of what you want to do."

Published under: Obamacare