After a remarkable run of success, Obamacare has hit some speed bumps lately. From premium hikes to unaffordable deductibles to backtracking insurers, cracks in the law’s foundational health exchanges have sprung into public view. These issues, however, all stem from a basic structural flaw in a key part of the law: it’s too conservative.
These problems are arising because a number of shoppers on Obamacare’s health exchanges aren’t finding much to like. The most affordable plans (called bronze and silver plans) often come with high deductibles that leave consumers on the hook for as much as the first $6,000 of their medical expenses. For silver plans, the law’s cost-sharing reduction—essentially co-insurance kicked in by the government—eases these deductibles for most exchange consumers. No such subsidy is available for people who can only afford the monthly premiums for a bronze plan.
For many consumers trying to comply with the law’s insurance mandate, these deductibles leave them insured in name only. “The deductible, $3,000 a year, makes it impossible to actually go to the doctor,” one consumer told the New York Times. “We have insurance, but can’t afford to use it.” His family ultimately dropped their insurance plan.
While these kinds of plans cover certain preventive services, they otherwise provide little more than catastrophic coverage. These kinds of catastrophic care plans have long been staples in the conservative vision of health reform, providing insurance for serious and expensive medical episodes, but leave the consumer self-funding virtually everything else. They’ve been part of recent conservative repeal-and-replace proposals, typically coupled with tax credits and health savings accounts.
Catastrophic care insurance is part of what political scientist Jacob Hacker calls conservatives’ “personal responsibility crusade” in his 2006 book, The Great Risk Shift. Conservatives worry that insurance creates moral hazard in the insured, encouraging them to engage in irresponsible behavior when they don’t bear the full cost of that behavior. Force individuals to own more of their risk, conservatives believe, and they will become more judicious healthcare consumers.
Liberals reject this and aim to spread risk faced in the typical course of life across society. But under Obamacare, they also wanted to provide a low-cost option to consumers compelled into the health insurance market by the law’s mandate. They thus included inexpensive bronze plans on the exchanges, while providing cost-sharing incentives for consumers to spring for a more comprehensive silver plan instead.
By providing a menu of options, health reformers hoped to draw in a broad pool of insurance consumers, including the young and healthy. Because insurers can no longer charge more to people with pre-existing conditions, they’ve counted on premiums from relatively healthy people to subsidize the sick.
But many people just aren’t biting. So far only 35 percent of eligible individuals have signed up for plans through the health exchanges. The nudge toward silver plans leaves some shoppers in limbo: they could buy a low-premium bronze plan that provides little actual insurance, or a silver plan that, while providing more coverage and more subsidies, may still be out of reach for their budget.
These unappealing options drive some people who are on the fence about purchasing insurance out of the market. One twenty-nine-year-old told the Times, “The deductibles are ridiculously high. I will never be able to go over the deductible unless something catastrophic happened to me. I’m better off not purchasing that insurance and saving the money in case something bad happens.”
For many, the perceived benefits of buying this kind of insurance are minimal, and the costs of defying the law’s insurance mandate are surprisingly bearable. The penalty for forgoing insurance was the greater of $325 or 1 percent of income last year, which could be far less than the cost of premiums. (This increases to $650 or 2.5 percent of income in 2016.)
The upshot is that many people are still electing not to purchase insurance. This creates a lopsided risk pool among those who are signing up, leaving companies insuring more sick people than they anticipated. Some companies have responded by raising premiums and others are threatening to leave the market altogether. They simply aren’t receiving the right mix of customers to sustain their exchange business.
Policymakers need to be proactive to shore up the health exchanges. Healthcare expert Andrew Sprung proposes simply extending cost-sharing subsidies to bronze plans. This would strengthen the insurance coverage of these plans, making them more appealing to more consumers. We could also redouble outreach efforts to sign up the uninsured and consider tightening the individual mandate further.
Obamacare has been tremendously successful at getting people insured. But its insurance exchanges need to be self-sustaining. Improving the quality and affordability of the insurance options on its exchanges would help this cause immensely. It would encourage more people to sign up, cutting the ranks of the uninsured even more. And it would discard a misguided conservative approach to health reform and embrace true social insurance instead.